DUMBO: Small Businesses Are Fighting to Survive Rising Rents

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Unless owners own their building, there is not a lot of protection from rising rents

The site of the P.S. Bookshop, now closed  (Demi Vitkute/The Brooklyn Ink)

 

While new big businesses,  like the Empire Stores, are continuing to move into DUMBO, smaller ones are struggling to survive. Rising commercial rents in DUMBO have been pushing small business owners to rethink their options. Some of them say they have to make strategic decisions to pay for their lease, while others move. And many of them have simply closed in the past couple of years.

Robert Piechota, Director of the New York Small Business Development Center (SBDC) at the Brooklyn Center, which is administered by State University of New York and funded by the U.S. Small Business Administration, said that rising rents in NYC force some businesses to move to less expensive areas, like New Jersey.

“I’m not saying it’s doomsday, but it’s tough on business owners because basically they plan on a certain revenue model based on an assumption of cost, and if rents go up dramatically—more than they’ve anticipated—they gotta pass that on to a consumer,” he said. “And if they pass that on to a consumer, what happens is the consumer goes elsewhere.”

DUMBO was recently ranked as the fourth most expensive neighborhood in New York City on the Top 50 priciest neighborhoods list, the only outer borough neighborhood in the top 10, according to Property Shark. It fell behind only TriBeCa, SoHo, and NoHo. The soaring prices in DUMBO were in part the result of sales in new development at 1 John Street. This luxury residence sold 30 units in the past three months, where the cheapest unit went for a little over $2.2 million.

 

Waterfront in DUMBO in the evening (Demi Vitkute/The Brooklyn Ink)

The NYC waterfront from DUMBO in the evening (Demi Vitkute/ The Brooklyn Ink)

 

On some streets, the average ground floor rent price per square foot has increased by 5 percent in DUMBO since the summer of 2015, according to Real Estate Board Of New York  report.

P.S. Bookshop closed after ten years in the neighborhood because of its failure to pay off real estate taxes to the landlord, Two Trees Management. The bookstore’s founder, Yuval Gans, launched a crowdsourcing campaign on Indiegogo and used the $13,600 in crowdsourcing money to hire a lawyer. Gans noted in the crowdsourcing campaign’s rationale that his shop had fallen five years behind on its real estate taxes, but that Two Trees had not presented him with a bill before this year.

“Commercial tax has been doubling with every passing year. In the last year alone it exceeded, for me, the amount of two months’ rent,” Gans told Gothamist. “All of the small businesses are losing their ground. We’re angry, because we were a central part of this [DUMBO] hype… now it’s completely in the hands of the developers.”

On Indiegogo, Gans said that surviving in DUMBO for the past nine years hadn’t been easy. “Many businesses around me didn’t cut it,” he wrote, “Only during the past year, with the continuing development of the neighborhood and its waterfront, did I begin to reap the fruit of my labor. I hired more employees and got to spend more time with my family. And then, the gentrification monster that I was riding turned around and bit my aforementioned butt.”

He said that he wanted to give up, but was dissuaded by his patrons and the support of community who he says regarded the bookshop as DUMBO’s cultural cornerstone.

A customer of P.S. Bookshop, Gerard P., wrote a review on Yelp on October, 2015. “The fact that a bookstore like this exists in DUMBO is a tribute to both the entrepreneurship and creativity of the people who’ve made Brooklyn their home. It’s a cavernous bookshop which simultaneously feels cozy and warm. The art section alone is worth visiting—I have yet to find another shop where there’s an entire section devoted to sculpture! So many fantastic rare and used books which you probably won’t find anywhere else-or if you do, it will be several different places.”

Reached for comment by Gothamist back in April, Two Trees highlighted that The Powerhouse Arena, another bookstore in the neighborhood is still thriving. However, Power House was struggling to make its monthly rent of $20,000, and had to close in June to move to a space half as big on Adams Street for $9,000 a month.

And it’s not just bookshops that have been closing. Back in 2014,  The Galapagos Art Space, a performance center, closed after nearly 20 years because of rising rental prices and moved from Brooklyn to Detroit. It first opened in Williamsburg in 1995 and then moved to DUMBO in 2007.

“A white-hot real estate market is burning through the affordable cultural habitat,” said Robert Elmes, the space’s executive director, to The New York Times. “And it’s no longer a crisis, it’s a conclusion.”

Just across from the new Empire Stores on Water Street, The Bridges, an American restaurant has closed; Gramercy Park Flower Shop closed its DUMBO location; Zakka, a miscellaneous goods shop rooted in Japanese culture, moved from SoHo to DUMBO in 2007, and now also closed, as have other retail shops.

Restaurants like Grimaldi’s, Juliana’s, Front Street Pizza, or Brooklyn Ice Cream Factory, that are popular tourist destinations and known as the best in the neighborhood, are less likely to be affected by increasing rent prices.

Sal Leonardi, 22, a manager at Front Street Pizza, guessed that around 70 percent of the store’s customers are tourists and the rest are locals. The pizza place has been thriving since 1989 and he predicts is not going to move anywhere anytime soon.

