Riddle me this…

Some observations over the last few weeks:

  • El Paso, on Houston Street, was one of our favorite restaurants for many years.  It was where my wife and I had discussed various ideas that led to me going into business for myself, and of course, we really liked the food.  Last spring, we went there on a Friday afternoon to find the place closed up.  I imagined that perhaps the owner had died or something.  But then, earlier this month, my wife and I were eating in the Village, and one of the waiters at that restaurant had worked at El Paso.  He told us that the landlord had substantially raised the rent, and the restaurant closed.  After lunch, out of curiosity, we went back to the site.  It looked exactly the same as when it had suddenly closed.  There was no trace of a new tenant, and not even a ‘For Rent’ sign.
  • Figaro was a sports bar near my office.  It was a pleasant spot for a business lunch without going too far afield.  At the end of 2013, on New Year’s Eve, I went there for the last time for lunch.  “This is our last day,” the waiter told us.  Their lease was not being renewed.  There was a ‘For Rent’ sign in the window for a couple of months, and then, a while later, an announcement of a sushi restaurant opening last fall.  But fall came and went, with no new place (even though I’d have preferred a sports bar).  Last week, the door was left opened.  The place was a wreck.  The next day, new signs covered the plate glass windows, with the name of the building that the storefront belongs to.  But no ‘for rent,’ no telephone number, nothing.
  • Not far from my office, on Fifth Avenue, is a building that went up fairly recently.  The storefront on the corner is a Chase bank, and the space next to it has been mostly empty for several years.  It has held temporary stores for Halloween costumes and Christmas decorations, and was used for a week for some kind of new product event, but there has been no permanent tenant since the space was built.

I’ve come to the conclusion that the owners of commercial real estate seem to be sitting on their properties, holding out for top dollar.  It seems counterproductive: an empty space not only gathers no revenue, it’s inherently an eyesore.  Get enough of them in one place, and the area–even if it’s midtown Manhattan–starts to look as if it’s going down the tubes.

And then there’s the Radio Shack.  It was a stone’s throw from my office; it saved my ass more times than I care to count as a spot to pick up a cable or a toggle switch or a soldering iron.  It closed at the end of February.  In fairness, it’s too soon to moan about yet another empty space.  But even if the store doesn’t stay empty for very long, I’m sure that whatever replaces the Radio Shack will be nowhere near as useful.

2 thoughts on “Riddle me this…”

  1. I think it must be something to do with tax write offs. The only reason any place would remain empty would be because it was a better value for the Real estate owner for it to remain empty. Perhaps IAM can give more details about tax write offs for commercial real estate owners, and how that affects local real estate markets.

    1. It depends on the age of the building, type of construction, and any tax breaks that the owner is getting. Nonresidential real property has a depreciation life of 39 years. The depreciable basis is what you paid for the property less the value of the underlying land. However, fully depreciated does not mean that the property has no economic value. A tax break has gone away.

      Restaurants do fail routinely, even restaurants that have been doing business for a while. I’ve been reading about difficulties that restaurants in New York have been having due to the eocnomic downturn. We don’t know what the situation was with the tenant paying the rent promptly or what the renewal terms of the lease were. The increased rent (or even the current level of rent) may have made the operation of the restaurant uneconomical for the owner of El Paso or the sports bar.

      I doubt that loss of a depreciation deduction would cause the building to be taken out of service as a rental property if the landlord intended to rent to another tenant. Even though nonresidential real estate has a 39 year depreciation life, it is possible to reduce the depreciation deduction to less than 1% of the initial value of the property in less than 39 years if an accelerated depreciation schedule was used, something like 150% of the basis. It would usually be on the order of 2.5% of the depreciable basis annually were straight-line depcriation used.

      I was starting to get into the possibility of doing a section 1031 exchange, which defers tax on the gain on the property, but I realized that I don’t know enough about the situation to do anything but guess their motives for not renewing a lease. It is possible that the building will be sold. The owner will have to continue to pay property tax, insurance, and for at least some utilities. These expenses continue to be deductible, but I would prefer to have a tenant in the building generating enough cash flow to pay the carrying costs of the building rather than get back perhaps 40% of these costs in tax relief.

      Attracting a tenant who can pay a higher-than-average rent also implies that the property to be rented is nicer or better suited to the user’s use than average. There is also the foregone rent while waiting for that better-paying tenant to consider.

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