By Alexandra Terrell.
Speaking at a Stropheus Art Law event entitled “Letting Go of Brick and Mortar: The Future of the Gallery” in September 2016, Josh Baer noted that the notorious art scene in the Big Apple has always changed cyclically. He questioned, “How many [galleries] are going to be flourishing 5, 10, 20 years from now? I’m going to say not many. And it’s always been that way.” Several quintessential New York City galleries affirm Baer’s prediction. On Stellar Rays, Andrea Rosen Gallery, and Mike Weiss Gallery, amongst others, have recently closed their doors for good. Small and midsize galleries, which often play a pivotal role in helping promote emerging artists (JTT with Damon Zucconi and Sargent’s Daughters with Cy Gavin are two examples), have a hard time surviving New York City’s ever-changing and always-demanding “make it or else” zeitgeist, much like the artists they represent. With an influx of artist-types comes gentrification, followed by higher property taxes, and when the lease expires, a higher rental rate to renew. When these increases in overhead become unsustainable, galleries often move to more affordable areas, starting the cycle all over again. Today, some might call the process hypergentrification because it seems to have heightened and accelerated, with property taxes and rental rates skyrocketing to stratospheric levels and landlords unwilling to negotiate longer-term leases.
The Internet plays an important role in the changing art market, as do art fairs—galleries are no longer the sole source of viewership for an artist. Artists often display their work directly to an audience online, eliciting sales and promoting their work without the help of a gallery. As Michael Foley of Foley Gallery aptly puts it, “The things that gallerists have embraced over the years as additional tools may ultimately be our undoing.” At the same time, however, the gallery offers a viewing experience that the dimensionless white space of the Internet cannot. It’s impossible to smell the paint or perceive a piece’s physical presence through the interface of a computer screen. To reconcile the innovations of the Internet age and costly real estate with the necessity of what Josh Baer describes as a “chemical view of art”, new models of gallerist-artist-client relationships have arisen, expanding the ways in which art is presented to the public. However, with diversified roles and the use of non-traditional spaces, gallerists take on new legal responsibilities.
The Essence of the Problem
Gallerists in New York City list many reasons for abandoning their brick-and-mortar spaces—the rise of art fairs, the burgeoning online art market, the desire to retreat from the grind of the art-industrial complex, and the changing nature of the art itself. Some even blame closed-minded clientele. Collectors have shifted their focus to “market-tested trophy works”, often buying such works online without viewing them in person. Because these works tend to be the domain of blue-chip galleries with multiple locations, they are the ones benefitting disproportionately from the online market while small and midsize galleries suffer.
In a recent article in the New York Times, Robin Pogrebin notes a widening economic divide between small galleries and large ones. She attributes this phenomenon to the exorbitant cost of real estate as well as the proliferation of expensive art fairs. Participating in certain art fairs can cost a gallery hundreds of thousands of dollars, virtually shutting out any gallery pulling in less than seven figures annually. Economic factors are not the only barrier to showing at major art fairs. Many are quite selective when choosing exhibitors, opting for galleries that represent well-recognized artists over those that promote emerging ones. According to The European Fine Art Foundation’s 2017 Economic Report, art fairs account to up to 41% of sales across the industry. Not only do small and midsize galleries not benefit from those sales, they have also witnessed a noticeable decline in foot traffic, diminishing their overall sales and forcing them to rely more heavily on their most loyal clients. While there is no obvious response to the economic impact of art fairs and the Internet on small and midsize galleries, it is easier to pin down a solution to rising real estate costs.
