Do load factors, CAM charges, triple nets, renewal options and market rate register with you?
What does any of this have to do with creating a successful brewery?
Some day soon you may be negotiating a Letter of Intent and be presented with a freshly minted 50 plus page lease document for your new brewery, at which point you enter the wild west of commercial real estate leasing.
Steel yourself, be informed, work with a team of seasoned professionals and you will avoid an ugly fate.
Long before you get to the lease you will need to decide what type of entity you intend to be. Whether planning a production brewery, a limited retail Nano brewery with taproom or a full-scale restaurant with brewery operation; you will want to work with an experienced commercial real estate broker. Forget about your parent’s friend who sells houses- he is not an asset in your search for commercial brewery space.
Thriving businesses rely on supportive partnerships in so many ways. The partnership you will forge with your broker is no exception. In the world of commercial brokers there are folks that specialize in tenant representation. One of these professionals can be your best asset in finding and negotiating a lease that positions your new or expanding brewery for success.
Your job is to find the right broker and be able to passionately describe your vision. Your broker will then “sell” potential landlords on your experience, vision and likeliness of success. No landlord wants a failing tenant in their building. During this courting period be prepared to provide your business plan and personal financial statement to perspective landlords.
Commercial space comes in every conceivable configuration. The following guidelines should apply to any space you are considering:
- Maximize exposure, corner space is almost always preferable to mid block
- Single story buildings are better than multi-story: think venting
- Purely commercial buildings are preferable to mixed use. While we in the industry enjoy the smell of the brewing process, apartment or condo tenants will have a different opinion of your vapors!
- Give yourself some headroom. Designing a 15 BBL brewery into a space with a 9 foot ceiling will try your sense of humor and ours (we will discuss in another post)
- Do your best to plan for success. The amount of expansion room you need depends almost entirely on your business plan, but make sure you figure it into your criteria.
- Your lease document is a highly negotiable document but not after it’s signed. Remember everything is negotiable except morals and values.
- Find a broker that believes in your vision, likes beer, and can convince perspective landlords that your brewery is a change agent and enhancement to their property
Your lease negotiation will begin with a Letter of Intent (LOI). This document will be drafted by your broker with your input and presented to the landlord or landlord’s broker. It sets the stage for several rounds of back and forth negotiation over aspects of your tenancy that will be fully spelled out in the lease.
Typically, square footage, lease rate, a period of free rent which allows you to build out your space and get running before rent payments commence, Tenant Improvement (TI) allowances and NNN, CAM and caps on these charges are thoroughly negotiated in the LOI.
Yes, I said caps.
Remember a lease is highly negotiable, and you can’t get it if you don’t ask for it. Your broker’s job is to secure long free rent periods, a reasonable rent, low annual increases and caped fees as much as possible. Your future landlord will be negotiating from a different perspective. Be prepared and know what you can afford as well as what the ultimate cost of your lease will be.
Once the LOI is complete your landlord will prepare the lease document. Again, set yourself up for success by partnering with a skilled real estate attorney.
Real estate law is particular and specialized. The real estate attorney is typically a deal maker with years of experience working through complex lease documents and is capable of assuring that the minute provisions of the lease are fair and will be easily interpreted over the years of your tenancy.
The upfront expense of solid legal help on your lease will pay off throughout your tenancy. Often your broker can suggest a qualified attorney to assist you.
When the lease document is presented there is a good chance that it will be a Building Owners and Managers Association (BOMA) lease, which is a whopping 60 plus page document.
You may be tempted to view it, or whatever lease document you receive, as “boiler plate” similar to a software agreement, however it is anything but. The provisions of the lease describe in minute detail the responsibilities that you and your landlord will have during the life of the lease.
If there is any question regarding the space, costs for insurance, maintenance and utilities (commonly referred to triple net or NNN charges) which are paid by the tenant, you in this case, or replacement of capitol items like HVAC equipment, the roof etc., they will be spelled out in your lease.
It is typical for your landlord to turn management of both the building and your tenancy over to a property manager once the lease is signed. Again the cost of management, typically around 4% of the gross lease rate will be a tenant expense.
Additionally, you may find that in a building with multiple tenants there are Common Area Maintenance (CAM) charges assessed. These will work their way into the NNN charges and become a monthly cost on top of your lease rate. CAM charges can include everything from snow removal, and trash disposal, to supplying common restrooms with paper products and periodic cleaning.
Your negotiated lease rate will typically be based on a dollar per square foot figure. The rate is also subject to periodic increases which, depending on your market, will typically be in the 3%/year range. Some leases demand a percentage rent, wherein a lower lease rate is provided but the landlord gets a small percentage of overall sales, or the lease rate may increase as sales thresholds are exceeded.
To fully understand the cost of occupancy you will need to know the lease rate, and NNN charges and what they include. NNN’s can be as low as a few cents per square foot per month in purely industrial space to as much as $.55 to $.65 per square foot per month for a multi tenant building with lots of common area.
That brewery space you think you are leasing for $12.00 per square foot per year is actually $18.60 once a $.55/month NNN is applied. Add utilities and insurance and your getting close to $20.00 PSF/yr. It’s crucial to understand these numbers and how they will affect your overhead and profit margins.
Lastly, think of your lease as a contract that gives you full rights to occupy and use your new space uninterrupted for the entire term of your lease.
In your lease this will be referred to as quiet enjoyment. Essentially if you are paying your bills and abiding by the rules, your landlord must leave you alone and let you brew beer.
Alternatively, if you do not pay your lease, or do not abide by the rules there are serious consequences.
Your lease both guarantees your quiet enjoyment and that you will unfailingly make payments on time and according to the terms of the lease. Keep in mind that you remain completely liable for the entire term of the lease. That means that you must pay the lease to full term, or be personally liable for the failure to do so.
There is a lot more to this subject then what I have written here.
Don’t find yourself swatting at the moon with a long pole. Educate yourself. Go online and get the information you need, ask questions and surround yourself with trusted, experienced partners.
Don’t act before you think. A well-assembled lease and a landlord that believes in your vision are great vehicles to a successful brewery. In the Wild West it’s better to mine for gold then find yourself swinging from a tree.