Retail Rent Control

First, a question:

I’m not familiar with the details of commercial leases. What are “triple-net leases” and (in just a rough way) how do they help favor chain stores in a situation such as the proposed commercial rent control system outlined in the linked to “Villager” article?

Some thoughts:

1) The three other reasons (off the top of your head) for being against commercial rent control all seem to boil down, more or less, to a decreased supply of up-to-date retail space. While I certainly agree that this is a sufficiently good reason to be against commercial rent control, I’m wondering if, however, for many liberal New Yorkers (especially for many liberal Manhattanites), this alone may not be a sufficient reason for them to be against commercial rent control.

What’s the main problem that’s usually mentioned with decreased supply? Usually economists point out that a lessened supply of retail space increases pressures to raise rents. But, from the point of view of those inclined to support commercial rent control anyway, I wonder if they think that this will not be a problem anymore because we would now have commercial rent control to counteract such pressure!

Plus, a lot of New Yorker’s seem to me to feel (erroneously, in my opinion) that New York City (especially Manhattan) already has enough retail space, and that even under rent control those places that are “really” good retail locations (like the frontage along “avenue” streets) will never be withdrawn from the market — they are just too good.

2) Therefore I think it might be helpful to “drop the other shoe” and even more explicitly point out that with decreased supply it’s harder for new businesses, especially even new “mom and pop’s,” to enter into the market.

And, as you already seem to point out, given the greater resources of the big guys (e.g., chains and banks, etc.), such a situation is likely to be their advantage anyway, as they will be able to afford to pay the higher rents required for brand new spaces that aren’t subject to commercial rent control — leaving the mom and pop type businesses to nevertheless indirectly “fight over” the existing (or maybe even dwindling) supply of older spaces that would be subject to commercial rent control. (In other words, the market will prevail anyway – despite the intentions of rent control advocates.)

Plus, commercial rent control is a form of protectionism that protects weak businesses (e.g., product no longer in much demand, poorly run, etc.) from closing down and giving way to stronger businesses (e.g., new product, better run, etc.)

3) By the way, I recently ran into some examples of this lack of concern for the supply of retail space — even without NYC having commercial rent control.

I recently opposed the landmarking of the open space in a “tower-in-the-park” development in Greenwich Village (NYU’s Silver Towers housing complex), and one of the reasons is that landmarking would prevent, so it seems to me, the construction of low-rise buildings that would provide additional retail spaces (to take the pressure off small businesses on surrounding blocks). (Low-rise buildings would also complement, in my opinion, the three architecturally distinguished apartment houses that are the main focus of the proposed landmarking.)

Right now, on the entire three city-block site the sum total of commercial space is only one not all that large supermarket! Yet many of the very same people who vigorously support the landmarking of this open space (and oppose the addition of low-rise buildings that would help create smaller, but more useful open spaces) complain about a) the lack of supermarkets in the area and b) about the influx of chain stores (other than supermarkets!) and banks into surrounding blocks, crowding out unique Village stores and mom and pop’s.

Another related example was a thread on the “New York Times” City Room blog, where people complained about the replacement of Cafe Figaro (not even the original!), on Bleecker St. a short walk from Silver Towers, with a chain eatery. Again people seem to be “ideologically unaware” of or “ideologically unconcerned” with the connection between a lack of retail space and the lack of space for needed retail (like supermarkets) and for mom and pop’s. Plus, in this case, the reporter who posted the original article linked to some on-line ratings of Café Figaro that seem to clearly indicate that, at least for the last year or so, this was an establishment that seemed to be having significant management problems. Why protect such a business?

4) Although the reporter seemed to be trying to be objective, here’s one comment where he might have let his New York City / Greenwich Village liberal biases slip through:

“The far-reaching measure, sought by Upper Manhattan Councilmember Robert Jackson and deemed by some as a form of commercial rent control, would set regulated increases not [at least immediately and visibly — BH] subject to LANDLORDS’ WHIMS [rather than, “the marketplace” — emphasis and added comment mine — BH].”

First, a question:

I’m not familiar with the details of commercial leases. What are “triple-net leases” and (in just a rough way) how do they help favor chain stores in a situation such as the proposed commercial rent control system outlined in the linked to “Villager” article?

Some thoughts:

1) The three other reasons (off the top of your head) for being against commercial rent control all seem to boil down, more or less, to a decreased supply of up-to-date retail space. While I certainly agree that this is a sufficiently good reason to be against commercial rent control, I’m wondering if, however, for many liberal New Yorkers (especially for many liberal Manhattanites), this alone may not be a sufficient reason for them to be against commercial rent control.