In March 2016, the Center for Art Law hosted a panel at Minus Space highlighting the central role the real estate market plays in the arts. Adam Sheffer, the president of the Art Dealers Association of America, relates that “you can never underestimate the significance of the relationship between the real estate and art markets.” Over the course of the post-war period, gallery hotspots shifted around the city, from the Upper East Side to Midtown to Soho to Chelsea to Williamsburg. Because of the rent increases in Chelsea and the Meatpacking District, galleries there began searching for alternatives. As early as 2001, galleries started making the move from Chelsea to the Lower East Side and Chinatown, where the majority of locations are smaller and are often run by independent landlords. Pierogi Gallery, run by Joe Amrhein and Susan Swenson, made the leap from Williamsburg to the Lower East Side to escape rents that are just as high as those in Chelsea. Prices in the Lower East Side range from $100-$145 per square foot, but because of the smaller spaces available, the overall costs are less. For larger spaces on the Bowery, rents can go up to $200 per square foot, likely because of the willingness of more profitable tenants—hotels and restaurants, for example—to take on such high rates in the area.
In the mid-2000s, rent in Chelsea fell between $90-$100 per square foot. Compare that to today, when rent on the “best blocks” can be $120-$145 per square foot. With spaces ranging in size from 1500 – 5000 square feet, only well-established blue-chip galleries have any hope of sustaining further increases. Few spaces can still be found for below $100 per square foot. One prevailing condition guarantees a bit of stability for galleries in Chelsea—retailers have been hesitant to move in. As a result, the rental rates are also highly dependent on what galleries are willing to pay. If no gallery can pay the rate, the space sits empty. With the Hudson Yards development being erected just above Chelsea, the situation may change. However, the upside is that with these upscale residences moving in, more affluent clientele move in as well.
Rent is expected to continue to increase even in lower-priced regions—the Lower East Side, Williamsburg, and Bushwick—so galleries remain in search of less charted areas. For some, that means Harlem, for others, it means Queens. A few have gone even further outside traditional realms, changing course and representing artists in the absence of a brick-and-mortar space.
The Source of High Rental Rates
How is it that rent can continue to increase? The answer is pretty simple: there is no commercial rent control law in New York. New York City had one from 1945 to 1963, but when it expired, there was little impetus to renew it because, as James Parrott, the deputy director and chief economist of the Fiscal Policy Institute, explains, “the real estate community has always been aggressive in campaign contributions… and, by doing so, they’ve successfully prevented anything that would restrict them.”
Where rent control is nonexistent, a gallery’s saving grace can be the terms of its lease agreement. Commercial lease agreements are often the result of an extensive negotiation process. Critical terms can make or break the leasing business. These terms include the length of the lease, the rent and any allowable increases, whether insurance, property taxes and maintenance costs are included in the rental rate or paid separately, and how disputes are to be settled.
There are two major types of commercial lease: a gross commercial lease and a commercial net lease. In a gross commercial lease, the tenant pays the landlord a fixed monthly fee. It is the landlord’s responsibility to cover all operating expenses of the building, including liability insurance and property taxes. This type of lease may initially be more expensive than a net lease, but it can protect the tenant should operating costs increase in the future. In a commercial net lease, the tenant is responsible for paying some of the operating costs of the building. These most commonly include property taxes, insurance, and maintenance, usually all based on the proportion of rentable space the tenant is leasing. When all three expenses are included, the lease is called a “triple net lease”. Negotiating these terms can be complex.
The ideal situation is one in which the tenant does not face unexpected costs in the middle of a lease. It is not uncommon for landlords to include a “Compliance with Laws” clause in the lease agreement. This clause can place responsibility on the tenant to ensure the building is up to code in compliance with the law, exposing the tenant to the expenses of unanticipated renovations and upgrades. A tenant-friendly clause should require that the landlord warrant that the building is in compliance at the time the tenant takes possession. This limits the tenant’s responsibility for any non-compliance that existed before occupancy. If the tenant is moving into a space that was previously occupied by a similar business, the agreement should require the landlord to warrant that the space is code-compliant for the intended business activities. If the tenant agrees to take on additional compliance responsibilities, they should be very clearly specified within the lease.
