By Michele Gambetta
Artist, ArtCondo founder, licensed NYS real estate agent at BOND New York
If you are an artist or creative business owner and want to legally live and work in the same location, a mixed-use property might be for you! Mixed-use buildings are a unique and versatile type of commercial property, specially zoned to include both commercial and residential units. They are residential-commercial hybrids where there is typically more residential square footage than commercial square footage, and both are contained in a single building. These buildings are usually self-contained and small – typically 2-3 floors and with 2-5 units – giving owners a unique autonomy and freedom from other owners, and ability to collect rent from leased units. These properties are an often misunderstood real estate inventory and can be challenging to purchase, precisely because of their uniqueness and versatility. If you are considering owning a mixed use building you need to understand more!
There are many varieties of mixed use properties in New York City. The boroughs of Brooklyn, Queens and the Bronx have many mixed-use brick buildings with mom-n-pop storefronts on street-level containing bodegas or delis, and 1-2 floors of residential units above. Less common are single-family properties in small borough neighborhoods, with doctor’s or dentist’s offices on the ground floor. Other variations include large apartment building complexes with a full block of ground floor retail containing needed neighborhood stores like dry-cleaners, deli, etc., and residential apartments located behind or above.
Mixed-use properties are unique in that they provide owners with the ability to have two different legal occupancy uses – both residential and commercial tenants – in one building. In the vast majority of mixed-use properties, the residential portion takes up more square footage than the commercial portion, and yet these buildings are considered a subset of commercial real estate. These buildings are often purchased for their rent-roll income, and are considered an asset-class. Since they include both residential and commercial tenants they usually bring an attractive texture and synergy to neighborhoods.
THINGS TO KNOW BEFORE PURCHASING A MIXED USE PROPERTY
Because of their unique features, mixed use properties require special consideration. They are a commercial product often purchased and owned by professional landlords to be rented to others, and transactions usually involve sophisticated sellers. (Residential units such as condominiums, coops, townhomes or single family homes are considered a “consumer” product since they are usually purchased by individuals to be owned and consumed/lived in, not rented out).
If you have found a mixed-use building you are interested in, thorough due diligence is critical. The risks (and resulting costs) could be significant if skimped on. You need to fully understand what you are purchasing and assuming liability for. New owners are responsible for things prior owners did incorrectly or didn’t do at all, so purchasers should have an experienced real estate attorney and real estate agent on their team to review all details. Many residential real estate agents are not familiar with mixed-use buildings since they are a small niche often falling under the provenance of commercial brokers, so be sure your real estate agent is familiar with this inventory or find a real estate agent who is. Your agent should know the following details and be able to address them with you.
Due diligence issues include understanding the zoning and past use of the building, the building rent-roll, and any outstanding Department of Building, Certificate of Occupancy or zoning issues that will follow possession of the deed. Past and present tenancy issues — whether the building is tenanted now or completely vacant – include the status of leases, whether there were ever any illegal evictions or overcharging of rent stabilized tenants, and histories of current tenants. Some questions include: How did this building become vacant? Were all construction and renovations done correctly? Are there any open permits? Can current use be grandfathered into the Certificate of Occupancy? How was the commercial portion of the building used in years prior? Is the building environmentally safe?
Because mixed-use buildings have two legally zoned uses, owners must consider two or more different kinds of potential renters, types of leases, construction needs, liabilities and insurance — unlike when buildings have only one legally zoned usage. You should think these things through before purchasing.
ZONING ISSUES + CERTIFICATE OF OCCUPANCY
The building’s Certificate of Occupancy (CofO) must be reviewed by your purchasing team. There have been cases where buyers failed to inspect the C of O and did not realize until after the completed purchase that the building was only commercial and not mixed-use, even though people were living there. NYC buildings constructed before 1938 often do not have a CofO, but the past use of the building can often be found and grandfathered in. Everything is case-by-case, and needs to be reviewed by your attorney. If a seller or broker tells you it is easy to change the use, speak to a zoning attorney. Changing a building’s Certificate of Occupancy could take 8-12 months, if successful. You also want to know if the building has any additional FAR (floor area ratio) “development rights” which could be added to the building and increase its value.
