The cheapest way to amuse yourself in a bustling city, like New York, is to stroll through it and observe its characters. Swarms of Japanese tourists with camera equipment from the year 2053, Whole Foods shoppers with one bag of groceries worth more than Malawi’s GDP, and businesspeople rushing to cubicle farms that make the pods on The Matrix seem luxurious. All this with a backdrop of storefronts. Recently, I’ve noticed more and more ‘for rent’ signs. Shades of the early 80’s when huge parts of Manhattan were a wasteland of porn shops, criminals, and empty buildings. It doesn’t have to be that way.
As the real estate bubble deflates, few are buying property. Even as commercial rents drop, few are taking the risk. Still, there’s an undercurrent of entrepreneurship…and bacon…in the air this morning. People want to start businesses, especially in Manhattan, but are not able or willing to pay the rents. A possible solution is equity-based leasing, where risk is shared between the entrepreneur and the property owner.
For this to work, the landlord has to give up the dream that someone’s going to pay $10,000 a month for a shoebox. His choices? One is to cut the price to the bone on a short-term lease and raise it later, if the business survives. A more dynamic approach might be to enter into a revenue-sharing deal with the tenant and get paid a lot more if the business succeeds. This can create more upside, but also eliminate a steady stream of rental income, no matter how tiny. In some cases, this might be a good bet.
To make this work, it would require periodic revenue verification, which can be problematic with cash businesses, less so with chains. (Verification could be done by a third party like a bank, property management company, or an audit firm.) Most importantly, this requires a leap of faith on both sides. Ultimately, an unoccupied space has no upside and a very damaging halo effect to the rest of the community, so what is the real risk?
PS – This idea may also be applied to residential real estate. In fact, individual income is much easier to verify. Of course, your landlord taking a cut of your paycheck would feel a lot like marriage…one spouse is plenty!