S***estions on Lease

Hello All,

I would like s***estions on how to structure a lease that we are currently negotiating with the local Packie or Packy (ABC Board - Alcoholic Beverage Control). Packie or Packy (ABC Stores down South) are set up by the Town/County and run by an independent ABC Board – no assets, no money, basically just future sales.

We feel good about the long term potential and are considering this even though our building will need major upfit for the ABC Store. Our main concern is how to structure things to protect against the possibility of high inflation over the long term loan repayment and the actual terms of the lease itself. This concern is coupled with the need to protect the long term viability of the ABC Store, providing for long term stability of the lease.

Background Info
We have some leverage since the town approved the ABC Store in 2009, and the ABC Board has not found a location that will work until now. (Small town, we are on the “drive home” side of the road, have an existing building, etc.) Building a new store was cost prohibitive for them (not enough sales volume to buy the land they were looking at in addition to the cost to build).

We will potentially be lending the money for the upfit, and possibly for the fixture purchase if we can find a way to structure it to our mutual benefit. It is a concern that if everything goes wrong there is no second source of repayment.

Tenant upfit will be approximately $100,000 (The ABC Board has no money at this time. The Town cannot lend money to the ABC Board. The ABC Board will be able to get some bank loans against future sales to purchase inventory and possibly fixtures (if we do not help finance this cost.)

Miscellaneous Information
• The State ABC Commission estimated that the location would produce sales between $800,000 and $900,000.
• This is a 4,000 square foot metal building (100 ft wide, 40 ft depth), 180 ft road frontage with two curb cuts for ingress/egress.
• We are looking at a 10 year lease.
• They want to start paying rent in March or April of 2012. (I don’t like this idea and we will have to compensate for the rent somehow!)
• We could loan them the upfit money and amortize the repayment over the term of the lease at 6 - 8 %, possibly as high as 9 % interest. Any other s***estions . . . besides the amortization of the upfit?
• So far we presented a base rent amount plus taxes and insurance to be paid by the tenant. We have not discussed terms of the upfit, % rent, etc.

Main Questions:
• How do we structure the upfit repayment for the best chance of success for them to stay in business long term, provide stable and optimum rental to us, and to protect against inflation for a long term loan.
• How do we structure to protect ourselves for the possibility of high inflation in the coming years and to optimize our rent payments.
o Variable rate
o Fixed rate with higher rent or % of sales
• How best to structure the lease?
o Lease Term – 10 years
o % rental over natural break
o CPI increase each year for base rent
o Security Deposit

Would appreciate any ideas about how to approach this leasing challenge (at least it is a challenge for us). Thanks in advance! Also, please know we are open to ALL s***esions!

Thanks very much!

Let me make sure I understand what your saying.

You have a location that abc wants to rent but does not have the funds to do the build out.

Is that the gist of what your saying?

Commercial Buyer

That is correct.

You are correct. In addition to leasing the building they will need the funding for the upfit of the premises for their particular use.

Alright I had to look up the word Packie to see what it ment to make sure I really understood what your talking about. lol.

“Urban Dictionary: packie
New England term for liquor store … 1. Packie New England term for liquor store. Yo, is there a packy near here - gotta pick up a six of tall boys.”

To be honest, this deal scares me alittle.

Not sure how much the rent is. I think that is one the most important factors. Especially if you are considering financing the build out “upfit” of upwards of $100k. If you’re going to lease for $25k a month then it may make sense. But if your leasing for 2k or 3k a month I don’t know. But even then it sounds like a bad deal.

Why Because who is going to control the build out you, them or their contractors? On a draw basis’s or onetime payment? Construction can sometimes spiral out of control with cost not anticipated.

Moreover, not sure if this is a corporate client that is publicly traded or a mom a pop team. But from the sounds of it is a small organization. Therefore, they could go up today do business for 6 months and then file chapter 7 bankruptcy. Everything you put up just went down the drain.

S***estion: Put your 100k into buying another building.

I would just wait to find a tenant that has the money to do the build out “upfit.” Sometimes you can’t look at the deal as what you would do if you were them.
For example, maybe 10 years back was looking to lease a retail location in Queens, New York about 3k sqft. One the place was around the corner from our current location, I thought would be perfect. I met the little old lady that owned the entire block. She wanted to give me a 3 year lease on the property, only one big problem. The place had been closed for what looked like 10 years. There was a dead raccoon in the basement. Build out for me would be at least 25k to 50k drop ceiling and all. I thought she was going to do the build out for me. She refused. I walked away. I thought she would never lease the location. Found another location 20 or so blocks away. However, 3 to 6 months later I did see she rented the location, to a hair salon, after walking into the place looks like they put over $150k into the place. 7 years later they closed down. The lady has a location already build out for a salon gratis of the former tenant. Who knew.

Nonetheless if this is not enough to deter from going forward. Here are some s***estions how to finance the build out or upfit.

Collateral financing

If they want $100k from me, I going to say what can you give me if things don’t turn out well. I am looking for real estate worth more than 100k that I can put a first mortgage on. If they don’t pay I foreclose. Then the terms you s***ested for repayment in the body of your text sounds good.

Hope this helps.

Commercial Buyer