What’s the main problem that’s usually mentioned with decreased supply? Usually economists point out that a lessened supply of retail space increases pressures to raise rents. But, from the point of view of those inclined to support commercial rent control anyway, I wonder if they think that this will not be a problem anymore because we would now have commercial rent control to counteract such pressure!

Plus, a lot of New Yorker’s seem to me to feel (erroneously, in my opinion) that New York City (especially Manhattan) already has enough retail space, and that even under rent control those places that are “really” good retail locations (like the frontage along “avenue” streets) will never be withdrawn from the market — they are just too good.

2) Therefore I think it might be helpful to “drop the other shoe” and even more explicitly point out that with decreased supply it’s harder for new businesses, especially even new “mom and pop’s,” to enter into the market.

And, as you already seem to point out, given the greater resources of the big guys (e.g., chains and banks, etc.), such a situation is likely to be their advantage anyway, as they will be able to afford to pay the higher rents required for brand new spaces that aren’t subject to commercial rent control — leaving the mom and pop type businesses to nevertheless indirectly “fight over” the existing (or maybe even dwindling) supply of older spaces that would be subject to commercial rent control. (In other words, the market will prevail anyway – despite the intentions of rent control advocates.)

Plus, commercial rent control is a form of protectionism that protects weak businesses (e.g., product no longer in much demand, poorly run, etc.) from closing down and giving way to stronger businesses (e.g., new product, better run, etc.)

3) By the way, I recently ran into some examples of this lack of concern for the supply of retail space — even without NYC having commercial rent control.

I recently opposed the landmarking of the open space in a “tower-in-the-park” development in Greenwich Village (NYU’s Silver Towers housing complex), and one of the reasons is that landmarking would prevent, so it seems to me, the construction of low-rise buildings that would provide additional retail spaces (to take the pressure off small businesses on surrounding blocks). (Low-rise buildings would also complement, in my opinion, the three architecturally distinguished apartment houses that are the main focus of the proposed landmarking.)

Right now, on the entire three city-block site the sum total of commercial space is only one not all that large supermarket! Yet many of the very same people who vigorously support the landmarking of this open space (and oppose the addition of low-rise buildings that would help create smaller, but more useful open spaces) complain about a) the lack of supermarkets in the area and b) about the influx of chain stores (other than supermarkets!) and banks into surrounding blocks, crowding out unique Village stores and mom and pop’s.

Another related example was a thread on the “New York Times” City Room blog, where people complained about the replacement of Cafe Figaro (not even the original!), on Bleecker St. a short walk from Silver Towers, with a chain eatery. Again people seem to be “ideologically unaware” of or “ideologically unconcerned” with the connection between a lack of retail space and the lack of space for needed retail (like supermarkets) and for mom and pop’s. Plus, in this case, the reporter who posted the original article linked to some on-line ratings of Café Figaro that seem to clearly indicate that, at least for the last year or so, this was an establishment that seemed to be having significant management problems. Why protect such a business?

4) Although the reporter seemed to be trying to be objective, here’s one comment where he might have let his New York City / Greenwich Village liberal biases slip through:

“The far-reaching measure, sought by Upper Manhattan Councilmember Robert Jackson and deemed by some as a form of commercial rent control, would set regulated increases not [at least immediately and visibly — BH] subject to LANDLORDS’ WHIMS [rather than, “the marketplace” — emphasis and added comment mine — BH].”

Adam, thanks for the info on a “triple-net lease.” If I understand your explanation correctly, the import of a “triple-net lease” is that it is, in a sense, a black market mechanism that allows the intended targets of commercial rent control to get around it anyway — in other words, one way or another, the markeplace will prevail and, in the end, it’s actually much better for society to have a transparent, above-board marketplace, rather than a hidden black market one.

– – – – –

In general, thinking the situation through a bit more (I was a bit rushed earlier), here are some additional comments and tentative refinements to the analysis:

1) “Market Urbanism” (Adam), I think it’s important, as you’ve done, to distinguish between different types of locations — good, bad and in between locations — in order to properly discuss the effects of the proposed commercial rent control law (which, by the way, if I recall the article correctly, is far more radical than just “retail” rent control).

2) It also seems important to note that with the anti-urban mentality (“we ‘need’ more parks and more ‘plazas,’ not more streets and retailing opportunities”) and anti-unplanned-development mentality (“new commerical space will create too much traffic for existing streets”) mentality of so many New Yorkers, there would probably be limited opportunities to create new commercial space even where the market would be willing to do so. (This is part of what I was trying to get at with my comment on the proposed landmarking of the Silver Towers open space. People are so anti-urban (yes, even in Manhattan) and so anti-development that they seem happy to limit construction of new commercial space, even if it would help provide the kind of stores they want and would also relieve the pressure on their beloved “mom and pop’s.”)

