Finding Your Space – Part 1: Leasing

June 21, 2017

 

Starting a successful winery or brewery is not always an easy venture.  Many owners are faced with the difficult decision of whether to build new, lease and renovate, or buy and renovate, not to mention the location and how much space to get.  We are developing this multi-part series specifically to tackle the challenges with finding your space.

In this inaugural post of the series, we will be covering lease renovation spaces and will explore three pros and cons to leasing your space.  You might be thinking that we’ve got ahead of ourselves and haven’t talked about how to decide on a location, but don’t worry, we have you covered.  Our friends over at CraftingaStrategy.com wrote a great post in 2015 under the similar title “Finding a Space.”  We highly recommend checking that out along with their other content for great insight into strategy and brewery operations first hand.

Pros:

  1. Existing Spaces are Out There Ready For Your Business
    • One of the main benefits of leasing a space is that utilities and other amenities are readily available to tap into and allow you to get started.  Costly items like sprinkler systems, sanitary tie ins, water tap ins, and running new power may already be taken care prior to your lease, saving you the cost and delay to incorporate these items in during your scope of work.
  2. Leverage Landlord Capital and Amortize Over Lease
    • A second pro for leasing a building is that many landlords are eager to work with businesses that will be attractive for their property(s).  What this means is that there are opportunities for you as a prospective tenant to negotiate with the property owner to see what improvements they would be willing to include in their cost in order to “sweeten” the deal with you as a prospective tenant.  While the extent will vary depending on the exact circumstances, as a tenant you may also have the opportunity to amortize certain costs over the course of your lease, rather than tying up additional finances in a larger SBA loan.  While this may increase your month-to-month leasing costs, it can reduce your initial capital requirement or let you focus your cash on other wants and needs, such as equipment upgrades.
  3. Deferral of Responsibility
    • The last pro we will highlight for this list is the deferral of responsibility.  As a tenant, generally there are a few items that you are not responsible for maintaining at the building.  Items such as roof leaks or parking lot maintenance are often either covered entirely or greatly reduced and prorated across multiple tenant leases helping save you costs over the course of your lease.

Cons:

  1. Lack of Building Ownership
    • When in a lease agreement, and unless specifically built into your contract with the building owner, you do not have ownership rights to the building your business will occupy.  While many savvy businesses are able to negotiate terms in order to protect themselves legally, you are still bound by the terms and conditions placed on you by the property owner.  You may be able to “buy out” after a certain period, but until then, will often have an extra step of approvals and sign-offs for any modifications to the space you occupy.
  2. Long Term Cost of Leasing vs. Buying
    • Just like the debate on renting vs. buying a home, as a business you need to determine whether you plan to stay in one location long enough to make purchasing a financially sound decision.  Until you buy or move out, you will be stuck with your monthly lease payments to the property owner.
  3. Many Properties Still Require Renovations Unless Purpose Built for Your Industry
    • For the final con to leasing, the truth of the matter is that there is rarely a “perfect space” out there just waiting for you to scoop it up and move in.  If you find yourself looking at a space that seems affordable up front, it is critical to do your homework and bring in an experienced team to assess the space with your needs.  A good example of the importance of this assessment happened with one of the breweries we have worked with in the last few years.  We were involved after the space had already been leased, but unfortunately, due to the changes in building uses, the brewery had to initially restrict the number of occupants it could legally have because of the limited number of restrooms available and lack of sprinklers.  In this case, we were able to make the space work and stagger out phases to reach the brewers end goals, but in other cases, the business had to turn away from a space because the costs to renovate would never be recuperated with their business plan.