Depending on which type of lease is secured, property tax increases are another variable that can desiccate a gallery’s finances. The Official Website of the City of New York provides information about how annual property tax rates are calculated. The Department of Finance determines the market value of the property, which differs depending on the class of property in question. In New York City, there are four property classes. All commercial and industrial properties, including office and retail buildings are included in Class 4. For Class 4 properties, the Department of Finance bases its market value calculation on income earning potential and expenses as well as some statistical modeling. This figure is multiplied by 45% to determine the assessed value of the property. The assessed value is then multiplied by the property tax rate—in the case of Class 4 properties, the tax rate is 10.6%. Within this calculation, the property’s market value is the biggest unknown, and it is the culprit for the escalating property taxes. Betty Cuningham, who moved her gallery to the Lower East Side in 2014, recounts, “Chelsea was getting way too expensive; our real estate taxes alone had gone from $1,500 the second year to $42,000 the last year.” With this wild card in the mix, the need for a fair lease agreement, one that might mitigate the damage of an unexpected tax increase, becomes exceedingly apparent.
The landlord, who typically has more experience in negotiations and holds greater bargaining power over the process, often drafts the final lease agreement. Under such circumstances, it is not difficult for a landlord to draft an agreement that favors his or her interests. Given the complexities involved in negotiating a commercial lease and the clear inequality of bargaining power between small business owners and real estate monoliths, a solution is required. It need not be novel. In fact, it may already exist.
Legislative Change: The Small Business Jobs Survival Act
Rewind back to the mid-1980s when City Council Member Ruth Messinger proposed the Small Business Jobs Survival Act (“SBJSA”). The SBJSA and its New York State counterpart, the Small Business Survival Act (“SBSA”), aim to rebalance the bargaining power through two major provisions. The first is that, barring certain exceptional circumstances enumerated in the SBJSA, the tenant has a right to demand a 10-year lease renewal. This counteracts the tendency for landlords to offer only shorter-term leases to capitalize on their ability to hike the rent once a lease expires. Additionally, if the tenant considers the terms of a lease renewal unacceptable, the SBJSA prescribes a very detailed arbitration process. Even at the end of that process, should the tenant remain unhappy with the agreed-upon rent, he or she can elect to pay the previous rental rate plus 10% without penalty.
The SBJSA has been discussed in City Council intermittently for the past 30 years. In recent years, the exponential rate of rent inflation and the resulting number of small business closures have brought the SBJSA back into focus. Though it would take some major lobbying to enact it, the SBJSA remains a viable solution to the devastating effects of skyrocketing real estate prices. Increased vacancies have so affected the streetscape that a website called Vacant New York has been established to document them. The dire situation has pushed City Council to discuss not only the SBJSA, but also the possibility of exempting small businesses from Commercial Rent Tax or introducing tax incentives for landlords to maintain their current rental rates. While organizations like Two Trees offer subsidies to cultural spaces to offset operational costs, there are not nearly enough available to aid every gallery in need. Instead of waiting for additional funding or legislative change, gallerists have gotten creative, crafting inventive solutions to overcome their financial plight and stay loyal to their artists and clients.
Creative Solutions and Their Legal Implications
Galleries are traditionally thought to be pristine white cubical spaces, static and permanent, changing only due to the art they exhibit. Owing primarily to the tough economic climate of New York’s real estate market, gallerists have had to be increasingly flexible, dynamic, and sometimes even nomadic. While some have chosen to relocate to evade financial straits, it seems even that is not a viable long-term solution. Many gallerists have accordingly chosen more radical revisions of their business model.
With established patronage and strong artist loyalty, some gallerists choose to move away from the City altogether and seek out cheaper locales from which to conduct their business. This has worked for Bill Brady, who owned ATM Gallery on 27th Street in NYC before moving to Kansas City to open up Bill Brady Gallery. Then there are Monya Rowe who moved her gallery to St. Augustine, Florida and Jeff Bailey who moved to Hudson, New York. All three maintain a strong presence in the art market despite their more remote headquarters.
