Artist Space Guide
The following forms of legal ownership are used in the creation of artist space.
Cooperatives: In a cooperative, the real estate is owned by a corporation, the shares of which are held by the individual building owners in proportion to how much space they occupy. Each owner also has a lease granting undisputed legal right to occupy his/her space. Co-ops pre-date condominiums and have several advantages:
- The entire property can have one “blanket” mortgage (shared by the unit owners), a series of smaller mortgages, or a combination of both.
- The overall financial strength of the borrowing group can be greater and thus carry members with uncertain incomes or lower net-worth. Some of the most dedicated and enthusiastic group members might fall into this category.
- Unlike internal changes to condominiums, which must be publicly recorded, changes in unit boundaries in co-ops do not need to be recorded in public documents.
- Co-ops are inherently more flexible than condos and thus easier to operate as mixed-use (live/work) buildings.
- Co-op members set their own rules about who can purchase shares (a unit), making it easy to require that all residents be artists.
Limited Equity Co-ops: “Limited equity” refers to the mechanism used to keep a project affordable by placing a cap on the resale price of the studios. For example, at the 249 A Street Artist Co-op in Boston, the resale price is limited to a 10% per year return on one’s cash (equity) down payment and capital improvements. Though this prevents early “windfalls,” long-time owners find that the 10% allowable increase eventually brings them close to the unrestricted market. Limited equity and restrictions on resale to artists limit the choice of lenders, since many banks and mortgage companies have standard debt products only.
Condominiums: Condominiums differ from co-ops in that each condo owner holds a deed to the unit and obtains an individual mortgage to purchase the unit if necessary. In this approach, each owner is responsible for mortgage payments and property taxes associated with the individual units. Unit owners form a condo association and elect trustees and/or hire a management company. The trustees or company are responsible for the management of the building, including oversight of common areas and structural elements. Unit owners typically pay a “condo fee” to maintain these common spaces. Mortgages to individual owners are usually conventional, 15- or 30-year, variable or fixed-rate mortgages. Condo associations seldom have legal rights to restrict the sale of units to non-artists, although such restrictions do exist in certain cases.
Limited Partnerships and Limited Liability Corporations (LLCs): Limited Partnerships are structured such that a group owns percentage shares of the “LP.” In certain cases, artists develop buildings and enter into a legal agreement with investors who invest in the project in exchange for the right to use the depreciation of the property as a tax shelter. This business-form of ownership is not well-suited for most owner-occupied residential projects for varying reasons including relinquishing managerial rights.
Because limited partnerships and their treatment by the IRS are extremely complex, have an experienced real estate attorney and accountant advise you should you decide to pursue an LP or LLC.
Limited liability corporations (LLCs) are another form of ownership. The primary reason LLCs are popular is that members of an LLC are not personally liable for debts or liabilities of the LLC beyond the investment they made in the project. In most respects, however, LLCs and Limited Partnerships serve the same purposes and function similarly.
Rental Properties: Rental properties are typically owned by partnerships and LLCs. Sometimes artists form a partnership to develop and own a studio building. Artists rent space to themselves (the rent comes back to them) and to tenants outside the partnership. Rental residential projects are rarely developed by artists but sometimes built as part of larger residential or mixed-use projects.
Artists who want to lease space might find themselves in several different situations:
- Signing a residential lease and working from a house, apartment, or residential loft.
- Subletting or signing a commercial or industrial lease and working in a studio in a previously developed artist building.
- Signing a commercial or industrial lease for an undeveloped space for a group of artists.
Quick Tips on Leases:
- Read carefully: When you get a lease, do not sign it immediately. Take it home and read it carefully.
- Get clarification in writing: If you don’t understand part of the lease, ask the landlord and/or broker to clarify in speech and writing.
- Revisions: It’s your right to ask for unacceptable elements of a lease to be eliminated before signing.
- No verbal agreements: Make sure that everything you verbally agree to or are promised is written down and in the document.
- Consider getting a lawyer: We strongly recommended that you have an attorney experienced in commercial leasing to review the lease and negotiate for you. Sometimes a lawyer can get you more than you could on your own. Ask lawyers about their experience with commercial leases and their fee (usually a retainer and an hourly rate.) Some might accept artwork instead of a fee. Also consider Volunteer Lawyers for the Arts.
- Ask for a rent reduction if you improve the space: Don’t hesitate to propose rent reductions in exchange for improvements you make to the landlord’s property.
- Know what needs the landlord’s approval: Be clear about which activities require the landlord’s approval, especially when subletting or subdividing a floor. Before bringing in subtenants or making improvements to the space, you might want to submit both to the landlord for their approval.
- Sharing a lease: Most landlords prefer to deal with only one or two tenants even though it might be ideal to have all the artists named on the lease. Make sure that the person whose name goes on the lease can handle of working with the landlord.
