Goodbye mom, pop: Time to upgrade your co-op's retail tenants?

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Up until a change in the federal tax law a couple of years ago, co-ops could earn no more than 20 percent of their income from their retail tenants under the much despised 80-20 rule.  So they rented their spaces out at deep discounts tailor-made for the narrow margins of mom-and-pop stores.

The repeal of the 80-20 rule was a prospective treasure trove for many co-ops (and a huge bummer for mom & pops). Even as the rule's end was rumored, co-ops began counting down the days until they could replace their bargain-basement tenants with market-rate ones.  

Then the real estate market crashed.

“Last year I did a corner in Carnegie Hill, a very rich zip code, for $325 a square foot.  Today in the same neighborhood I did a deal at $200 per square foot,” says Faith Hope Consolo, chairman of the retail leasing and sales division at Prudential Douglas Elliman. “It was the same quality tenant, the same demographics, the same type of co-op building.”

Overall, says Consolo, many co-ops are still getting a bit more rent than they could before—just not nearly what they had expected.   

“If you have three or five stores and you have the possibility of changing the aesthetics and type of retailer to a more sophisticated one, you should do it,” says Consolo.  

Some considerations:

1.  National stores or retailers with multiple locations—or a strong online presence—are a better financial bet.  “They are not dependent on traffic from just one store,” says Consolo.

2. Chances are that a retailer who brings something that’s missing in the neighborhood will be a more stable, longterm tenant.

3. A more sophisticated store improves the curb appeal of your co-op building to apartment buyers: “People who move into the building are very affected by the retailers there,” says Consolo.  

4.  Similarly, if you have more than one retail space, upgrading your tenant now will make your other spaces more attractive to higher-end, deeper-pocketed tenants down the line when rents begin to recover.

5. To capitalize on any future upswing in retail rents, you consider offering a lower rent for the first two years, or a short-term lease with the option to renew at fair market value.

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