NY Lease Audits 2026: Mixed-Use Liabilities

What is commercial real estate law in the United States?

Commercial real estate law in the United States is a patchwork of state property and contract rules overlaid with key federal statutes on lending, fair housing, environmental compliance, and taxes. For an investor or owner, this means deals, leases, and disputes mostly turn on state law, but federal rules can change your financing structure, risk profile, and exit strategy.

At a high level, U.S. commercial real estate covers:

• Office, retail, industrial, hospitality, multifamily (5+ units), and mixed-use buildings
• Fee ownership, ground leases, air rights, and condominium structures
• Acquisitions, joint ventures, financing, leasing, and development

Key legal layers you need to understand

• State property and contract law
  • Controls ownership, transfer of title, mortgages, landlord-tenant law, and remedies.
  • Each state has its own recording statutes, eviction procedures, and rent rules.
• Local law and agencies
  • Zoning codes (e.g., New York City Zoning Resolution).
  • Building codes and C of O rules (e.g., NYC Department of Buildings).
  • Local rent regulation regimes (rent control, rent stabilization, and Good Cause-type laws).
• Federal statutes that often affect commercial deals
  • Fair Housing Act for residential units in mixed-use buildings.
  • Americans with Disabilities Act (ADA) for public accommodations and accessibility.
  • Environmental laws such as CERCLA for contamination risk.
  • Tax rules (e.g., 1031 exchanges, REIT requirements, FIRPTA for foreign sellers).

For multi-tenant and mixed-use buildings, landlord-tenant law, zoning, and local rent regulations usually dominate your risk profile and NOI story.

How do property rights and title work in U.S. commercial real estate?

In U.S. commercial real estate, you secure property rights through recorded deeds, and you protect yourself with title insurance and careful due diligence before closing. Recording in the county land records puts the world on notice of your ownership and priority relative to other liens and interests.

Core ownership concepts

• Fee simple ownership: Full ownership, subject to liens, easements, and government powers (taxation, eminent domain, police power).
• Leasehold interests: Long-term ground leases or commercial leases that create valuable, financeable tenant estates.
• Shared structures:
  • LLCs, LPs, and joint ventures for risk allocation and tax planning.
  • Condominiums and air rights parcels, especially in dense markets like NYC.

Due diligence and closing workflow

1. Letter of intent (LOI) - non-binding business terms with some binding pieces (confidentiality, exclusivity).
2. Purchase and sale agreement (PSA) - detailed contract with reps, warranties, closing conditions, and prorations.
3. Title and survey review - check for liens, encroachments, easements, gaps in title.
4. Zoning and C of O review - verify legal use vs. actual use, especially for mixed-use and residential components.
5. Lease and NOI audit - test the story the seller is telling you, including pass-throughs and expense allocations.
6. Environmental and engineering reports - Phase I ESA, structural, MEP, facade, compliance.
7. Closing - deed and loan documents sign, funds disburse, and documents get recorded.

Typical U.S. commercial closing costs (illustrative)

Use these ranges for underwriting only; in markets like NYC, LA, and DC, transfer taxes and legal costs can be materially higher.

How are U.S. commercial leases structured and how do they affect NOI?

U.S. commercial leases allocate operating costs and risk between landlord and tenant using rent structure, pass-throughs, and escalation clauses, and those choices directly shape your Net Operating Income. A well-drafted lease can stabilize building cash flow and hedge inflation, while a weak structure can trap landlords with rising costs they cannot recover.

Main commercial lease types and expense structures

Operating expense escalations and NOI

Most multi-tenant office and mixed-use leases use some variation of:

• Base year structure
  • Tenant pays its pro rata share of increases over a defined "base year" of operating expenses.
  • Landlord risk: if the base year is artificially low (e.g., vacancies, tax abatements), recovery will lag future real costs.
• Expense stop
  • Landlord pays up to a fixed dollar-per-square-foot amount; tenant pays the excess.
  • Gives clearer underwriting, but you must update the stop for inflation when renewing.
• Direct pass-throughs
  • Tenant pays a defined share of "Operating Expenses" including taxes and insurance.
  • Landlord risk depends on how tightly "Operating Expenses" is defined and what is excluded.

Key drafting points that protect landlords

• Definition of Operating Expenses
  • Include: real estate taxes, insurance, utilities, repairs, security, management, compliance costs.
  • Exclude: capital improvements (unless they reduce operating costs), leasing commissions, debt service, landlord income taxes, costs for other projects.
• Tax and insurance pass-throughs
  • Make clear that tax law changes, loss of abatements, or re-assessments after a sale flow through to tenants.
  • Require tenants to carry liability and property insurance with landlord as additional insured and loss payee as appropriate.
• Operating expense caps and floors
  • Tenant-side negotiation often seeks caps on controllable operating expense increases (e.g., 5% - 8% per year, compounded).
  • Landlord should carve out non-controllable items from any cap (taxes, insurance, snow removal, utilities).
• Audit rights and true-ups
  • Allow annual reconciliation of estimated vs. actual expenses and recovery of shortfalls.
  • Limit tenant audits to serious discrepancies and prevent fishing expeditions.