An increasingly popular solution to unsustainable real estate prices has been to adopt a pop-up model. In an interview with Stropheus Art Law, Sasha Wolf describes that she decided to vacate her brick-and-mortar space for a multitude of reasons. The most compelling reason for her, however, was increased freedom—both personal and economic. She retreated from public view, pulling the artists she represents with her. Her clients had few qualms about the increased privacy, but her artists rely on their works being shown to the public. To resolve this, Sasha organizes pop-up exhibitions. For her, this model offers her the opportunity to work at her own pace, maintain variety in her daily routine, and spend more time away from New York to meet with clients and artists. For her clients, it offers a greater sense of exclusivity and a more intimate transactional experience. For her artists, it allows them to have a say in choosing the space in which they show their work and maintains their public presence. In the same interview, David Dixon describes that there is certainly some appeal to showing in varied spaces. Artists can play a more curatorial role in finding a space specifically suited to their work or one that casts it in a new light. Without the pressure to keep pace with surrounding galleries, there seem to be fewer entrenched rules for a pop-up exhibition, which can be as short as a day or as long as a few weeks.
Another form of gallery ownership is the seasonal gallery, which offers a consistent physical space with temporal flexibility. One example is Topless at 91-02 Rockaway Beach Boulevard. Jenni Crain and Brent Birnbaum, co-founders and co-directors, revive the space each summer to stage four three-week shows from mid-June to late August. Running pop-up and seasonal spaces rather than year-round brick-and-mortar locations can free up a gallerist’s time and resources so that they can travel to art fairs without significant overhead.
For some gallery owners, staying afloat means diversifying the business and scaling up. This can be through the addition of a coffee shop or bookstore, or by transforming part of the space into a bar or dance venue by night. In the late 1980s, Gavin Brown had the idea to open up the bar Passerby adjacent to his West 15th Street gallery space, Gavin Brown’s enterprise. With a dance floor designed and installed by artist Piotr Uklanski, the venue attracted an eclectic mix of the subcultural elite. Even with his imaginative business model and memorable exhibitions, however, in 2014, Gavin Brown was forced to relocate when a developer bought his headquarters. In 2016, he opened a new space in a 19th-century building in Harlem after a complex renovation process. The Knockdown Center took a different approach to diversification. It has a bar, yes, but the owners, artists Michael Merck and Tyler Myers, went one step further. They rent out parts of the 60,000 square foot refurbished brick factory for events—anything from weddings to beer festivals.
Other galleries thrive by moving off the beaten path not only in terms of location, but also in the nature the space itself. Hood Gallery is a converted shipping container in Bushwick. Founded by Tom Koehler in 2013, the space is dry-walled and has electricity, but no heat. The unique space acts as a medium, often inspiring the final form of an artist’s exhibition. It is a space that provokes experimentation. Add to that its lack of an official website and its hidden locale, it is unsurprising that it has fashioned a scene unto itself.
Still other gallerists have put a more personal spin on the shifting landscape, bringing the gallery closer to home—or rather, into the home. Sister in Bushwick was founded by artist-curators Jenny Lee and Zuriel Waters in 2015. It is a micro-exhibition space, only 30 inches wide, situated in the front window of their apartment. When Sister has an opening, viewers wander through the apartment to socialize, but to see the art, they must go outside and look into the front window. This window setup allows the founders to show work 24/7 without any real intrusion upon their daily lives. Eddysroom, also somewhere in Brooklyn—its address is not even listed online—is semi-private. It is accessible by appointment only, and news of opening receptions is communicated directly from the gallerist, Mr. Eddy, to prospective attendees with a request to refrain from passing the address and phone number to others. Founded by three artists, 106 Green inhabits the living room of 104 (no, not 106) Green Avenue in Greenpoint, Brooklyn and is open only on Sundays. Artist Michael Fleming founded MOUNTAIN in 2016 and runs it out of his Bushwick apartment at 284 Siegel Street. He opens his doors for events, receptions, and by appointment. Most of these home-based artist-run galleries are not money-making ventures. Rather than profit, the goal is to interact with other artists and to foster community. It is to provide artists who have little intention of entering the mainstream with a place to show their work and generate discourse around it.