If you sign a lease for a unit in a standard residential building (even in a loft building) you should ensure it is a proper rental live/work space. If it is, it will:
- be built with sound proofing and exhaust systems within units (if not, it will have provisions for adding exhaust systems on a unit-by-unit basis);
- have a working relationship with an industrial hygienist who can respond to tenants’ questions and blow the whistle on things that just should not be done in a multi-unit situation;
- have provisions for disposal of solvents, acids, etc.;
- have durable, cleanable floors in most of the space;
- manage to provide for living amenities/basics without using up all the work space, a tricky balance to strike in small spaces.
Neighbors in live/work buildings follow the golden rule when it comes to accommodating occasional inconveniences, crowds, or noises. Lease terms empower management to deal with people who egregiously or routinely disturb other occupants.
Commercial rents are usually expressed in gross square feet per year (measured from the outside wall). For example, if the landlord tells you that the rent is $9.00 per square foot (p.s.f.) for 2000 square feet then the annual rent is $18,000.00 ($9 x 2000) or $1,500.00 a month ($18,000/12.)
In general, there are two types of commercial leases.
Gross Lease: A gross lease is similar to a residential lease, which you sign when renting an apartment. A gross lease is a lease of a fixed amount every month in which the landlord covers the majority of the operating expenses of a space (including taxes, insurance, repair costs, and common area maintenance costs or CAM.) The landlord might or might not pay for utilities.
Net Lease: Under a net lease, you will be required to pay rent for your space and a certain portion of the operating expenses related to the property. These expenses might include CAM, insurance costs and real estate taxes, as well as utilities. CAM costs might include your share of maintaining the common areas like the lobby, bathrooms, and elevators.
Net leases are also called “double net” or “triple net” leases, the primary difference being the amount of the operating expenses charged to you on top of your base rent. In a double net lease (Net-Net or NN), the lessee or tenant is responsible for property tax and building insurance. A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance.
The following is a quick review of typical “terms” you will encounter in a lease. Review these premises carefully before signing. A term is a legal item that you agree to follow by signing the lease.
The lease should lay out the exact location and boundaries of your space and tell you which spaces are common to the building.
Rentable Area versus Usable Area
Many commercial buildings assign a share of common areas to each tenant. Ask if the area of your space is the actual area within the space itself (the “usable” area) or “rentable” space (the usable area times the building’s “common area multiplier.”) In a building with 20% of the space used for common areas, 1000 usable square feet might actually be leased for as much as 1200 rentable square feet.
The rent figure often does not include the full cost of your occupancy. Know exactly what your rent covers. Is the lease gross or net? Will you have to pay utilities? Ask for an estimate of the utility charges for the space you are considering, including copies of bills for the past few years.
Length of Lease
Leases for commercial or industrial spaces are typically two or three years and sometimes as much as five years or more. If you like the space and want to stay for a while, seek the longest lease possible. Remember signing a lease is a legal obligation to pay the rent for the length of time for which you sign. You can also try to get an option to extend the lease. Be aware that even if you move out, you must pay the rent unless you can legally transfer the lease or sublet to someone else, which recourses would be permitted by an “escape clause.”
As part of the signing of the lease, insist that you have permission to sublease for specific categories of tenants in advance (e.g. other artists.)
Cost of Living Adjustments
If your lease contains this section, it means that your annual rent might increase. Be sure you understand the formula laid out in the lease. The cost of living adjustments might be tied to increasing operating costs.
Liability insurance is often required and can be costly. Make sure you understand whether this is required.
Fuel Operating Expense and Tax Increase Adjustments
Read this section carefully and review it with the landlord until you understand it. It might contain hidden costs. Write down your understanding of it and have the landlord sign off on your understanding, especially if the lease is not clear. If you have an attorney, this would be a good time for them to advocate for you and/or press the landlord to rewrite the lease.
What improvements or repairs are needed and who will pay for them? Before signing the lease, note everything that needs to be repaired/improved and identify which party, you or the landlord, will be responsible for each improvement. If improvements are needed, payment of rent should start after the work is completed. Be sure you know which fixtures (e.g. a new faucet or toilet) belong to you when you move out.
Living in a Work Space
A commercial landlord cannot legally sign a lease that allows a tenant to live in area that does not comply with the residential building code or is not zoned for residential use. A lease can include permission for 24-hour access, a bathroom with a shower, a cot or sofa, and a minimal work-related kitchen. If you do so, however, you are putting yourself and the landlord at risk.
If the initial deposit is too high for you, try to obtain permission to pay the deposit over several months to reduce your initial expenses.
Rules and Regulations
Some buildings have rules about elevator use, trash collection, etc. Have such rules attached to the lease or get a written acknowledgement that no such rules exist.
Ask whether and to what extent you remain obligated to the lease in the event that you cannot use the space for a significant period of time because of a fire or failure of heating system.
Heat and/or Cooling on Nights and Weekends
Some commercial buildings provide HVAC during normal business hours only. If that’s the case in your building, consider how it might interfere with your artistic practice.
How many parking spaces are there for you and visitors?
Would your fumes or dust contaminate others’ spaces or are there provisions for fume exhaust? Do the windows even open?
How would visitors find you and enter the building? Is there a simple entry system?