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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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.