Though a seemingly straightforward response to the unaffordable commercial space, the in-home gallery comes with its own legal implications. New York City’s Zoning Resolution regulates the in-home business, or what it calls a “home occupation”. According to the by-laws, a home-based business can occupy up to 25% of the home’s space and may only sell goods produced on site. Certain types of enterprises are prohibited, though a gallery is not one of them. The problem, then, is that for most galleries, the works they sell are not created on site. As well, some galleries open up their entire home for exhibitions, showing pieces all throughout the space, not in just 25% of it. The semi-private nature of many in-home galleries makes them unlikely to attract special attention from neighbors, but there is the possibility that a complaint could throw a wrench into the operation. The Official Website of the City of New York has a complaint portal that links directly to a submission form specifically for illegal use of a residence as a business. With this in mind, the reasons to keep in-home galleries more clandestine may extend beyond simply maintaining domestic privacy.
In the midst of all this, a gallerist must consider where his or her legal responsibilities lie. With new roles come new responsibilities. In September 2016, Richard Lehun of Stropheus Art Law, speaking on the same panel as Josh Baer, offered an overview of the hybrid gallerist’s legal obligations. A gallerist’s primary responsibility is to the artist. When gallerists free themselves from their physical space, though they may assume the role of an art advisor or dealer in the process, their responsibility to their artists remains intact. An art advisor must be loyal exclusively to the buyer, whereas an art dealer in the secondary market owes their loyalty to the seller. When a gallerist becomes all three, they could potentially face a conflict of interest that may be irresolvable.
When a gallerist forms a relationship with an artist, he or she has special fiduciary duties to the artist. These include managing the consigned artworks, the funds held in trust, and the funds derived from the representation relationship. Where a gallerist also acts as an art advisor, which is generally the case in the contemporary art market, his or her duties multiply, and so does potential liability. Mr. Lehun details these areas of potential liability in his presentation, which can be viewed here.
Perhaps, through it all, the shifting scene is what is best for artists. It has compelled gallerists and artist-curators alike to invent new spaces, folding the white cube of the traditional gallery and providing artists with more opportunity for curatorial experimentation. For some small and midsize gallerists, the harsh economic climate signaled their end, while for others, it harnessed their entrepreneurial spirit, driving them into unknown territory. Michele Robecchi, an editor at Phaidon, offers his take on the situation, “If you let your business be ruled by apocalyptic predictions, you’re inevitably doomed to fail.” Financial relief may come in the form of legislative change, though it is unclear when that might occur. Despite all the challenges it has faced, it seems unlikely that the brick-and-mortar gallery is going to become completely extinct anytime soon. Ultimately, these new models act to counterbalance an increasingly commercial and homogeneous art market, reserving wall space for a diverse community of emerging artists. Gallerists have found several workable models to maintain the gallery’s physical presence, and they will continue to find more to survive the times.
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- US, Committee on Small Business, Small Business Jobs Survival Act (Int. No. 402) (New York, NY: The New York City Council, 2014), http://legistar.council.nyc.gov/LegislationDetail.aspx?ID=1825175&GUID=AFE9C183-5929-43FB-80AE-C7595CB610BD. Accessed 10 May 2017.
About the Author: Alexandra Terrell, the May 2017 Center for Art Law intern, is a rising second-year J.D. Candidate at the Schulich School of Law at Dalhousie University in Halifax, Nova Scotia. With a B.A. in Visual Art from Yale University, she plans to pursue a legal career within the art world. She can be reached at email@example.com.