The Real Estate Board of New York to The Committee on Small Business of the New York City Council Regarding Intro. No. 1796 and Intro. No. 2299

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The Real Estate Board of New York (REBNY) is the City’s leading real estate trade association representing commercial, residential, and institutional property owners, builders, managers, investors, brokers, salespeople, and other organizations and individuals active in New York City real estate. REBNY thanks the New York City Council Committee on Small Business for the opportunity to provide testimony about two bills that would each impose commercial rent control, Intro. 1796 and Intro No. 2299.

It goes without saying that it is important for City officials to take greater steps to support small businesses and retailers across the city. They bring vibrancy to our neighborhoods, provide employment and opportunities for economic mobility to generations of immigrant entrepreneurs. Retail is a challenging business and failure rates have been consistent for decades - the average retail business survives less than 14 years – because there is always a new challenge.i This past decade the big disruptor is ecommerce, with a 123% increase in the online share of the retail sales market from 2013 to 2020. Additionally from 2013 to 2020, the dollar volume of online sales increased 201%, while offline sales volume increased only 19%.ii The decade prior it was big box. Nearly twenty years ago it was 9/11, and before that suburban flight and urban blight.

The important conversation we need to have is how to enact proven policies that will support small businesses.

Commercial rent control is a flawed concept that fundamentally fails to address the root causes of the greatest challenges facing small businesses in New York City and as these bills are written, rests upon a questionable legal foundation. Assuming the City Council has the authority to impose commercial rent control – which it does not - these bills are bad ideas even in a strong economy and even worse as the city recovers from the pandemic.

Throughout the pandemic, which economically impacted owner and tenant alike, the real estate industry has been a staunch advocate for small businesses and commercial property owners have made it a priority to work with struggling tenants throughout the pandemic, adjusting and in some cases forgiving rent. Neither bill recognizes on-the-ground realities, most notably, the concept of percentage rent or, paying a percentage of gross revenue generated in the premises as rent. Many landlords provided Covid rent relief by converting fixed rent, or a portion of it, into percentage rent. Property owners also provided capital for outdoor dining and adapting lease structures to help these businesses survive. All this, in spite of the City Council imposing unnecessary burdens upon owners such as Local Law 55 of 2020 which prohibits the enforcement of personal guarantees on certain commercial leases.

Unfortunately, many businesses have not survived. The pandemic’s impact on restaurants is most severe. According to National Restaurant Association restaurants that closed they had been open on average for 16 years, and 16% had been open for 30 years. And yet, despite ongoing declines in retail rents and business closures, property owners persist in filling vacancies and sparking new opportunities for small businesses and entrepreneurs.

Enacting commercial rent control will upend this dynamic. Even as taxes and other costs continue to rise, rent caps determined by a politically-appointed body would only incentivize owners to avoid deals with small businesses and pop-up tenants, opting for larger, more credit-worthy tenants instead. Propping up businesses that are not economically viable will lead to economic disaster.

Despite the advocates’ rhetoric, these bills are not simply a matter of protecting small storefront retailers from large property owners. Indeed, these bills would limit rents for tenants ranging from Starbucks to Tiffany. And Intro. No. 2299 would also prevent nearly 100,000 co-op households from effectively managing the ground-floor commercial space they rely on to maintain the financial health of their buildings and avoid ever-rising maintenance fees. Additionally, 3,043 condominium households and 488,175 rental households would be impacted by this legislation, as would not-for-profits such as houses of worship that earn income by renting space to other organizations. They could be adversely impacted by not being able to charge a true market rent or ensuring the tenant met the best community need.

Finally, these rent control schemes would reduce the value of retail properties and directly impact property tax collections. The City cannot afford to forego that tax revenue.

For these reasons, the City Council should stop debating legally dubious commercial rent control proposals and instead pursue thoughtful policies that will create a better environment for New York City’s small businesses to succeed. These include:

  • A legacy business tax abatement program
    Rather than artificially seek to limit rents through some form of commercial rent control, policymakers could instead develop programs that support property owners who work to keep legacy businesses and businesses owned by women, people of color, immigrants, artists, and new entrepreneurs in their buildings. One way to do so would be a new property tax abatement program that supports owners who work to keep those types of business owners in their location at affordable rents. Particularly in a strong market when there is competition for space, such a program could provide a meaningful incentive to property owners to keep existing tenants rather than market the space. 
  • Eliminate the commercial rent tax
    The commercial rent tax is a 3.9% tax on gross rent paid by commercial tenants whose rent exceeds $250,000 and are located in Manhattan south of 96th street. This tax costs businesses over $840 million in Fiscal Year 2021 and is projected to rise to nearly $1 billion by 2025. With the City budget now in excess of $100 billion, the City can easily afford to eliminate this tax that unfairly raises the cost of doing business in Manhattan and will make it harder for the retail industry to recover. 
  • Street Vendor Enforcement
    One of the challenges facing storefront retailers is the competition and disruption from street vendors who are not held to the same regulatory standards as storefronts and may not be operating legally at all. Indeed, in many parts of midtown Manhattan, street vending is not authorized during business hours. Yet, it occurs undeterred. For this reason, as the City sets up its new Street Vendor Advisory Group, it will be critical that enforcement of illegal vending be prioritized.
  • Reduce barriers to entry for new businesses created by outdated rules and regulations
    In 2015, the Mayor’s Office reported that New York City has over 6,000 rules and regulations impacting businesses and over 250 different types of business licenses and permits. Consequently, it can take months – if not years – for businesses to open their doors. Rather than ask business owners to understand each and every type of permit and license they may need, the City should create a single small business permit for businesses with fewer than 100 employees. Entrepreneurs should be able to apply with a single form from their phone or computer and promptly get a response from the City. This type of plan, first put forward by then-Mayoral Candidate Kathryn Garcia, is the kind of policy change that will be needed to promptly fill vacant storefronts throughout the five boroughs. 
  • Strengthen City services for small business owners
    The City’s Department of Small Business Services (SBS) administers a number of programs to help businesses get up and running but more can be done. Specifically, SBS should strive to create a storefront presence in each business improvement district or community district to provide a visible presence in the neighborhood. Services provided should include help for new entrepreneurs starting a business as well as legal assistance to help businesses understand and enter into commercial leases.
  • Speed up and simplifying small business permitting
    In 2015, the Mayor’s Office reported that New York City has over 6,000 rules and regulations impacting businesses and over 250 different types of business licenses and permits. Consequently, it can take months – if not years – for businesses to open their doors. Rather than ask business owners to understand each and every type of permit and license they may need, the City should create a single small business permit for businesses with fewer than 100 employees. Entrepreneurs should be able to apply with a single form from their phone or computer and promptly get a response from the City. This type of plan, first put forward by then-Mayoral Candidate Kathryn Garcia, is the kind of policy change that will be needed to promptly fill vacant storefronts throughout the five boroughs.

Bill specific comments may be found below.

BILL: Int 1796-2019
SUBJECT: This bill would establish a system of commercial rent registration and regulation applicable to retail stores of 10,000 square feet or less, manufacturing establishments of 25,000 square feet or less, and professional, services or other offices of 10,000 square feet or less. The Mayor would appoint a seven-member Commercial Rent Guidelines Board responsible for annually establishing guidelines and the rate of rent adjustments for covered commercial spaces.
SPONSORS: Council Members Levin, Gibson, Reynoso, Ayala, Lander, Chin, Van Bramer Dromm, Kallos, Menchaca, Rivera, Rosenthal, Diaz, Rose, Koslowitz, Ampry-Samuel, Brooks-Powers, Cornegy, Barron, Riley, Adams

Unlike other commercial rent control schemes the City Council has contemplated, we know exactly how a control board will operate and damage a market sector. Over multiple mayoral administrations, the City’s residential Rent Guidelines Board has failed to issue increases aligned with rising expenses for a variety of reasons including flawed methodologies, outdated data, and political interference. There is no reason to believe a commercial rent guideline board would operate any differently, despite even the best of intentions.

Further, there is no practical way for an annual guideline to account for the myriad of retail corridor types, market conditions, building typologies, permitting requirements based on business use, and the variety within the sector, versus the relative homogeneity and intensity of residential use. The board would not be able to equalize the commercial controls and cost of such on the Upper West Side such as landmark approvals and zoning requirements to the none that exist on Astoria Boulevard, nor to equalize the insurance costs in a flood plain to those outside of it.

This bill fails to even contemplate what implementation would mean, what the qualifications of such a board should be, what the cost to assessments and tax value would be over time if rents are capped without explicit guardrails to ensure such flawed methodologies are not adapted here by the whim of a politically appointed board with no requirements for expertise in this space. As we work together to ensure a robust economic recovery now is the not the time to experiment with measures the City has little to no experience in.

BILL: Int 2299-2021
SUBJECT: This bill would establish protections for tenants of storefront premises through a “Storefront Business Bill of Rights.” For any tenancy of more than one year, the bill would require a written lease for storefront premises. In addition, the bill provides for lease renewal procedures and the option to extend the lease in certain cases for up to one year with not more than a ten percent rent increase. The bill would further require an owner to provide a tenant with relevant information about the storefront premises to be leased. The bill would permit a court to impose civil penalties and award damages, equitable relief, attorneys’ fees and court costs for failure to comply with these requirements. The Commissioner of Small Business Services would oversee administration of the bill’s lease requirements and would also be required to make available online model commercial leases for storefront premises, as well as translations of such leases in other languages.
SPONSORS: Council Members Rosenthal, Levin, Gibson, Louis, Cumbo, Menchaca, Dromm, Chin, Admas, Ayala, Brooks-Powers, Rose, Koslowitz, Brannan, Riley, Kallo, By request of the Manhattan Borough President, Public Advocate Williams

We know that job growth in this city is fueled by new ideas. Yet, this bill will take away the rights of new entrepreneurs in two ways. First, by requiring that existing businesses have the right to remain in place regardless of their financial viability or neighborhood needs and takes spaces off the market for other users. Second, the bill dramatically increases the risk in signing a new, untested tenant. Under this framework, the City Council is forcing an owner to make the economically rational choice of waiting for someone whose idea is proven and can pay. In the interim, more storefronts will remain or become vacant again.

Further, it sets up a “gotcha” regime with its byzantine requirements to produce documents that are already publicly available in most cases, and when they are not, would require an additional cost to access. These include documents that the City itself controls, such as certificate of occupancy or prior fine record.

Thank you for your consideration on these points.