Rent Control: Commercial Landlords May Be the New Big Bad Wolf
The following article on commercial rent control is a guest post by Janet Nina Esagoff, Esq.
Members of the New York City Council have been considering different iterations of commercial rent control (aka rent stabilization) for a long time, ever since prior rent control laws expired in 1963. As a real estate attorney serving both landlord and tenant clients, I see there is a good argument to be made for either side. Generally, however, while the main advantages lie with the landowner, the court of public opinion often lies with tenants, as policymakers make every effort to offer them protections. Mimicking the national political headlines, there is a constant tension between exercising individual rights (i.e., property owners) versus the reasonable needs of the masses (i.e., tenants).
Now that residential rent stabilization has been codified in the “Housing Stability and Tenant Protections Act of 2019,” the commercial rent control issue is back—via a new bill, the “Commercial Rent Stabilization Act,” recently submitted in the City Legislature. The proposed bill faces similar challenges as the residential rent laws due to constitutionality, but its goal is to offer a leg up to small business owners, particularly in immigrant communities and communities of color. In all likelihood, this new attempt to stabilize commercial rents will not pass—not at this time.
If passed, however, the bill would create a rent guidelines board to determine annual rent increases for certain commercial spaces, including small retail spaces (under 10,000 square feet) and offices and manufacturing tenants under 25,000.00 square feet.
Needless to say, many industry insiders are steaming mad. Opponents to rent control—namely, landlords and business improvement districts—believe that turnover is necessary to attract new businesses. Empty stores are “normal,” even though they are more prevalent in today’s times due to shrinkage, and fewer brick-and-mortar stores operate in the internet economy. Still, many commercial owners and brokers believe that the commercial rental market, like residential markets, is akin to a self-run economic ecosystem. Supply and demand of commercial spaces is always in flux. Sometimes it is a renter’s market, and sometimes not.
There will be fallout if the new bill is passed. Due to the recent changes in New York City residential rent laws, for example, the multifamily sales market has stagnated for any building with mostly rent-regulated apartments. Ask any broker or owner who is hurting and being squeezed. Rather than renew or re-let, some are choosing to let units stay vacant until a viable tenant comes along. Small-time and big-time owners are defaulting on mortgages. Over the long term, this inevitably results in bankruptcies and foreclosures due to less rental cash flow.
On the flip side, however, city officials are understandably being proactive and taking action against the “retail vacancy crisis.” While the problems of vacancy are real and identifiable, the solutions are not so clear. The problem of empty storefronts is a national problem, but in New York City, it is often attributed to soaring rents. According to a recent study by New York City Comptroller Scott Stringer, reported vacant retail space in the city roughly doubled over a decade, up to 11.8 million square feet in 2017 from 5.6 million square feet in 2007. During this period, the report said, retail rents rose by 22% on average across the city. Somehow, commercial landlords are taking the brunt of blame.
Last year, city lawmakers took specific steps to target commercial landlords. In July 2019, the City Council passed a comprehensive package of legislation that will enable the city to track retail vacancies. As reported on the Gothamist website, “three of the bills require annual reporting on storefront vacancies, the business environment, and specific tracking of mom-and-pop shops.” The data, which will be gathered by the NYC Department of Finance, will include size, as well as occupancy status and monthly rents if the property is being leased. The other bills are requiring the city’s Department of Small Business Services to provide small businesses with training on regulation compliance and marketing. The City Council also recently approved wider protections for commercial tenants, making it unlawful for commercial landlords to engage in dilatory eviction practices, like threats and physical intimidation, denying repairs, cutting off heat and utilities, and frivolous prosecution.
Undeniably, the commercial rent stabilization proposal demonstrates the want and need of many to provide additional protections for the “underdog” in today’s economic climate. As with many issues that politicians and experts in public policy try to solve, there is a balancing test. Brick-and-mortar property owners should be allowed to use and benefit from their property, as long as they comply with the law. Poorer or less technologically advanced individuals, shut out of the internet economy, may need to rent commercial space to make a living. The only option to realize their dreams, let alone the American dream, just might be the local corner store to sell specialty wares or provide needed services from the “big bad landlord.”
Rich versus poor. Underdog and top dog. A sign of the times, for sure.
Janet Nina Esagoff is a Great Neck attorney and president of the Esagoff Law Group, P.C. Her practice focuses on helping individuals and businesses in civil litigation, contract law and real estate matters, including landlord-tenant law.
