In the typical suburban condo development, one must go to another location to  shop— maybe to the mini-mall, or the big box store down the road. But in New York  City co-ops and condos, stores are often found on the ground floor—supermarkets, restaurants, drugstores, clothing stores and more. Sometimes you’ll also find doctor’s or dentist’s offices.  

 The relationship between the co-op or condo and the ground-floor business tenant  is a complicated one. Having these stores on the ground floor is often seen as  a plus by shareholders or unit owners. But for management, it can raise  questions. There can be a lot to unpack from the standpoint of insurance,  liability, and other concerns.  

 Desirable and Undesirable

 What kind of business is the 'ideal' commercial tenant? Answers vary. Carl  Cesarano, CPA, of the Floral Park-based accounting firm Cesarano & Khan, PC, says that bars and restaurants can raise issues of crowds, noise,  rodents, insects, and illuminated signs that may shine into residential units.  And tenants that use chemicals that could be unsafe, such as dry cleaners, and  have other environmental issues “would certainly be less desirable.”  

 Many people feel that bars in particular are problematic because they’re open late at night, a factor that could disturb residents.  

 Of course, these are not a hard and fast rule for everybody—a quick look around the city reveals plenty of residential buildings with  restaurants or diners on the ground floor. As to which of these buildings are  co-ops/condos and which are rentals, doing such a survey, of course, would be a  huge undertaking outside the bounds of this article.  

 Manhattan commercial real estate broker Michael Kramer talks about some of the  types of commercial tenants he feels are desirable in a residential building.  One is a non-food “national” tenant, such as a bank, “which will give you peace of mind and a steady wire deposit each month into your  bank account.” Another is a local niche business, such as factory outlet designer or a local  food grower, which would add to the quality of life in a neighborhood.  

 Insurance professional Jim Sutton, of the Jim Sutton Agency in East Islip,  answers the question in terms of business management. “You would want a tenant that would have good management skills in operating this  location with safety in mind and with good housekeeping. Neat, clean and on the  job when it comes to running a business.”  

 What Kind of Insurance?

 What kind of insurance do condos and co-ops need if they have commercial  tenants? Our experts have several answers.  

 Edward Mackoul, president of the New York and New Jersey–based insurance firm Mackoul & Associates says, “There is no special insurance the co-op or condominium needs to have, but the  commercial space should be required to maintain their own general liability  insurance and name the co-op or condominium as an additional insured on their  policy. There should be a lease agreement or other contract stating that it is  required.”  

 “Typically the commercial tenant obtains the insurance that complies with the  specifications of the coop/condo’s requirements,” real estate attorney Adam Leitman Bailey, Esq., who heads the law firm Adam  Leitman Bailey, P.C., adds. “The co-op/condo requires that it be a named in the insurance policy. The  co-op/condo requires a certain amount of insurance and specific types of  insurance in case of a fire or liability.”  

 According to Kramer, in his lease provisions, “We require our tenants to be fully insured and `hold harmless’ their landlord. `Insurance costs’ can mean all-risk property insurance in an amount of the full replacement cost  of the occupied tenant space and its fixtures, comprehensive public liability  insurance (in an amount reasonably determined by landlord), rental value  (rental loss) insurance (in an amount equal to 100% of the annual base rental  and all additional rent for the building) boiler insurance (to the extent  applicable) for the building and such other types of insurance as the landlord  shall reasonably require.”  

 High-Risk Tenants

 How does a higher-risk tenant on the premises, such as a co-op or condo, affect  a co-op or condo’s insurance? Several insurance professionals asked by The Cooperator replied that a  higher-risk tenant may restrict the number of insurance companies who are  willing to write the insurance, which will in all probability make the premium  higher.  

 Kramer says that because there is always a possibility that businesses such as  restaurants and light manufacturing, which are governed by city codes and need  permits, may have to close temporarily in order to address violations,  comprehensive public liability and rental value insurance coverage must be  adequate.  

 What happens if the co-op or condo building is damaged as a result of a fire or  other mishap in the tenant’s business—say, a fire in a restaurant’s ventilation system?  

