Inside the plight of a small retail landlord

Commercial tenant protections put mom-and-pop building owners in a bind

National /
Dec.December 09, 2020 10:30 AM
David Swerdloff and his father (left) with 124 7th Avenue (Phots via David Swerdloff; Google Maps)

David Swerdloff and his father (left) with 124 7th Avenue (Photos via David Swerdloff; Google Maps)

David Swerdloff is a far cry from what many picture a Manhattan commercial landlord to be.

The 75-year-old owns a single building, on Seventh Avenue in Chelsea. Soaring condos and offices dwarf the one-story structure, whose air rights he sold in 1997.

Swerdloff, who lives in the suburbs of Westchester County, didn’t set out to be a landlord. He inherited his building in the early 1980s, when it housed his family’s kitchen and bathroom showroom. After his father died, Swerdloff ran the 2,800-square-foot showroom for 25 more years.

David Swerdloff's father, 1969

David Swerdloff’s father in 1969

“I remember growing up in his store,” his daughter, Lindsey Rosenthal, wrote in an emailed letter to The Real Deal. “The owners and workers in the neighboring stores would talk outside, feed the parking meters every hour and knew everything about each other’s family.”

Swerdloff retired in 2006, and Le Pain Quotidien signed a 15-year lease for the space, 124 7th Avenue. But when the Chelsea eatery started losing money last year, Le Pain stopped paying the rent — nearly $47,000 a month — and the $226,000 in annual real estate taxes, according to a default notice sent to the international bakery chain.

Swerdloff said he tried negotiating to lower the rent, hoping to get some, really any, amount of money. No dice. The company, which filed for bankruptcy in May, never resumed paying and eventually abandoned the location.

“There are a bunch of other [small landlords] suffering from this, and it’s tough.”

David Swerdloff, commercial landlord

The struggling landlord took Le Pain to landlord-tenant court in August 2019. Or tried to, at least. After Swerdloff waited six months for a hearing, the judge threw out the case on a technicality — one of the five addresses where the subpoena was served was incorrect. His options all but exhausted, Swerdloff turned to civil court.

Then the pandemic hit. The courts closed and a wave of tenant protections swept over the legal landscape.

Under a series of laws and executive orders signed by Gov. Andrew Cuomo and Mayor Bill de Blasio this spring, commercial landlords cannot evict tenants. Nor, in most cases, can they go after the personal assets of non-paying tenants even if a clause in the lease allows it.

“With the signing of my bill, any small business owner with a personal liability clause in their lease will see that provision temporarily suspended,” declared Council member Carlina Rivera in a statement at the time. “They will no longer have to fear their landlord going after their personal life savings and assets because of a disaster no one saw coming.”

It was a cruel irony for mom-and-pop landlords like Swerdloff — one that could become more prevalent in major markets like New York in the age of Covid.

Lawmakers went to great lengths to protect small business owners from big landlords, but made no effort to protect small landlords from big tenants. Untold numbers of property owners whose corporate tenants stopped paying have been scrambling to pay their mortgages and taxes, putting them at risk of losing their properties.

“Nobody said to the landlords, they don’t have to pay real estate taxes, they don’t have to pay mortgages, they don’t have to pay lenders,” said attorney Luise Barrack, a managing partner at Rosenberg & Estis and head of the firm’s litigation department. “It could be a corporation or an LLC, or it could be somebody who’s sunk their life savings — or their entire family’s life savings — into a building.”

The impact on smaller landlords could be long-term.

“You count on streams of cash being there, because of your streams of expenses,” said commercial real estate lawyer Joshua Stein. “If you start to screw around with that ecosystem, inevitably bad things are going to happen.”

The U.S. has 10 million to 11 million small-time landlords, managing an average of two units each, according to an analysis of IRS data by the Department of Housing and Urban Development’s Office of Policy Development and Research. Institutional landlords, meanwhile, number fewer than 1 million.

With stores shuttering and a recession taking hold, pandemic-wracked retail tenants checked with their attorneys and found no compelling rationale to keep paying their landlords.

“If you’re a retailer that doesn’t have an underlying ‘good guy’ guarantee, or a meaningful corporate guarantee, then you have every reason not to pay rent,” said Peter Braus, a managing partner and co-founder of the commercial brokerage Lee & Associates. “The recourse that a landlord has is quite minimal in this environment.”

The city did face some legal backlash from mom-and-pop landlords. Two, both first-generation immigrants, sued in July, arguing that Covid-19 protections for non-paying businesses deny landlords’ right to free speech and due process, and violate the Constitution’s contract clause.

“I think a lot of people in New York City, a lot of renters, paint a picture that landlords are evil,” plaintiff Marcia Melendez, who owns two properties in Brooklyn, said in an interview.
“There are a lot of small landlords that actually need the income from their properties to survive and to pay the bills for the property. You can’t lump everybody together.”

Her tenants include residents, one of whom she says is not paying rent, and a small local coffee shop, for which she has provided rent relief. But the case also cites the defaults of Gap, Old Navy and Victoria’s Secret.

“We’ve seen major corporations take advantage of this,” said Stephen Younger, of Patterson Belknap Webb & Tyler, the lead attorney for the plaintiffs. “There’s no income test that would take into account whether you’re truly suffering or not.”

But the case against the city was recently dismissed. The plaintiffs are deciding whether to appeal.

“These provisions are put in place to protect those in need,” said attorney Laura Brandt, who brands herself as “the Retail Lawyer.” She noted that some stores have lost millions, if not billions, of dollars in the pandemic.

“But now that this has dragged on, it’s not just the retailers — the landlords are starting to go into bankruptcy,” Brandt said. “So now they’re both underdogs.”

David Swerdloff, 2006

David Swerdloff, 2006

When Le Pain filed for Chapter 11, Swerdloff lost all hope.

“There are a bunch of other [small landlords] suffering from this, and it’s tough,” he said.

Hospitality investment firm Aurify bought Le Pain out of bankruptcy last month with plans to reopen some locations across the U.S. A spokesperson for Le Pain declined to comment.

Smaller landlords with just one property and very little capital often lack the resources to replace a tenant, Braus noted. “They can’t compete with the deep-pocketed landlords, who are able to go out and get really good tenants by spending the money that’s necessary,” he said.

Swerdloff paid $240,000, with interest, in 2019 property taxes and expects to owe $220,000 for this year. Eighteen months without a paying tenant makes the upcoming tax payment daunting, if not impossible. Swerdloff said he and his wife have already gone through their life savings.

Desperate, he and his wife sent a letter to the City Council in October, pleading for some kind of relief. “We cannot live another day like this,” they wrote. They never heard back.

Swerdloff sold his home of 44 years in an attempt to stay afloat, according to the letter. He is still looking for a tenant, or perhaps a buyer, for his 7th Avenue building.

“The city is not doing anything,” he argued. “They’re oblivious to the plight.”






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