For mixed-use buildings where residential income is constrained by regulation, strong commercial pass-throughs and escalation language can be the difference between an underperforming and a financeable asset.

How do residential tenant protections like "Good Cause Eviction" affect mixed-use building value in NYC?

"Good Cause Eviction" style protections for certain residential tenants in New York cap rent increases and restrict evictions, which can flatten residential income growth and increase legal costs in mixed-use buildings. This pressure forces landlords to look to the commercial component for NOI growth, making lease structure, tenant quality, and expense recovery far more important.

What "Good Cause" does in practice

While details vary by statute and locality, "Good Cause" frameworks generally:

• Give residential tenants a presumptive right to renew, unless the landlord can prove one of several "good causes" (nonpayment, nuisance, owner occupancy, etc.).
• Treat rent increases above a set formula (for example, the lesser of a percentage over CPI or 10%) as presumptively "unreasonable" and subject to challenge.
• Shift the eviction battleground from pure nonpayment or lease expiration into contested questions about "good cause" and reasonableness.

New York's adoption of a limited Good Cause structure as part of the 2024 budget package, with automatic application in New York City and potential opt-ins elsewhere, fits this pattern, though with numerous exemptions (for example, newer buildings, small owner-occupied buildings, some high-rent units, and regulated units that already have protections).

Impact on mixed-use NOI and valuation

• Flattened residential revenue growth
  • Annual rent increases for covered residential units become more predictable but are capped effectively by statute and inflation.
  • Upside from "marking to market" on turnover is harder to realize, especially if tenants stay long term.
• Higher legal and compliance costs
  • More contested holdovers and rent disputes, especially when owners try to reposition or repurpose units.
  • Need for stronger documentation of reasons for non-renewal and rent changes increases legal spend.
• Cap rate and valuation pressure
  • Investors may underwrite lower long-term growth rates for the residential piece, which can widen cap rates for mixed-use assets heavy on covered units.
  • Buyers discount for regulatory risk, political risk, and potential future expansions of tenant protections.
• Shift in value creation strategy
  • More focus on commercial rent growth, tenant mix, and expense recovery to drive NOI.
  • Value-add plans may pivot from "turn and burn" of residential units to capital improvements and amenity strategies that justify lawful rent increases.

Practical steps for NYC mixed-use owners

• Inventory all residential units by:
  • Regulatory status (market, rent stabilized, regulated, Good Cause-covered, exempt).
  • Lease form and riders, including any promises on renewal or rent formulas.
  • Actual physical use versus C of O use classification.
• Model separate income streams:
  • Stress-test residential income with conservative rent growth and higher legal/turnover costs.
  • Test how much NOI you must extract from the commercial component to hit debt yield and DSCR targets.
• Coordinate with leasing team:
  • Use the more flexible commercial side to structure percentage rent, escalation floors, and additional services fees.
  • Time commercial renewals and expansions around major capital projects that benefit both commercial and residential tenants.

How should commercial landlords audit leases for pass-through expenses and liability shifts?

Commercial landlords should line-by-line review each lease to confirm which operating costs, taxes, and liabilities are recoverable from tenants, then compare that to actual building expenses to identify leakage. This audit is especially important in mixed-use buildings where residential income is constrained and commercial leases must carry more of the load.

Step-by-step lease audit process

1. Collect source documents
   • Executed leases, amendments, side letters, guaranties.
   • Estoppel certificates, SNDA agreements, and any prior settlement agreements.
2. Build a lease abstract focused on economics
   • Base rent, percentage rent, and free rent periods.
   • Expense structure: gross, base year, NNN, expense stop; tenant's pro rata share.
   • Definition of Operating Expenses, exclusions, and any caps on increases.
   • Tax and insurance pass-through mechanics and carve-outs.
3. Map lease rights against your actual P&L
   • Compare recoverable expenses in theory vs. what you are actually billing.
   • Identify categories you are absorbing that could be passed through under the lease.
4. Identify liability shifts and gaps
   • Check indemnity clauses for injury, property damage, environmental issues, and third-party claims.
   • Confirm insurance requirements match actual certificates and that landlord is properly named as additional insured.
   • Review repair and maintenance obligations (structural vs. non-structural, HVAC, roof, systems).
5. Prioritize re-negotiation targets
   • Leases that under-recover expenses relative to other tenants or market standards.
   • Upcoming renewals and options that give you leverage to fix economics and risk allocation.