 Mackoul says that in such a case, having additional insured status under the  tenant’s policy should put the burden of claim on the tenant’s insurance company rather than the building’s insurance company.  

 Bailey adds that there’s a “bonus if the condo or co-op requires the commercial tenant to hire the same  insurer as the building because then they cannot fight over whether to cover  the incident.”  

 Once the Tenant is In

 So far, we’ve just talked about the insurance needs of the building or development. But  what about the needs of the commercial tenant itself? How is this affected when  a business is within a residential building vs. being in its own building or in  a commercial strip?  

 Sutton says a commercial tenant’s insurance needs changes very little from renting space in an all-commercial  building, such as a strip mall, to renting space in a residential building.  Indeed, he says, the commercial building or mall may put more demands on the  business as far as liability insurance coverage is concerned.  

 Once the commercial tenant is in a residential building, experts say, it’s up to the condo or co-op board or manager to decide the appropriate insurance  coverage for that tenant—with the assistance of the insurance broker, attorney and/or management company.  

 Another important issue is what type of insurance information the business  tenant needs to provide to a building’s board and legal professionals before signing a lease.  

 The board, says Bailey, should ask for a certificate of insurance and the  contract demonstrating proof that the amount of coverage the board requires in  the lease has been obtained.  

 “Remember that the carrier may not write the policy until the lease is in place,  so careful drafting of the lease will allow the board to terminate the lease  for non-compliance,” he says.  

 Mackoul offers some numbers: “At the very least, they [the commercial business] should maintain general  liability in the amount of $1 million per occurrence with a $2 million  aggregate.”  

 The Manager’s Role

 In a mixed-use building that contains both resident shareholders/unit owners and  commercial tenants, the manager acts as an intermediary between all owners  and/or tenants, just like he or she does in a totally residential building.  

 The manager or management company also should be prepared to offer their  expertise about insurance, city codes and regulations, alterations and other  matters to the commercial tenants, and should always be accessible.  

 Sutton adds that “the building manager plays a significant role in making sure the business is  operating in a safe manner so losses are minimized. Paperwork must be obtained  showing that the correct insurance is in place. Vigilance is maintained in  checking on the business as often as possible to correct any problems or stop  any inappropriate behavior from continuing.”  

 Attorney Stephen Lasser, Esq., a partner with the law firm of Barton LLP in  Manhattan, points out that the manager’s role also becomes different when the commercial tenant is actually a tenant of  one particular condo unit owner, or a subtenant of an overall commercial  tenant, rather than a tenant of the building itself. (There are cases where a  building rents out space to a commercial developer, who then in turn finds the  actual retail tenants.)  

 Most of the time, when the business is a tenant of the condo/co-op building  itself, the manager will have to deal with repair issues, rent collections and  lease renewals, just like a manager does in a residential rental building. But  when a building’s commercial space is owned by another entity, then leased to the store or  business, the manager will have less of a role.  

 When Insurance Lapses

 Finally, let’s examine what happens if a commercial tenant’s insurance lapses, and then there’s an accident or incident in which the co-op/condo building or its contents are  damaged.  

 Professionals agree that the business’s lease should specify that the business must give notice to the board or  managing agent before ending the policy. Bailey says this is usually 30 days,  while Sutton recommends a 60-day notice of cancellation.  

 If there is no current insurance, says Bailey, either the commercial tenant or  the building itself “may be on the hook for monies due and damages.”  

 And when the association or building must deal with the loss, its rates may go  up at the next renewal.  

 For all these reasons, it’s important for the board or management to keep on top of the commercial tenant  and to make sure its insurance is up to date and inclusive.  

 Thankfully, experts—insurance brokers, accountants, attorneys, condo and co-op organizations, and  the managers themselves—are available to help buildings and developments deal with their commercial  tenants. With the right type of management, a condo or co-op can find that  having retail or commercial businesses located right inside their building is a  convenience they can’t do without.   

 Raanan Geberer is a freelance writer and a frequent contributor to The  Cooperator.