I’m thinking of buying a condo in a mixed-use building with a retail store on the ground floor. What sort of things should I be aware of or concerned about before I make my decision?
Mixed-use buildings—which have apartments and commercial space such as offices, retail, hotels, or restaurants—are fairly common in New York City. They can range from buildings with small storefronts or a supermarket up to the multi-level complexes seen at the Time Warner Center in Columbus Circle and the new Hudson Yards on the far west side of Midtown Manhattan.
Such buildings can be a big draw, especially in neighborhoods where there isn’t a lot of other commercial activity. Living above a Whole Foods or complex of retailers can be a major convenience—and bragging right—for potential buyers like yourself.
Just because these buildings can be found all over the city doesn’t mean you won’t face some risks buying into one, says Jeffrey Rendin, a New York City real estate lawyer and partner at the firm Wagner, Berkow & Brandt.
“It’s important to know when you’re buying into a building like this that you’ll have virtually no control over what the owner of that retail or commercial unit does with its unit. That’s the bottom line, 95 percent of time,” Rendin says.
Typically, the commercial space is a completely separate condo unit within building and generates profits for the commercial unit owner and the business that operates within it. Your Declaration of Condominium, the document that creates the condominium and sets forth how it is to operate, will have special provisions governing the use and disposition of any commercial units within a building.
For example, the commercial unit owner’s common charges will often be different than the residential unit owners.
“If the residential units are served by a doorman, but the commercial unit isn’t, the budget won’t allocate any of the doorman’s salary in common charges to the commercial unit owner," Rendin explains.
Also, a condo board’s “right of first refusal” usually isn’t applicable to the sale or lease of a commercial unit.
“If a condo board doesn’t like the terms of a proposed sale or lease of a residential unit, it can exercise its right of first refusal, and purchase or rent the unit itself on those terms. Not so with a commercial unit,” Rendin says. That’s because time plus flexibility equal money to the businesses that own and operate within commercial units.
While these buildings are typically condos or cond-ops, there are some co-ops that own—and sometimes control—a commercial space in their building that they rent out. How lucrative these commercial spaces are for a co-op vary building to building. If you find one, have your lawyer review the co-op’s lease with its commercial tenant and any subleases.
Below, three questions to ask before you sign on the dotted line for an apartment in a mixed-use building.
1. What’s in the offering plan?
The commercial unit’s specifications will be disclosed in a few places in your building’s offering plan. Always read the special risks section in the beginning, first. Then turn to the budget, Rendin says. You’ll find that the offering plan’s initial budget aims to keep the residential and commercial entities—and expenses—as separate as possible.
However, separating such expenses isn’t always easy, considering there are certain structural factors that affect both residential and commercial owners, such as the building’s facade, sidewalks, or roof. Consider whether the percentage of the common charges the commercial unit owner is responsible for seems fair, given its size and the common services it uses with the building
“That roof prevents rain from getting in all the units, even those who are not on the top floor. Who’s responsible for the maintenance of that?” Rendin questions.
Finally, have your lawyer carefully read the Declaration of Condominium, located in Part II of the offering plan, which has the most relevant discussion of how the commercial units are to be owned and operated, and the extent to which they may wind up limiting the residential unit owner’s control of the board.
2. How big is the commercial space?
Another thing you should be mindful of when considering buying into a mixed-use building is how big the commercial unit is. Is it just a small storefront, or a vast space? Its size matters because it affects the commercial unit owner’s representation on the building’s board.
“I’ve worked with condo boards where the residential component of the building was very small, maybe 15 percent of all the units. Those residential unit owners were never going to gain control of the building from the commercial unit owner,” Rendin says. “Mathematically they will never have the ability to override the commercial unit owners’ votes on the board. That’s an important consideration when the board must address a building-wide issue, like selecting a building-wide managing agent.”
3. What is the commercial space used for?
Take into consideration what the commercial component is being used for. What might be a high-end retailer, restaurant, or hotel today, could be a lower-end store or fast-food or hotel chain tomorrow, which could affect your apartment’s resale value down the line.
“The future is unpredictable, and the offering plan is no seer," Rendin warns. "Your initial purchase decision might be influenced by what is current, but space occupied by a high-end store today could, and frequently does, change hands."
You may also want to look into types of businesses that are—or aren’t—restricted in operating in your building’s commercial space. Common restricted businesses may include a head shop, tattoo parlor, or a marijuana dispensary.
“The commercial unit’s value is enhanced by the more ways you can legally derive profits out of it,” Rendin says. “The value diminishes a bit every time you add a use restriction.”
New York City real estate attorney Jeffrey Rendin is a partner of Wagner, Berkow & Brandt with more than 14 years of experience representing purchasers, sellers, developers, investors, banks and New York’s top regulator of condo and co-op development in all forms of transactions, litigation, and regulatory matters. He is the former Chief of Enforcement of the New York State Attorney General’s Real Estate Finance Bureau. To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-931-5711.