High-value edits to seek in renewals

• Clarify and broaden "Operating Expenses" while preserving market exclusions.
• Add explicit pass-through of:
  • Tax law changes, new assessments, and loss of abatements.
  • Security, compliance upgrades, and mandated capital improvements amortized over useful life.
• Tighten indemnities and require higher liability limits where tenant operations are riskier (restaurants, gyms, medical).
• Add or strengthen audit and true-up provisions in landlord's favor for underbillings and errors discovered later.

How can landlords renegotiate operating expense escalations in commercial leases?

Landlords can renegotiate operating expense escalations by trading tenant concessions (term, TI, free rent) for stronger base years, fewer caps, and broader pass-throughs, especially at renewal or expansion. The goal is to align lease economics with real operating cost trends so NOI tracks inflation and local tax increases.

Strategies for rebalancing escalations

• Base year re-set on renewal
  • Use the renewal date as a new base year, capturing current tax and operating levels.
  • If the tenant has leverage, consider a rent concession in exchange for the re-set.
• Replace fixed bumps with indexed increases
  • Shift from flat 2% or 3% annual bumps to CPI-based increases with a floor (e.g., "CPI, but not less than 2% and not more than 5%").
  • Continuously index longer-term leases to hedge inflation risk.
• Narrow "controllable expense" caps
  • Limit caps to a short list of truly discretionary costs.
  • Exclude taxes, insurance, utilities, snow removal, and security from any caps.
• Amortize capital improvements through operating expenses
  • Where allowed, recover the cost of mandated or cost-saving capital projects over their useful life as part of Operating Expenses.
  • Tie recovery to demonstrable reductions in other operating costs where possible.

Negotiation levers that often work

• Offer tenant improvement (TI) allowances or build-out support in exchange for updated escalation language.
• Trade option rights (e.g., expansion, contraction, ROFR) for more landlord-favorable expense mechanics.
• Use blend-and-extend deals: reduce near-term face rent in exchange for longer term with better escalations and pass-throughs.
• Present benchmarking data showing that your proposed structure aligns with current market practice in the submarket.

Why do zoning and Certificates of Occupancy matter for 2026 lease renewals?

Zoning and Certificates of Occupancy matter for 2026 lease renewals because any mismatch between legal use and actual use can undercut your bargaining power, trigger enforcement risk, and complicate financing. For mixed-use buildings, especially in NYC, a clean C of O and compliant zoning profile are now central to valuation and lender underwriting.

How zoning and C of O issues show up in mixed-use assets

• Mismatched uses
  • Residential units being used as offices or short-term rentals where not permitted.
  • Retail spaces used for more intensive or different categories than allowed by zoning.
• Outdated or provisional C of O
  • Temporary C of O that was never finalized after construction or alteration.
  • C of O that lists fewer residential units or different layouts than exist today.
• Non-compliant conversions
  • Cellar or basement space occupied as residential without legal authorization.
  • Mezzanines or interior alterations that change egress, occupancy loads, or accessibility.

Why this matters for 2026 and beyond

• Lender and buyer scrutiny
  • Post-pandemic, lenders and investors are more conservative on regulatory risk, especially in NYC.
  • Illegal or questionable uses can lead to holdbacks, lower valuations, or deal-killing conditions.
• Leverage in renewal negotiations
  • Tenants who discover zoning or C of O issues can use that information to negotiate lower rent or more favorable terms.
  • Regulatory exposure weakens your position in disputes and holdover situations.
• Interaction with Good Cause and rent regulations
  • Unclear legal status of units can complicate whether and how tenant protections apply.
  • Cleaning up legal status now helps avoid future litigation risk around coverage and lawful rents.

Actionable audit steps before 2026

1. Pull official records
   • Download zoning maps, zoning text, and C of O documents (e.g., from NYC Department of Buildings).
   • Check for open violations, stop work orders, or ECB/OATH penalties.
2. Compare records to reality
   • Walk the building with a zoning and code consultant.
   • Confirm unit count, layouts, use types, and egress match the approved plans and C of O.
3. Identify legalization paths
   • Where feasible, bring out-of-compliance uses into conformity via variance, special permit, or alteration filings.
   • Where not feasible, plan staged de-occupancy or re-tenanting strategies.
4. Align leasing with legal use
   • Update lease use clauses so they align with zoning and C of O limitations.
   • Obtain tenant cooperation obligations for permits, inspections, and corrective work.

Which lease clauses protect landlords against holdover commercial tenants?

