A resolution passed last week by the Common Council of the Roosevelt Island Residents Association (RIRA) endorses a plan under which the Roosevelt Island Operating Corporation (RIOC) will work with a master leaseholder to market retail space in Northtown. The WIRE asked the Councilor who worked on the resolution to explain it for WIRE readers.

Jonathan Kalkin

There has been a lot of confusion over the Public Authorities Accountability Act of 2005. If you have been to any RIOC meeting in the last year, you have witnessed a vicious cycle in three steps: (1) A problem arises that has plagued Roosevelt Island forever; (2) a logical and fair solution is suggested; but (3) the Public Authorities Act gets in the way. The worst part of this cycle is the end result – nothing happens.

This month the Common Council of the Residents Association found a way to tame the "but" and passed a resolution with a striking majority. If all goes as expected, it will give Islanders what they have craved and lacked – a voice and some action on vacant retail storefronts.

Northtown has had empty storefronts for years...

To understand the Public Authorities Act, one must first look at its history. It was passed because, unlike Corporations or State Agencies, Public Authorities operated without any direct oversight. Even if most were necessary and spending their money correctly, there was no one keeping score.

In February 2005, then-Governor George Pataki issued Executive Order 135, creating the 13-member New York State Commission on Public Authority Reform (NYSCPAR), charging it with creating governance principles that would strengthen oversight, accountability, and disclosure. The Commission was a well-qualified group, drawn from business and academia.

They came up with a brilliant solution. The Act requires that Public Authorities do what the first word in their name suggests – to make their actions public. This means reporting things like inventory, selling or leasing of property, budgeting – and not only what they do but how they do it. Property owned or controlled by the State has to be sold or leased according to guidelines that encourage competition and bidding. Board members must attend classes to keep informed of what they have to do. They must report to a Commission and a Budget Office that oversee all these reporting requirements. Most importantly, they are required to make this sort of information readily available to the public. In sum, they have to do things openly and honestly – and you get to know about it.

Those who planned the reform act even left a safety net in case the selling or leasing of property in a competitive market doesn’t work. If a deal is contrary to the public benefit, the authority doesn’t have to go along.

All in all, it’s a great idea – as long as real human beings are not involved. I always tell people that the law isn’t usually so complicated, but people and circumstances make it that way. If you are a legislator, a drafter of complex contracts, or even the person who writes a disclaimer for the back of a dry-cleaning ticket, it’s simply impossible to predict every situation that will arise in the real world. One example among thousands: There are virtual libraries of published litigation based on just two or three lines printed on the back of those dry-cleaning tickets. You can imagine the ambiguities to be found in a document running over 30 pages.

RIOC President Steve Shane and his legal counsel have said that the Act’s ambiguities are found in its fair-market-value requirement. It says that property must be sold or leased for the fair market value. The problem, Shane says, is that fair-market value can vary depending on use: Space leased for office use may have a different value from space used for retail operations. Shane says it’s almost impossible, on a varied-use basis, to determine fair-market value. To complicate things further, property reaching a lower threshold of fair market value has different sale or lease requirements. If RIOC says fair market value varies by the use, then it is difficult or impossible to determine which process to use.

That puts us back in that vicious circle. We would love to have shops, restaurants, and a range of services that we deserve as a community – and we could have them – but (that word again) for the Public Authorities Act. Even worse, if we could devise a perfect way to determine fair market value, following the Act to the letter triggers a process that takes months, even if the space is ready to be occupied – and much of the retail space on the Island is less than ready.

In sum, we are leasing a place that is heavily regulated, is not available for months, and is probably not ready for occupancy. If you were reading this as a real-estate advertisement, I don’t think you would be reaching for the phone.

...but in more recent times, even active storefronts...

So the Commission put in a safety net to make sure that public benefit is served by the Act.

Here’s a test: How long can retail space lie fallow before that runs contrary to the public benefit? No one benefits from an empty storefront, lack of competition, and lack of services. The safety net is there to make sure the public benefits.

We came up with an answer. I say "we" because it would be a tragedy not to ackowledge the people dedicated to finding what benefits the public. Those people include Steve Shane. In a world of apathy, Roosevelt Island is truly a place of empathy, and that’s why it’s so important that we find a way to buff out this diamond in the rough we call home.

Our solution is simple: We lease the commercial space to a master leaseholder who then sublets the individual storefronts. You’ve heard this approach before, but we added a few restrictions that will give the Roosevelt Island public a role and a voice: An advisory group of residents will help the leaseholder decide what kind of stores, restaurants, and services we need.