3) So it seems to me that in good locations a number of things are likely to happen:

a) Businesses that have existing leases will be protected from competition and the changing marketplace. We’ll have more tired, out-of-date stores, poor service, etc.

b) Businessmen with existing leases will get a windfall resource — a virtually non-cancellable lease. It seems to me that commercial rent control would then encourage a black market whereby tenants could charge “key money” etc. to sell their businesses. The net result is that the profit from a location would be diverted from the landlord to the tenant — who is less likely than the landlord to re-invest his profit in THIS property (i.e., maintaining and updating the property).

It seems to me that this has happened to a certain degree with the various forms of residential rent control. Tenants use the money they’ve saved on rent, or the money they’ve “earned” by subleasing or throug key money, to buy property ELSEWHERE, like retirement or vacation homes. Property owner’s, on the other hand, would be more inclined to reinvest properties back into the property itself, in order to maintain its rental and resale value. This is one of the things I had wanted to write about regarding Rangel, but didn’t have the time.)

4) In bad commercial locations, it seems to me that commerical rent control might not have too much effect, since bad locations aren’t likely to be subject to large rent increases anyway. (In other words, the market rent isn’t going to be much higher than a controlled rent.)

Maybe the biggest effect of commercial rent control in such areas (e.g., commercial districts in outlying areas) would be to deprive them of potential good tenants who might have moved there because of the high rents in good locations? Why would good tenants move to a bad location if they already have a lease in a good location or if they are able to pay some form of key money for a good location?

I’m thinking here, for example, what if SoHo had been subject to commerical rent control? Would the art scene have moved as it did to cheaper space on the Lower East Side, Greenpoint and West Chelsea? Perhaps it would have, with the shut-outs leading the way, but it seems to me that commercial rent control would have greatly retarded this overall beneficial process (which “liberal” New Yorkers tend to decry).

5) So the end result of commerical rent control would seem to be to encourage the disinvestment in NEW YORK CITY real estate and to encourage stagnation and decay of NYC’s commercial environment. It would seem to me to allow for / encourage less innovative and up-to-date commerce, since rent control would tend to freeze commerce in place, protect poor businessmen and let tenants bleed the profits from NYC real estate and invest them elsewhere.

Adam, thanks for the info on a “triple-net lease.” If I understand your explanation correctly, the import of a “triple-net lease” is that it is, in a sense, a black market mechanism that allows the intended targets of commercial rent control to get around it anyway — in other words, one way or another, the markeplace will prevail and, in the end, it’s actually much better for society to have a transparent, above-board marketplace, rather than a hidden black market one.

To clarify, triple-net is not typically a black market mechanism, as it is the most common form of lease for many retail tenants, but would become a mechanism that would avoid rent controls. They are also typically long-term, usually 10 years. Thus, those who already use triple-nets will certainly not suffer the same fate as mom and pops.

You make a lot of tremendous points. Let me know if you ever want to contribute your own posts at Market Urbanism. This topic deserves more in-depth treatment – an entire article actually, which is why I just wanted to mention the thoughts from the top of my head. At least for now.

More on Silver Towers and Market Urbanism, etc.

Thanks for the clarification about “triple-net lease” as a black market mechanism. Actually that’s what I thought you originally meant, but I didn’t express myself clearly.

Also, thanks for the invite about contributing posts at Market Urbanism. I hope to take you up on this when I have the time.

Regarding Silver Towers:

Adam (a/k/a “Market Urbanism”), the Silver Towers complex and the streets directly around it are always dead — it wasn’t just when you were there. And, not only is this area naturally uninviting, but there are also signs all over the place forbidding transpassing, etc.! Off hand, I don’t remember the actual number of the various “keep out” signs, but there are quite a number of them. I actually counted them last spring for my testimony before the Landmark Preservation Commission, where I opposed the landmarking of the superblock site plan (but didn’t oppose the landmarking of the Pei towers or the Picasso).

I’m delighted that you mention Jane Jacobs with regard to your perceptions of this complex, because her analysis of the aesthetic, social, political and ECONOMIC effects of these “tower-in-the-park” type complexes is so on target! And having lived near Silver Towers and Washington Square Village (which is the development directly to the north) for forty years (and having also done some additional research on the history of these developments), I have seen how these complexes very neatly illustrate what she says in her books.

I’d also like to note one thing especially here on the “Market Urbanism” blog: the areas directly surrounding these complexes have been, economically speaking, among the deadest areas of Greewhich Village for at least the last forty years! (Their only rivals being the other areas that have also been negatively impacted by urban renewal.) It’s really quite amazing how dead these centrally located streets have been. And it’s only relatively recently (four years ago?), during the current “boom,” that LaGuardia Place (which is the most “successful” of these streets) actually started to pick-up — finally!