TENANTS / REGULATIONS
When purchasing a mixed use property, residential rent regulation and rent stabilization laws need to be considered. NYC is a tenant friendly city – especially for residential tenants – and you want to be sure you understand the laws. People from other parts of USA or the globe often assume that the residential tenants’ legal rights will be as limited as those of commercial tenants, but that is not true in NYC. Some new owners of properties with rent-regulated units have been blindsided by financial risks arising from their (and their attorneys’) ignorance of those residential laws and failure to take precautions to prevent loss. The careful negotiation of the contract of sale and all the sellers terms and facts, is essential to preserve a building’s income and to proactively prevent future losses. While commercial tenants are not as protected as residential tenants, they can also bring their own issues and be hard to evict.
Financing a mixed-use property can be challenging for buyers who are not professional landlords, but it is still usually possible for qualified buyers, who can show 3 years of tax returns and bank statements. Mixed-Use buildings are typically funded through commercial loans, but both Fannie Mae and FHA allow mixed-use loans for financing both single-family and two-to-four-unit mixed-use properties, as long as at least 51 percent of the building is residential. The Small Business Administration (SBA) offers a special loan with low down-payment options for small business owners — which is a great option for artists, gallery owners and small creative businesses that can show steady business income. The federal government backs these SBA loans, resulting in a smaller needed down-payment and highly competitive interest rates. Most banks will accept artists as “small business owners” if their application is strong enough, and correctly presented. A knowledgeable lender and real estate agent can help with this positioning.
Mixed use properties are appealing to owners because of the commercial income they can generate, but important to note that lenders are often uneasy if too high a percentage of a property’s total income is generated by the commercial rather than the residential component. You will also have to pay the commercial tax rate and whatever associated business taxes your state requires.
Insurance for mixed-use buildings is often not considered when purchasing, but should be kept in mind. Will your commercial tenant be a child-care organization, restaurant, laundromat, bank, deli? Each different business has its own physical needs which determine whether the tenancy is possible, as well as its own insurance needs. You want a good insurance agent to walk you through commercial tenancy types and transfer of risk. Each commercial tenant should be required to carry a liability policy of at least $1 million. Policies should name the landlord or building owner as an additional insured. Building owners should not be held responsible for tenants’ customers. The insurance carrier for commercial tenants should be rated B+ or better on the A.M. Best scale, which will indicate if the insurance company has a good ability to meet its financial obligations. Other insurance rating groups use different classifications, but the key is to find a carrier with a “good” outlook.
Mixed-use buildings are a great inventory for artists and small businesses to consider, and can still be found in NYC for less than $1M in certain parts of the boroughs. Like all real estate in New York City, their value is greatly determined by their location, closeness to transportation, age, structure, amount of rent which can be commanded by the leased units (buildings rent roll) and what the market will bear. These are fascinating property type often used by artists in 70s and 80s; and if you have never considered them seriously, I encourage you to check them out!
ABOUT ARTCONDO + Michele Gambetta
ArtCondo LLC is a Brooklyn-based community-focused real estate initiative created to help creative professionals purchase and develop buildings throughout the NYC area in partnership with neighborhood residents. We are working to help artists, arts non-profits and art-related businesses purchase commercial and live/work spaces. Additional information is available on our website www.ArtCondo.com.
BIO: Michele Gambetta, ArtCondo founder, CEO
Michele Gambetta is NYC-based artist who founded RIDER Projects, a mobile art gallery based in the social sculpture ideas of Joseph Bueys, exploring the potential of art to create positive social change. She is the recipient of a Presidential Scholarship and BFA from School of the Art Institute of Chicago, an MFA from School of Visual Arts, and attended University of Chicago. In 2005 & 2006 she was awarded Brooklyn Arts Council re-grants through the NYC Department of Cultural Affairs, and an Independence Community Foundation Grant in 2007.
Michele has been working in commercial and residential real estate for the last 15 years. She is a licensed NYS real estate agent with Bond NY and has a Certificate in Real Estate Finance and Investment from NYU Schack Institute. She has worked for a Manhattan real estate developer is a Certified Negotiation Expert.
Contact: Michele Gambetta, 646-245-9801 / firstname.lastname@example.org