Why would the leaseholder listen to residents? Because it is in his economic interest to listen.

I spoke to a developer in Williamsburg, Nelson Cuesta, who is not involved in this transaction. He said that getting feedback from the community is usually the first thing he tries to do when filling a space. The group of stores a leaseholder has to fill is a collective product. If the community doesn’t like what’s chosen, the stores fail and the master leaseholder doesn’t collect his rent. An empty storefront is a loss for a master leaseholder because he is paying the rent as a whole whether or not a space is sublet. Someone in a RIRA meeting suggest that perhaps we should take profit out of the equation here on Roosevelt Island. Cuesta said that if he does what’s best for the community (sounds a lot like public benefit, right?), profit doesn’t have to be part of the equation. Profit will follow if a leaseholder puts in stores the public wants. Other commercial real-estate representatives have echoed Cuesta’s opinion.

RIOC says this master-lease idea solves the problem of fair-market-value ambiguity. A bidding process would determine fair market value, and the fair market value won’t vary based on use. A master leaseholder will want to make his storefronts appealing and rentable, so they’ll be put into strong rentable condition. In any case, it’s not uncommon for a business renter to refurbish a location. If this works as it should, the area will look wonderful and RIOC will save refurbishing costs.

A good idea is only as good as its flaws. The first, most common fear is that a master leaseholder will fill stores with office space and we’ll get no retail stores. But my commercial real-estate sources say that retail storefronts usually get higher rents than office space. Here, most of our retail locations have the great combination of heavy foot traffic, a captive audience, and direct street access. It’s in the master leaseholder’s interest to get that premium retail rent. Of course, being a leaseholder is a balancing act, and some office services will be appropriate. Overall, the quest for balance should secure the diversity we seek.

The second concern usually addressed is that a commercial leaseholder will make this place look more like a strip-mall than a generous mix of franchise and mom-and-pop places. Nothing says mom-and-pop businesses can’t thrive here. My favorite example is Huntington, New York, where some areas are owned by one leaseholder. Huntington is like Roosevelt Island, and it has a wonderful mosaic of shops, restaurants, and office space. It even has one of the few thriving independent bookstores left in New York. Huntington’s mom-and-pop businesses succeed because they offer something above and beyond what a franchise can offer. A free market and competition ensure that if a mom-and-pop business thrives here, it is because it offers impeccable service that can’t be found anywhere else. That’s the kind of business we want.

A third concern is how we avoid aesthetic problems if we do get some franchises. It is quite common in commercial leases to have aesthetic restrictions to make sure things are uniform and pleasing to the eye. One idea is to create our own unique feel with signs that echo a small town theme – the sort of thing that can be found in areas like Port Jefferson. Roosevelt Island is the closest thing to a small-town feel that you can get in New York City. With Southpoint Park on its way, the right retail environment could be part of a popular tourist destination.

A final concern is what will happen to the rents of the current shopowners once their leases are up. At this point, I can’t say that rents won’t go up, but what I can say is that a street filled with stores and restaurants should attract more people, and more traffic equals more profit. I expect that, for a majority of our merchants, the master leaseholder approach will be a net plus.

And if you think one of the stores chosen is a bad idea, you can vote with your wallet. If people don’t buy, places will close. But they’ll be replaced quickly because the master leaseholder will be losing money. He’ll do his best to fill empty storefronts with something Islanders want or need.

...have gone empty.

An amendment to the Public Authorities Act has been proposed, and a vote is pending. It adds fun things like an oath of fiduciary duty for all RIOC Board members. This was added because the Commission felt the Act lacked any real teeth. You can imagine the inaction we will see when individuals are accountable. So the time to act is now.

This plan gives the Islanders a double voice – an advisory group and the ability to vote with our dollars. It lets residents, rather than RIOC, decide what businesses Roosevelt Island will have. It creates a strong incentive for action because a master leaseholder will want the properties he controls to produce income.

We have eliminated the nasty but. I wish it a fond farewell. I know the unwanted but is surely finding its way into a Red Bus debate, or a ground lease discussion, but I think we’ve banished it from the marketing of retail storefronts.

I’d like to thank Steve Shane, who is actually determining the public benefit in this case by listening to the public. It is a novel idea. If you see him, I suggest you encourage it.

Jonathan Kalkin, a member of the Residents Association Common Council, is a Principal at an Insurance and Financial firm in New York. He holds a Juris Doctor degree and has studied Government Administration and Public Finance at the University of Pennsylvania.