The Bottom LineThe Bottom Line

Legal Aid to Level the Playing Field for Small Businesses in New York

A small city program makes a big difference to minority- and women-owned small businesses when it comes to negotiating commercial lease terms.

The Riverdale location of Buunni Coffee, owned by Sarina Prabasi and Elias Gurmu. (Photo by Oscar Perry Abello)

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It was love at first sight. It was nearly loss at first disaster.

Originally from Nepal, Sarina Prabasi moved to Ethiopia, the birthplace of coffee, where she met Elias Gurmu. They fell in love, married, and eventually moved to New York City, settling in the Washington Heights section of Manhattan, where they opened Cafe Buunni in 2012.

“Our business became a community hub, a place for gathering, for more than coffee,” says Prabasi. “Coffee is a daytime business, so we started opening our space up in the evenings for all kinds of events”

When the couple came upon a space in the Riverdale section of the Bronx, a short drive or bus trip north, they knew they had found an ideal next location for their business. They invested heavily in the build-out.

“We saw the space and we just fell in love with it, and you’re not supposed to do that,” says Prabasi. “The thing we fell in love with was it really has amazing light, really high ceilings and a mezzanine level, so we tried to build it out in a way that would accentuate that. But maybe we weren’t as hard-nosed business-wise as we could have been.”

When the pandemic shut down came in mid-March, Buunni initially shuttered all four of its locations. It wasn’t immediately clear whether it could maintain the leases on all of them, not to mention the 30 or so employees it had at that point. Like many business owners across the city and the country, large and small, the couple started reaching out to their landlords to negotiate some kind of arrangement in response to the unprecedented situation.

At their treasured Riverdale spot, however, instead of dealing directly with a landlord, they had to confront the landlord’s lawyer. “I felt like I was at a disadvantage,” says Prabasi, who has a master’s degree in international development.

The business eventually received legal aid through the city-funded Commercial Lease Assistance Program. With the program’s help, Buunni negotiated a temporary rent reduction on its Riverdale location.

“Having an attorney was just mentally a huge relief,” says Prabasi. “It’s not perfect, it’s not like we solved all the problems, but we got a significant [rent] reduction and we got to the point where we said ‘we can do this.’ It really gave us that breathing space and room.”

The Commercial Lease Assistance Program launched as a small pilot program in 2018, with $2.4 million in funding over two years. It has provided assistance on more than 1,000 legal matters to around 400 businesses (some have returned for more than one case) — 75 percent of which are owned by people of color, 64 percent are immigrant-owned, and 51 percent are women-owned. Of those business owners, 33 percent primarily speak a language other than English, and a majority employ five or fewer employees. In order to be eligible for assistance from the program, business owners must be “low-income,” defined as up to five times the federal poverty level.

The Commercial Lease Assistance Program was not renewed in the city budget negotiated at the end of June, which Mayor Bill de Blasio admitted was a mistake. After outcries and organizing from small business groups, city council passed a bill in August to restore funding and make the program permanent, though for now it will remain small in scale, at just $1.5 million in annual funding.

“If anything the city should be doubling or tripling the funding for this program,” says Prabasi. “I hear a lot of lip service about the importance of small businesses to the city, but in terms of practical support this is a very practical kind of support.”

Things might be far worse if not for a statewide eviction moratorium for commercial tenants — although that program has been extended only month to month, and is set to expire on September 20.

The market for small business space in New York City was fraught long before the pandemic hit.

Like New York’s housing market, the commercial market is predominantly a rental market, making it an outlier among cities. Small retail businesses typically rent or lease locations on the ground floor or second floor of residential or office buildings that are often too large for any single tenant to acquire and maintain.

New York’s typically older building stock regularly requires new financing or refinancing to free up cash for ongoing maintenance. Every visit with a lender is an opportunity for legacy owners to think instead about cashing out of properties that have appreciated greatly in value over the past decade or two. New owners may have less connection to and appreciation for the small businesses tenants they have, opting instead to seek out tenants that reflect future aspirations for even higher real estate values in the neighborhood. Unlike the situation with residential tenants, landlords aren’t required to offer renewals to their commercial tenants in New York City.

In other cases, landlords of commercial spaces may be milking tenants for high rents while providing minimal upkeep, leaving those tenants primarily responsible for maintenance in their spaces — on top of any build-out expenses.

“There are no rights for commercial tenants under state law, unlike residential tenants, [for] whom landlords, for example, are required to maintain running water and heat,” says Catherine Humphreville, attorney in charge of the community and economic development program at Brooklyn Legal Services Corporation A. “Their lease is the only protection commercial tenants have.”

Brooklyn A, as it’s known, is one of the three legal aid groups that the city funds to operate the Commercial Lease Assistance Program. Between March and the end of June — when funding for the program ran out temporarily — the legal aid group says inquiries for the program went up tenfold.

In one of the most pervasive practices, commercial lease terms often explicitly pass at least a portion of property taxes directly onto commercial tenants — sometimes 100 percent of the property taxes, says Humphreville. She’s even seen cases where commercial tenants are paying property taxes to their landlord even though the landlord actually has some kind of tax abatement in place.

And it gets worse. To Humphreville, the most egregious of the lease terms she’s come across are provisions that say if any sort of commercial rent control is ever established, that the tenant is essentially waives those potential rights for themselves. “It’s not super-common, but it makes me personally angry as an advocate for small business,” she says.