Jacques Torres’ chocolate shop has been in DUMBO for 15 years. Shaquille McCaul, 21, who works there, said he’d seen DUMBO develop rapidly. The developers “are trying to keep the history, but I don’t think it’s going to last long,” he said, of  the preservation of architecture of old warehouses and cobblestone streets.

DUMBO Improvement District, a nonprofit organization, plans events and promotional activities all year round to help businesses in DUMBO. They offer a neighborhood-wide loyalty program, called DUMBO VIP, where more than 60 small businesses offer deals to people who live and work in DUMBO. The Improvement District brought a flea market to DUMBO this year. They also put up destination art pieces around the neighborhood to encourage people to walk in different patterns and go into shops. The latest installment is on John Street section of Brooklyn Bridge Park, called the DUMBO reflector.

Alexandria Sica, Executive Director of the DUMBO Improvement District, thinks that there’s a great opportunity for retail in DUMBO in the next five years with new residents moving in and with the opening of the Dumbo Heights Development (which is owned by Kushner Companies—the CEO is Donald Trump’s son-in-law Jared Kushner) and Empire Stores. “So DUMBO will become a destination for a night out, where you can pick from a number of restaurants… and it will also have a little bit more of a feel of a shopping district,” she said.

Businesses in other neighborhoods in Brooklyn have also been struggling to pay rent.

Robert Piechota, Director of SBDC, said the businesses that do close are not prepared to deal with a trend that was established a number of years ago, which is rising costs of rent. “And if you don’t own your building, then you’re at the mercy of a landlord who might get a higher bidder for the entire block rather than just be satisfied with keeping you in your location for the next ten years. Leases are shrinking in terms of duration. Landlords are more sensitive to market shifts and that’s easily identified,” he said.

He does offer a solution, which is purchasing the building. The U.S. Small Business Administration offers a loan guarantee program, called 504. “This program empowers small business owners to actually purchase their building so they’re not at risk of being forced out by rising rents,” Piechota said.

To qualify, a business owner has to put at least 10 percent down and show viability in the business, so a startup would not qualify for this loan. Piechota said his office has been successful in helping some business owners take advantage of this program, but only if a landlord wants to sell.

“Quite honestly, most of these block sell-outs involve big developments. The landlord may be sitting on 20 million dollars’ worth of inventory and make it sell out to a developer who’s gonna basically move out all business and put up higher price housing or what not,” he said.

One of the businesses that the 504 loan program helped to save is Brooklyn Farmacy & Soda Fountain in Carrol Gardens, ranked as number 13 on the most expensive list of neighborhoods in NYC, according to Property Shark.

“I have no doubt to tell you that we would not be here today if we didn’t buy that building. It’s allowed us to survive,” said Gia Giasullo, the co-owner of Brooklyn Farmacy & Soda Fountain.

They’ve been open since summer of 2010 and Giasullo, who runs the business with her brother, has yet to take a vacation.

The restaurant’s story is unlike any other. “We’ve had a very kind of magical beginning that I think drove our story, which is very unusual,” said Giasullo. The space that they leased was once a thriving neighborhood pharmacy. The corner storefront had shut down for more than thirteen years.

Giasullo said they were on the brink of not opening when one day her brother Peter Freeman, the co-owner, was working outside, and a woman pulled up asking for directions to a Fairway. She glanced across his shoulder at the space and asked him some questions. Turns out, she was a casting director for a reality TV show on the Discovery Channel, called Construction Intervention. She fell in love with the space and Brooklyn Farmacy & Soda Fountain ended up becoming the final contestant on the show. They got the space renovated for about $600,000, and the store opened quickly after.

Six months from opening, the owner of the building told them that he wanted to sell the building. It was 2010 and the recession was still a factor, Giasullo and her brother spent more than two years trying to buy the building through what she calls “normal outlets,” such as applying for small business loans from Bank of America, Citi Bank, Wells Fargo.

Giasullo said they expected to get a loan. They filed enormous amount of paperwork and spent many hours applying. But they were denied, and frustrated. “If the banks that have small business loans, would not give away to our situation, it really made us wonder, who are these loans for?” she asked. “It was heartbreaking. It took us in some cases, three months of back and forth paper work… really to come down to two or three pieces of paper—you’re not really showing enough profit,” she said.

As the third year anniversary of their opening approached, they were also turned down by the third bank. The understanding owner of the building was the one who suggested the 504 loan. By that time, the restaurant had been featured on the front page of the Food & Dining section of The New York Times, and the siblings were also in a process of writing a book (an agent approached them after the Times piece was published).

Applying for the 504 loan took nine months. It seemed that the loan wouldn’t be granted, but then Piechota stepped in. Giasullo said Piechota helped them in the final moments of the process by putting the right numbers in the right column and by framing the business in “the language they needed to hear.” Brooklyn Farmacy & Soda Fountain was finally granted the loan.

“He’s been an enormous support. He’s kind of like our fairy godmother,” said Giasullo about Piechota, who continues to support the business.

In Carrol Gardens, Giasullo has witnessed the loss of several useful businesses, like her favorite pharmacy. Now she needs to walk to Rite Aid.

She advises new businesses to consider owning the property before opening or asking— “Am I in a rent stable place? Because I don’t think there’s any protection, really,” she said.

 

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