Rappaport Retail Report

By Joanne Chua

It comes as no surprise that a city as vibrant and rich in culture as New York plays host to a number of groups that fight for the protection of its historic architecture and landscapes. Among the most notable of these is the Landmarks Preservation Commission, which exerts considerable influence on property owners, land users, and particularly, as will be discussed shortly, on retail store operators.

Established in 1965, the Landmarks Preservation Commission’s chief goal is to administer the city’s Landmarks Preservation Law. Signed by Mayor Robert Wagner following the 1964 demolition of Pennsylvania Station (currently Madison Square Garden), the law enables the Commission to designate landmarks, and to regulate changes to designated landmarks, throughout New York City.

Landmark designation is the process by which the Commission works to ensure that the city’s important social, cultural, and historical sites and attributes remain intact. The Commission can pronounce different buildings, structures, and areas as individual landmarks, interior landmarks, historic districts, or scenic landmarks. The law states that a building or structure must be at least 30 years old before it can be declared a landmark. As of May 2009, the Commission has designated over 25,000 buildings as landmarks in all five boroughs, including 1,230 individual landmarks, 110 interior landmarks, 10 scenic landmarks, and 95 historic districts.

How does work done by the Commission affect retail storeowners? In order to make any sort of alteration to the storefront or interior of a landmarked building or building in an historic district, a storeowner needs to apply to the Landmarks Commission for approval before they may begin work.

Before delving into the Commission’s application process for work approval, we need to first clarify the difference between a landmarked building and a building residing in an historic district. Distinguishing between the two is essential, because buildings designated as individual landmarks, and buildings in designated historic districts, have different implications for retailers seeking approval for permits.

Image source: http://www.gvshp.org/_gvshp/preservation/south_village/south_village-main.htm

An historic district is a group of buildings or properties within a certain prescribed area that have been collectively deemed architecturally significant. Examples of historic districts include the districts of Gramercy, Greenwich Village, and SoHo in Manhattan. One historic district currently being proposed, that has been backed by the Greenwich Village Society for Historic Preservation since January of 2007, is the South Village. The village will cover an area stretching south of West Fourth Street to Broome Street, bounded by La Guardia Place to the east, and Seventh Avenue South to the west. The area will be the first largely tenement-based historic district, highlighting the history of immigration in the city, especially that of Italian-American immigrants. To view photos and descriptions of all designated historic districts to date, visit the Historic District Council’s digital image library at http://www.hdc.org/DIL/DILintro.htm.

So what does this distinction mean for retailers, as they prepare to design and construct a storefront property? If a retailer proposes construction work on a building’s storefront in an historic district, the work must reinforce the fundamental character and feel of the area. The Commission is fundamentally concerned with the façade of buildings in historic districts, and how they blend in with one another. Such proposed work is thus subject to partially defined yet flexible criteria, depending on the type of work proposed.

Similarly, individual landmark status only protects a building’s exterior. Individual landmarks are the Commission’s most common designation, and can apply to any single building or structure—for example, Grand Central Station, or the Coney Island Wonder Wheel. For the interior of individual landmarks to be under the protection of the Landmarks Law, the Commission has the power to designate important public spaces as interior landmarks—spaces such as the lobby of the Woolworth building, and the interior of the Ed Sullivan theater.

As opposed to buildings in historic districts, a retailer proposing work on a landmarked building, so designated to preserve the specific building’s architectural features, may have to follow stricter guidelines and encounter more restrictions, at the discretion of the Commission.

Both generalizations made above apply to work proposed on the exterior of a building. If a retailer were to propose work on the interior of a building, they would need to obtain a Certificate of No Effect from the Commission before they can apply for a Department of Buildings permit, which is required for any project that demolishes, alters, adds onto or builds a new structure to make certain that the resulting structure complies with all applicable laws. As the Commission usually isn’t very concerned with the interior of a building, unless they have designated it an interior landmark, this step is quick and easy, and will not delay the construction process. The Certificate of No Effect will be more fully explained below.

The operations and processes carried out by the Commission are important, because they affect retail storeowners’ build-out schedule, design plans, and construction costs.

The Commission issues three types of permits to grant approval for proposed work—a Certificate of No Effect, a Permit for Minor Work, and a Certificate of Appropriateness.

A Certificate of No Effect, or “CNE”, is issued when the proposed work requires a Department of Buildings permit but does not affect the architectural features of a building. A CNE is typically issued for interior renovations requiring Department of Building permits, such as plumbing and heating equipment installations. In the event that the proposed interior work does affect the exterior features of a building—the vent of a kitchen exhaust fan cutting through a decorative feature of the façade, for instance—a Commission staff member may help the applicant revise their proposal until it is satisfactory.

The second permit issued by the Commission is a Permit for Minor Work, or “PMW”. The Commission issues a PMW when the proposed work is minor—affecting significant protected architectural features, but not requiring a Department of Buildings permit. Examples of such work include window or door replacement, masonry cleaning or repair, and restoration of architectural details.

The third permit the Commission issues is a Certificate of Appropriateness, or “C of A”. A C of A is needed when the proposed work is major, both requiring a Department of Buildings permit and affecting significant architectural features of a building. Additions, new construction, or removal of architectural features, such as stoops and cornices, usually require a C of A. The Landmarks Law states that a public hearing must be held for each C of A application. C of A hearings are conducted by the Commission every month.

The Commission makes its decisions on the three types of permits within the following time periods: 30 working days for a CNE, 20 working days for a PMW, and 90 working days for a C of A. In most cases, the Commission will make a decision in much less time. However, storeowners must account for the time it may take for a permit to be issued, and should therefore apply to the Commission as early as they can, provided that they have carefully thought out and prepared their application.