Efforts to level the playing field between landlords — some of whom even today certainly qualify as small businesses themselves — and commercial tenants go back decades. In the mid 1980s, something called the Small Business Jobs Survival Act first emerged in city council. Versions of the bill have been repeatedly proposed and pulled back or otherwise stalled under mayors of both Democratic and Republican parties.

Currently backed by a citywide coalition called TakeBackNYC, the Small Business Jobs Survival Act in its most recent form would require landlords to offer commercial tenants a ten-year lease, and it would give tenants the right to take landlords into legal arbitration if they feel the rent increase on their renewal is out of line with market conditions. It would also restrict landlords from passing the cost of property taxes directly onto small business owners.

While the bill currently has the support of a majority on city council, Mayor De Blasio’s administration currently sides with the real estate industry, which continues to oppose the Small Business Jobs Survival Act.

The Commercial Lease Assistance Program emerged after other small business groups, led by the coalition United for Small Business NYC, successfully lobbied for the passage of a 2016 bill that for the first time defined commercial tenant harassment. City council expanded and strengthened that definition in a 2019 bill.

In some ways the Commercial Lease Assistance Program is just a stopgap. It doesn’t require landlords to offer lease renewals to commercial tenants. But in other ways, the help it offers would complement something like the Small Business Jobs Survival Act. For example, if that act were to pass, it guarantees the right to arbitration but that arbitration would not come with free legal assistance.

Of more than 200,000 businesses in New York City, 98 percent have fewer than 100 employees, and 89 percent employ fewer than 20. So the number of businesses that the Commercial Lease Assistance Program has helped so far is hardly a drop in that bucket. But over the past two years it has started to reveal some of the more hidden but pervasive barriers to small business ownership in New York.

One example is the “personal liability provision” or “personal guarantee” that is a standard clause on commercial leases. It’s akin to the penalty that residential tenants pay for breaking a lease, which can be anywhere from $1,000 to three or four months’ rent. For commercial tenants, the typical personal guarantee puts business owners on the hook to pay the entire amount of rent remaining on a lease. So if the business fails two years into a five-year lease, the business owner would owe three years’ worth of rent.

“I would say it’s extremely rare for one of my clients to not have a personal guarantee,” says Humphreville. “Realistically, if a landlord says they’re going to ask for a personal guarantee, that’s not something we’re going to negotiate out, what we try to do is limit the potential personal liability of the business owner.”

One alternative that has worked is negotiating a “Good Guy Clause.” In one example Humphreville gives, if the business is at least three years into a five-year lease, and it gives the landlord at least six months’ notice, the rest of the personal guarantee is extinguished.

Just understanding what options are out there during the pandemic has proven to be a frustrating barrier for businesses. It’s hard to see any patterns. Some larger landlords are harsher, with less patience for partial or missed rent payments; other large landlords have more of a cash cushion to wait things out for longer than smaller landlords. Other small landlords have deeper ties to neighborhood businesses they’ve long had as tenants.

“I did my research, contacted everyone I could in the neighborhood, the community board, the chamber of commerce,” says Prabasi. “What was being agreed to by others, it was all over the place. Some people were getting reductions, some were getting rent-free periods. We’re all kind of on our own to say what makes sense. And I guess businesses are all different, but it was hard for us to even know what to ask for.”

Scrambling for advice on lease negotiations, Prabasi turned to the Business Center for New Americans, a nonprofit that makes small business loans to immigrant and women-owned businesses. She hoped they had clients who had faced similar situations and could provide some insight.

“I was thinking about other businesses in our neighborhoods, mostly Spanish speaking owners,” says Prabasi. “The smallest businesses in New York are not equipped. The playing field is so unequal, the power dynamic is so unequal when it comes to small business and a landlord.”

The Commercial Lease Assistance Program has relied on trusted community-based organizations for client referrals. A few get a small slice of the funding for outreach programming.

The Business Center for New Americans informally connected Prabasi to Brooklyn A, where she ultimately ended up working with Humphreville to negotiate a temporary rent reduction for their Riverdale location — before the gap in funding for the program took hold.

“I hope we can go back to them and ask for some more pro bono legal assistance,” says Prabasi. “The pandemic is not over, we’re planning ahead and we do still have the four locations. A big part of our identity is about being a meeting place, a gathering place, so we want to hold onto that, even knowing that we can’t do that for now.”

The lease assistance work has also touched on some of the deeper racial disparities that the COVID-19 pandemic has laid bare.

“Anecdotally, I do have some higher rent clients and they typically have just more bargaining power with their landlords because their landlord is just not going to find someone for that $10,000 a month space right now,” says Humphreville. “There’s a racial component to that, where the higher-end, white-owned businesses, based on clients I’ve worked with, are the ones getting higher breaks on rent versus outer-borough POC-owned businesses.”

If a handful of state and local legislators have their way, small businesses in New York City will have a new option to put on the table. They’ve introduced a bill at the state level to give New York City the option to offer landlords a property tax abatement in exchange for providing commercial tenants a “recovery lease,” defined as a ten-year lease with specific limits on annual rent increases. Any tenant would be allowed to break their current lease and enter into a recovery lease with their landlord. The local bill, still being worked out, would specify the level of property tax abatement as well as the limits on annual rent increases.

“My district is not unfamiliar with disasters,” says Assemblymember Yuh-Line Niou, one of the co-sponsors of the legislation at the state level, whose district includes Chinatown, the Lower East Side, and Wall Street — all areas hit hard by Superstorm Sandy, and before that, 9/11.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: new york citysmall businessrent

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