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Commercial Tenants in Residential Buildings: The Neighbor Downstairs

By Elizabeth Lent

November 2015


In the Market

If commercial tenants are allowed and welcomed, boards and residents should recognize the pros and cons of certain types of renters. “The right type of commercial tenant for a particular building, whether it’s a condo or a co-op, depends on many factors,” says [an attorney].

“There’s no one formula when it comes to putting together the ideal tenant mix, or selecting a business for the ground floor of one’s property. Looking closely at the demographics is always a good start. Is the building mainly occupied by millennials who are on the go and looking for fast, healthy eats, trendy hot spots and socially conscious fashion brands? Or is it filled with young families who are shopping for little ones in addition to themselves and crave a Starbucks after taking their wee ones to a class at Gymboree? Perhaps it’s home to mature baby boomers who have more sophisticated retail needs and tastes and are looking for luxury and convenience? Or, as it is in many cases, is it a mix of all of the above?”

Residents might also appreciate a thorough examination of the neighborhood to see what is lacking. “Does the neighborhood have a sufficient number of banks, supermarkets, medical offices and dentists?” says [an attorney]. “If there’s no florist in sight, then there’s a need that can be met. That type of tenant typically receives the warmest welcome from a co-op or condo’s residents.”

Having a tenant who is committed to a good and healthy working relationship can help as well. “The best commercial tenant pays their rent on time and is extremely quiet without a lot of foot traffic,” says attorney Adam Leitman Bailey of the firm Adam Leitman Bailey, P.C. in Manhattan.

Like in any good relationship, it is helpful for the board or manager and the business owner to have a few conversations before entering into any sort of agreement. It also helps enormously to have an attorney who specializes in this type of service to oversee creation of the lease. “For a condominium, many of the commercial spaces have been sold to a private person or company,” says Bailey. “Hopefully the corporate documents allow for the residential building to have some authority over many of the company’s operations.” This includes a say in opening and closing times, signage and the number of people allowed to enter the entity at one time.

How much say the building’s board has in the lease can depend on the market conditions. “The better the market for the owners, the more restrictions the tenant will have to accept,” says Bailey. “The lease negotiation will depend on the desirability of the address of the location and the availability of space in the market. Less inventory and a more desirable location will result in the ability to place more restrictions and limitations.”

Insuring Success

Most unit owners aren’t interested in a vanguard choice for a commercial space.  A reliable coffee shop or a nice gym might sound more appealing than a trendy bistro that’s getting written up by all the papers. Board members, though, will need to work with their attorneys, insurance representatives, and potential lessees to make sure that all matters of insurance are examined and squared away before finalizing any deals.

“In a mixed-use building, it is customary that the commercial user hold their own general liability insurance, and that the policy names the condo as an insured party,” says [an attorney]. “To protect itself, a building should spell that out as a requirement within the lease contract. The document should also note the amount and type of insurance needed to protect the building in the event of a fire or other liability issue, including replacement costs, public liability, rental loss and more.”

“Almost all decent commercial leases,” adds Bailey, “require the tenant to obtain insurance and many times name the co-op or condo as additional insured. The co-op and condo should also obtain additional insurance to cover any shortfall between the two insurances. Also, it is quite common for a commercial tenant’s insurance to lapse. So not only should the building require the tenant update the building with any insurance changes or cancellations, it should have additional insurance for protection.”

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