Commercial Lease

[jhoag]

Hello,
I am in the process of building a craft cider business. I have looked at several location and found one that I am interested in.

The building is 4,000 sqft total. 600sqft of it is finished office space (soon to be tasting room), large drains in the floor, 4" reinforced concrete floors, 12' tall ceilings, city water, propane heating, single phase electrical, forklift included, large 16' wide roll up doors. exterior maintenance included.

The owners asked us to submit an offer to lease. My question is other that price and length of term (which we are comfortable with) what are some things important for a new craft beverage company to have in a lease?

[Cascade_Floors]

A lot of my friends in the industry have told me they do leases from 2-5 yrs. Depends on your dream and thoughts for the location long term.

Once you sign a lease we would love to help out on any floor coating needs you have. We have installed over 1.5 million sq/ft for over 365 breweries and Cideries to date.

[patrickrue]

Double check that the equipment you're looking to bring in, and future equipment you'd need to grow, will work with the existing electrical. Most larger production equipment doesn't come in single phase, and upgrading electrical is almost always very expensive. Also check that the 4 inch floors will work for the tanks you'd have, and that the water service is sufficient for your needs (not as important with cider production as it is with beer production).

You'll be putting a lot of money into building improvements that often you can't take with you at the end of a lease, so you'll want to be able to be in the space as long as possible. Yet, you want some flexibility in case things go great (and need to move to a larger space) or bad (get out of the space). I'd recommend the shortest lease terms you can get with as many options to renew the lease as you can get. For example, most leases I've negotiated are for 3 years, and anywhere from 3-5 options, so I can extend the lease up to 15-18 years, or have the lease expire at the end of a 3 year period, which gives you some flexibility. How the rent for each period is determined would be in the lease as well. Be careful about "fair market value" adjustments, which is typical but can price you out of your space (often happens in industrial areas that are becoming the "cool" area of town, often in areas where breweries / cideries are located). Having a fair market value adjustment with a 3-5% per year increase cap can help protect you from this, or at least buy you a little time before the rent becomes outrageous.

Asking for 3-6 months of free rent (and typically getting 1-2 months) is worth asking for as it'll take awhile for you to get your licenses and construction complete, and some of this burden can be shifted to the landlord. You'll still likely owe first / last months rent, plus a security deposit upon signing the lease. Also, if you can give yourself a way out of the lease if you weren't able to get your licensing, that would be helpful as well. Often this is a short period for you to do your due diligence to make sure your use is compatible with zoning.

If you're spending a lot of money on improvements that will permanently enhance the value of their building for other uses outside of yours, ask for paying a share of those improvements.

Other thoughts when you get to negotiating the lease itself:
- Make sure your insurance policy will cover what the landlord is requiring in the lease.
- Is it a "gross lease" (rent includes everything) or a "triple net lease" (property tax, maintenance need to be paid on top of rent)? Make sure to consider the total cost of leasing the property, those property tax payments can be brutal if the landlord hasn't owned the building for very long.
- Is the landlord responsible for the major parts of the building, if property damage / an issue were to be found? Think of things that existed a long time before you arrived, like the roof, HVAC, existing electricity, existing plumbing, existing floors, etc. Often any issues that may arise with their building are shifted onto the tenant (frequently the roof will leak, or HVAC compressor burns out soon after you move in), even if it's not at all related to your use of the building.
- Liability-- Does the landlord take liability for what happens in common areas / shared areas between tenants, such as parking lots & shared restrooms? If this liability is shifted to you, are other tenants similarly situated?
- Does the lease state that the space needs to be returned to its original condition at the end of a lease? Often this requires you (upon the landlord's demand) to remove any improvements you put in, patch, and re-paint. Often this can be quite expensive, and if it's at the end of a lease when your business is closing up, can add insult to injury.

Best strategy is to ask for a lot of things with the expectation that some you'll get, some you'll meet in the middle, and some will be rejected. Figure out where you want to be, ask for more than that (within reason) with the hope of getting to where you wanted to be in the first place.

Good luck!