I’ve written quite a bit about the various issues surrounding the proposed landmarking of the Silver Towers open space and, for those who are interested, perhaps my most easily accessed comments are to be found in a thread on the City Room blog of the “New York Times.” The blog post starting off the thread, “I.M. Pei’s Silver Towers Could Become a Landmark,” is by Sewall Chan and was posted on Feb. 15, 2008. (It can easily be found by typing “Pei” into the search box of the City Room blog.) My comments are comments #10, #17, #21, #24. I think comments #21 and #24 might be especially pertinent to market urbanism.

More on Silver Towers and Market Urbanism, etc.

Thanks for the clarification about “triple-net lease” as a black market mechanism. Actually that’s what I thought you originally meant, but I didn’t express myself clearly.

Also, thanks for the invite about contributing posts at Market Urbanism. I hope to take you up on this when I have the time.

Regarding Silver Towers:

Adam (a/k/a “Market Urbanism”), the Silver Towers complex and the streets directly around it are always dead — it wasn’t just when you were there. And, not only is this area naturally uninviting, but there are also signs all over the place forbidding transpassing, etc.! Off hand, I don’t remember the actual number of the various “keep out” signs, but there are quite a number of them. I actually counted them last spring for my testimony before the Landmark Preservation Commission, where I opposed the landmarking of the superblock site plan (but didn’t oppose the landmarking of the Pei towers or the Picasso).

I’m delighted that you mention Jane Jacobs with regard to your perceptions of this complex, because her analysis of the aesthetic, social, political and ECONOMIC effects of these “tower-in-the-park” type complexes is so on target! And having lived near Silver Towers and Washington Square Village (which is the development directly to the north) for forty years (and having also done some additional research on the history of these developments), I have seen how these complexes very neatly illustrate what she says in her books.

I’d also like to note one thing especially here on the “Market Urbanism” blog: the areas directly surrounding these complexes have been, economically speaking, among the deadest areas of Greewhich Village for at least the last forty years! (Their only rivals being the other areas that have also been negatively impacted by urban renewal.) It’s really quite amazing how dead these centrally located streets have been. And it’s only relatively recently (four years ago?), during the current “boom,” that LaGuardia Place (which is the most “successful” of these streets) actually started to pick-up — finally!

I’ve written quite a bit about the various issues surrounding the proposed landmarking of the Silver Towers open space and, for those who are interested, perhaps my most easily accessed comments are to be found in a thread on the City Room blog of the “New York Times.” The blog post starting off the thread, “I.M. Pei’s Silver Towers Could Become a Landmark,” is by Sewall Chan and was posted on Feb. 15, 2008. (It can easily be found by typing “Pei” into the search box of the City Room blog.) My comments are comments #10, #17, #21, #24. I think comments #21 and #24 might be especially pertinent to market urbanism.

I walked through the Silver Towers area again last weekend with my wife and visiting friends. My wife asked, “Can’t they move the Picasso to somewhere people will actually walk by and appreciate it?” Being from Chicago, where the other Picasso statue is, she was surprised the statue was so under-appreciated, unlike Chicago’s Picasso…

I walked through the Silver Towers area again last weekend with my wife and visiting friends. My wife asked, “Can’t they move the Picasso to somewhere people will actually walk by and appreciate it?” Being from Chicago, where the other Picasso statue is, she was surprised the statue was so under-appreciated, unlike Chicago’s Picasso…

I read the City Room comments. I pretty much agree with your points. I don’t know why some people insist that it’s a vibrant place. I didn’t see a single person using the “open space” or even walking through it. At the same time McDougal, for example, was packed with people enjoying the streets.

Maybe it’s nice aesthetically, but aesthetics should be secondary to human needs. And if nobody is appreciating the aesthetics, then what’s the real value? (if a tree falls in the woods….)

Even the retail on the site was dull and didn’t appear to be thriving, despite the density. I was shocked that a supermarket in this neighborhood wasn’t packed.

I have a website that explains what a triple net lease is (I don’t sell anything). You can click the link on my username to read all about it. As an investor I think triple net leases are extremely safe and profitable (over a long enough time). I buy properties then do a triple net lease to a property management firm, who then sublets the properties to rentors. I don’t have to worry about maintenance, taxes, or any random expenses. Works Great!

I have a website that explains what a triple net lease is (I don’t sell anything). You can click the link on my username to read all about it. As an investor I think triple net leases are extremely safe and profitable (over a long enough time). I buy properties then do a triple net lease to a property management firm, who then sublets the properties to rentors. I don’t have to worry about maintenance, taxes, or any random expenses. Works Great!