Start-ups and businesses in their infancy always prefer leases for just a few years in case their business fails; however, established businesses always prefer longer lease terms which gives them control of their space, especially businesses that have spent money building out their space, such as breweries. Most leases have a section called "In Solido" which means the tenant is personally responsible for the entire lease payments even though the lease is in the name of an LLC. That means the term of your obligation is a financial burden.
Recently Louisiana Commercial Realty helped Urban South Brewery renew their $1,000,000 lease for another 5 years in one of the more complicated real estate negotiations in their 20 year history. Broker Robert Hand explains, “We have a long history with this warehouse, having been hired by the warehouse owner in 2015. The property is zoned MU-2, so we originally marketed the warehouse to those businesses requiring that zoning, which included breweries. Within 30 days, we secured a 10 year lease with Urban South Brewery for our landlord client”.
But that is only half the story. The original lease was only for the 20,000 square foot front half of the building and when the rear half of the building became available the following year, Hand negotiated a 10 year lease for that space also. Therein lies the challenge. Each space, front and rear, had a separate lease that included an annual adjustment for the Consumer Price Index, causing the owner to calculate the inflation adjustment based on different periods, effective dates and square footages.
Like many properties in New Orleans that are inherited, owners self-manage their commercial property and forgo the expense of paying 3% to 6% of rent income to a property management company who does all the everyday little things that come up in renting commercial space. The result is that owners rarely have the expertise to negotiate commercial leases smoothly and without expensive conflict in later years.
Just before the initial lease term expired, the tenant expressed interest in exercising an option to renew the lease, and Hand had an idea, "Why not combine both spaces and have one lease start date and one annual inflation adjustment date? Easy, right? Except that one of the spaces had a renewal provision triggering an 8% rate increase upon renewal and the other did not.” Complicating the negotiations was that one of the parties wanted an attorney to draft a complicated agreement to renew the lease. “We spent lots of time explaining the lease language to both sides, to make sure each party understood the language and that the lease renewal language was what they intended”, Hand explained, “and we corrected much of the attorney’s wording so it made sense and was easier for landlord and tenant to understand-with the attorney’s final approval, of course.”
Commercial real estate involves knowledge of property values, zoning, population demographics and marketing but also negotiations. Hand says, “This is a clear example of why owners need help with commercial property. I have been trained in negotiation by the NASD, and have the CCIM and SIOR designations, an MBA, and spent years writing appraisals. We are well qualified to handle any aspect of commercial property. This is another example of where we helped the landlord simplify their property management and also helped the tenant get a lease renewal with favorable terms. This deal would never have been successful had we not been involved-there were simply too many moving parts. We just took one issue at a time and zeroed in on a solution. In life, there are those that make excuses and those that get things done. We get it done.”
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