Whether planning to do work on a landmarked building or building in an historic district, a retail storeowner may face more challenges with the Landmarks Commission than he or she might initially expect. Many see the entire process as expensive and time-consuming. However, costs can be reduced, and challenges abated, if storeowners arm themselves with sufficient knowledge about the Commission’s rules and regulations.

West 71st Historic District in Manhattan. Image source: http://www.hdc.org/DIL/west71.htm

In general, the Commission wishes to preserve the historic character of the landmarked building or designated historic district. It thus looks for the addition presented in the proposal to be respectful and comparable to the scale, material, and style of the original building. It also prefers the work proposed to preserve as much solid, intact historic material as possible. For example, regarding brownstone repair, the Commission would favor a proposal that patches only deteriorated areas over a proposal that resurfaces the entire façade.

Retailers must keep in mind that although the Commission has general guidelines and procedures to how they perform their work, it still treats each proposal on a case-by-case basis. Documents that may be of use to those preparing a proposal, such as “Rules of the Landmarks Preservation Commission”, “Work Guidelines & Material Checklists for Work on Landmarked Buildings”, and “Rooftop Addition Guidelines”, may be found in the Forms and Publications section of the Commission’s website, at http://www.nyc.gov/html/lpc/html/forms/forms_pub.shtml. Additionally, more detailed information on how to perform work on landmarked properties—work on such features as lighting, painting, signage, storefronts, and temporary installations can be located at http://www.nyc.gov/html/lpc/downloads/pdf/pubs/workguide.pdf.

If retailers are at all unsure of anything regarding the work approval process, they should visit the Commission’s website, at http://www.nyc.gov/html/lpc/html/home/home.shtml. If any further questions remain unanswered, or you wish to check the status of an application, email the Commission at info@lpc.nyc.gov, or call them at (212) 669-7817. Should you feel the need to visit their office, they are located on the 9th Floor of the Municipal Building at the corner of Centre Street and Chambers Street, in Manhattan. Their business hours are from 9:00 am to 5:00 pm, Monday through Friday, except holidays. Be sure to bring two forms of photo ID.

Other web links that may be of interest are the designation report database, a project led by the Neighborhood Preservation Center and the Landmarks Preservation Commission featuring all the city’s landmark designation reports, found at http://www.neighborhoodpreservationcenter.org/designation_reports/index.php, and the New York Historical Society’s current exhibition, “Landmarks of New York”, for which more information may be obtained at https://www.nyhistory.org/web/default.php?section=exhibits_collections&page=exhibit_detail&id=6208136.

Joanne Chua is a retail real estate intern at Sinvin Realty.

By Steve Rappaport

Being a veteran of 30 years of luxury retailing in numerous Manhattan locations, and having survived relatively unscathed, the following are a few insights I have gained into this business that might help others involved in store leasing.

It is now clearly a tenant’s market. This is the new fact of life of commercial retail leasing. Landlords are generally reconciled to the idea that they must accommodate prospective users of their increasingly vacant spaces. However, most landlords have only a rudimentary idea of what these needs are, for instance, whether a particular location is suitable for the retailer’s product. Requisite sales figures and attendant costs are generally a mystery to both brokers and landlords. Knowing these details creates a shared understanding between parties that facilitates negotiations. Armed with correct information, brokers can help landlords understand the economic specifics underlying the decision to rent a store. On the tenant side, brokers can truly be empathetic to the requirements of those they represent.

Image source: http://www.journeytomastery.com/new-agent-articles/do-the-math/

To do this, we must learn the new math. We all can figure out what 3.3% of the aggregate total of a lease is. It is imperative to discover some other calculations. If brokers know what the costs are to run a store they can be effective allies of both tenants and landlords. We can become informed partners for either side. Further, we should understand the numbers behind sales projections. With this knowledge we can guide tenants to make educated choices, and we can help a landlord understand the facts of retail in New York City. If both sides realize just how much business has to be done to support a certain rent, there is the possibility that they might manage their expectations in a different manner.

The old saw that rent should not exceed 10% of a store’s business no longer cuts. Over the years, New York retail rents have soared, making 15% a more accurate estimate. However it does not suffice to say that a unit that rents for $300,000 a year must produce annual sales of $2 million. How is the number achieved? Let’s analyze that $2 million target more precisely.

It equates to $38,461 per week in sales, or about $5,500 per day. Consider that the average retail cost per item is $150. That would be 36 transactions per day, or 256 per week. Now think what that translates to if the average item is $75! And if the average cost per item is $25, it is 1,538 transactions per week, or 219 per day. Now imagine standing in a store and waiting for all those customers. It hardly happens easily and sometimes hardly at all. In the current economic climate there are not that many customers entering a store, much less purchasing an item.

Another important yardstick of retail viability is receipts per square foot. If the store under consideration is 1,500 square feet, it would need to produce $1,300 per square foot per year—far higher than industry average.

Whether or not sales projections are met, there are still plenty of bills to pay. What are the costs beyond rent involved in running a retail operation? We all know there are utilities, salaries, advertising and a host of other costs involved. But what are they exactly, and how much do they each cost? This data supplies the necessary perspective to evaluate any retail situation.

The most basic cost for retailers is that of the merchandise being sold. The difference between what an item is purchased for and what it is sold for is gross profit. That difference is called the markup. And if the markup is not sufficient, the gross profit is not large enough to cover all the other costs. And when that happens, it is called losing money, which is what most retail stores have been doing lately.

Although both are considered retail, there are different numbers involved in running a restaurant than for operating a dry goods store. The following charts show current average estimated costs for either a clothing store or a mid-priced restaurant in New York City. Knowing and understanding these numbers can enable brokers to be effective advocates for all parties in the retail leasing market.

The charts can be found on pages 2 to 5 of the following file: Retail Math.