Landlords protect themselves against holdover commercial tenants using clauses that impose premium rent, define holdover as a default, and shift liability for downstream losses such as lost new leases or sale delays. A tight holdover regime is critical to avoid a single tenant disrupting a refinance, repositioning, or sale.

Core anti-holdover tools

• Premium holdover rent
  • Set holdover rent at a significant multiple of the last month's rent, often 150% - 200% or more.
  • Clarify that the premium is not a waiver of other landlord remedies.
• Express holdover default
  • State that remaining in possession after lease expiration without written consent is an event of default.
  • Preserve landlord's right to summary eviction proceedings where available under state law.
• Consequential damages allocation
  • Provide that tenant is liable for damages arising from holdover, including:
    • Lost rent from replacement tenants.
    • Penalties under new leases that cannot start on time.
    • Extra costs for temporary space for new tenants.
  • Carve this out from any general consequential damages waiver that benefits the tenant.
• Clear surrender obligations
  • Require tenant to vacate, remove personal property and trade fixtures, and return keys and access devices by a specific time and date.
  • Define acceptable condition and clarify what improvements must remain vs. be removed.
• No implied tenancy rights
  • State that acceptance of rent during holdover does not create a renewal or waiver of rights.
  • Specify whether any month-to-month tenancy is entirely at landlord's option and still subject to premium rent.

Practical coordination with litigation counsel

• Align lease language with state eviction procedures so that your lawyer can pursue fast-track remedies.
• Pre-plan evidence collection (photos, access logs, correspondence) needed to show timely surrender failures.
• For key rollover dates tied to financing or major tenants, build a calendar of notice and enforcement checkpoints 6-12 months out.

When should a U.S. commercial real estate investor hire a lawyer or other expert?

Investors should hire a real estate lawyer and other experts at the front end of acquisitions, major leases, refinancings, and any repositioning involving zoning, rent regulations, or significant construction. The more mixed-use, regulated, or urban your asset is, the earlier you want specialized advice.

Key moments to bring in counsel and advisors

• Pre-LOI for complex or regulated assets
  • Structure JV, purchase, or ground lease terms with your risk allocation in mind.
  • Screen for red-flag issues like rent regulation status, illegal units, or environmental problems.
• PSA and lease drafting
  • Negotiate key protections on title, reps/warranties, and closing conditions.
  • Draft or revise commercial leases to optimize escalations, pass-throughs, and holdover protections.
• Zoning and C of O questions
  • Use zoning counsel and expediters to confirm legal use and pathways to legalization or redevelopment.
  • Coordinate with architects and engineers for code compliance and DOB filings.
• Regulatory changes and disputes
  • Respond to new Good Cause-style laws, rent guideline shifts, or enforcement initiatives.
  • Handle tenant litigation, rent challenges, and complex evictions.
• Tax and exit planning
  • Involve tax counsel and accountants for 1031 exchanges, REIT structures, or cross-border investors.
  • Plan entity exits or recapitalizations with an eye to transfer taxes, consents, and change-of-control issues.

What are the practical next steps for owners of mixed-use buildings?

Owners of mixed-use buildings should immediately tighten their documentation, re-underwrite NOI with realistic residential assumptions, and use upcoming renewals to fix weak commercial lease terms. A focused, building-by-building plan will position you for regulatory shifts and the 2026 leasing cycle.

Concrete action plan

1. Regulatory and C of O check
   • Obtain and review zoning and C of O documents for each building.
   • Flag any mismatch between legal use and actual use, and engage zoning counsel where needed.
2. Residential status mapping
   • Classify residential units by regulation type, likely Good Cause coverage, exemptions, and known issues.
   • Model conservative rent growth and higher legal costs in your pro formas.
3. Commercial lease audit
   • Abstract all material leases, focusing on rent, escalations, pass-throughs, and holdover language.
   • Identify underperforming leases and upcoming expirations and options through at least 2027.
4. Renegotiation and renewal strategy
   • Prioritize renewals where you can re-set base years, tighten operating expense language, and add premium holdover provisions.
   • Use blend-and-extend and TI to trade near-term tenant wins for long-term NOI protection.
5. Lender and investor communication
   • Share your regulatory and lease audit findings proactively with lenders as you approach refinancing.
   • Highlight steps you have taken to stabilize NOI and mitigate regulatory and holdover risk.
6. Build a permanent expert bench
   • Identify go-to counsel for leasing, zoning, and landlord-tenant litigation in your key jurisdictions.
   • Maintain relationships with tax advisors and property managers who understand your submarkets and regulatory landscape.

Working this plan in an organized way over the next 12-24 months will help you preserve leverage in negotiations, protect NOI, and keep mixed-use assets financeable despite tighter residential regulations.