04 Dec The Three Pillars of Brewery Real Estate: Location, Location, and Don’t Get Screwed by your Landlord
by Mark E. Lasbury for Indiana On Tap
Welcome to the latest piece in our continuing series on industries and people that work on the edges of craft beer, and how just how they help keep us in beer. If there is a most crucial piece for craft breweries to have in place in order to make and perhaps serve beer, it would be having a reliable location from which to operate. Dealing with a landlord, keeping your real estate deal fair, getting help in any search for new locations, and making sure that possible locations are zoned, permitted, and contain those things important for brewing and serving are perhaps the biggest issues for a nascent brewery, beyond having the equipment and ingredients to make beer.
A brewery has huge money tied up in their brewing system and in the labor to run the brewery and serve/sell beer, but the costs for rent and upkeep can be right up there with the largest costs for a brewery as a whole. Getting the best deal and being represented well can make or break a brewing operation. Because of this, it would be nice to have a real estate group that is well versed in the needs and wants of a craft brewery when they get ready to set down roots, find a new location, or renegotiate a rental deal or buy a building.
That’s just what brewers have in Lee & Associates, located in Indianapolis, but working all over Indiana. Part of the Restaurant, Bar, and Brewery (RBB) group of businesses that work together to provide services that are specific to breweries (along with Kitto Insurance, Somerset CPAs and Advisors, Koorsen Fire Services, Clark Quinn LLP, and others), Lee & Associates has an arm that specializes in the needs of craft breweries when it comes to real estate.
image credit: Lee & Associates
Somerset and Kitto were sort of the genesis of the RBB group, but there was no getting around the fact that they needed a partner that had the knowledge of what brewers need in real estate and leases for both production breweries and taprooms. Lee & Associates was there to fill that gap. The craft beer group at Lee & Associates is made up primarily of Scot Courtney and Crystal Kennard, but together they have a fund of knowledge that will benefit any brewery. Scot is the president of the Indianapolis office, and a shareholder in the corporate entity that is Lee & Associates (although each office is held and operates separately). He started in real estate in 1995 in the retail area. He was filling a void in the office then, and yet has come to make this his specialty.
Crystal began working in real estate a dozen years ago, and has done a variety of jobs, from Operations Management to retail transactions. While Scot was a beer geek before the brewery arm of Lee & Associates arose, it was the business aspect of working with bars and breweries that attracted Crystal and subsequently turned her into a craft beer fan. Crystal is a fan of the lighter beers, with a bent toward pilsners, while Scot is more eclectic, and likes everything from IPAs to stouts.
The corporation was started in LA in 1979 by Bill Lee, while the Indianapolis office was originally Grub & Ellis. After the crash of 2008 they joined Lee & Associates. Indianapolis was the 41st office, but now there are 60 offices in the US and Canada. Not every office of Lee & Associates has a craft beer arm so Indiana should very fortunate; the important thing to note here is that you don’t just say you know craft beer real estate issues. First you learn about brewing and what they need and then you know you can specialize. And even better – the breweries get for free all the expertize that Lee & Associates has gained. It isn’t widely known, but it’s the landlord or seller that pays for the real estate commissions, even if the realtor is representing only the brewery.
Lee & Associates is a privately held company, so this affords them a certain freedom in how they operate; like not worrying about creating a craft brewery specific arm of the business. Scot and Crystal estimate that 60-75% of their business is now along the RBB lines, so they have picked up quite a bit of expert knowledge. There’s no getting around the fact that Lee & Associates is a big business, they have 26 people in the Indianapolis office alone, but this actually works in a brewery’s favor. They have people out all over the state looking over properties and dealing with landlords. There is little going on in real estate that they don’t know about.
The large number of people in the office also helps Lee & Associates be more proactive in helping brewers and breweries. They believe in the boots on the ground approach to finding clients and spaces, rather than waiting for referrals or clients to fall into their laps. They know that finding locations for breweries and taprooms is about a sense of place, both for the patrons and for the businesses, and this is where their anti-corporate attitude helps Lee & Associates.
The recent deal bringing Taxman to downtown Indy hints at how intricate real estate deals can be for breweries. image credit: Fox 59
Scot and Crystal think like breweries do, looking for spots that meet their physical needs, but also feel right. Many real estate offices have a list of spaces they either represent or know about, and they try to wedge their clients into only those spots. “Hey, we have a spot that could be great for you,” but they don’t know the neighbors, how close food partners might be, what the demographics of the neighborhood are, or even what stage of rejuvenation or neighborhood growth the location is in. Knowing these things isn’t just brewery friendly, it’s bottom-line friendly.
So what does Lee & Associates know that other real estate firms might not and how did they learn it? Well, number one, they talk to breweries and they consult with the RBB group at least once a month. They teach themselves and have others teach them about what is important to breweries, both in terms of physical spaces an in terms of leasing agreements. Who better to tell you want breweries need/want than breweries and the businesses that work with them? Number two, they have a super secret source with whom they work to learn about both upcoming locations and breweries that may be getting ready to look for first or additional locations (no, it’s not me).
There are two general areas where a real estate company can assist a brewery in terms of the physical space that they will occupy – market dynamics and site dynamics. Market dynamic refers to things such as is a site zoned correctly for a brewery or taproom, what are the types and levels of competition in the area, or what will they need to do to get permitted at that specific site. Market dynamics also encompasses things like is this a work opportunity zone so that they can take advantage of certain government incentives and what are the demographics of the area and do they match the model of the brewery (ultra-local vs. draw from large area)?
Then there are the site dynamics – is there enough clearance for the size of system that a brewery is looking to install, is the power sufficient for the expected load, can the walls and floor take the physical load, will there be appropriating seating and amenities and room to grow? You’d be surprised to know how many first site breweries don’t know how much room they’ll need. There are more site dynamic issues, such as how will the water fees affect the overall health of the business, is the building amenable to easy build out, and who pays for it? It’s good to have someone who knows.
All of these are factors that many people miss. Just one lesson as an example – a recent brewery took up residence in a building that was originally a car dealership. No big deal, right? Well, they used to display cars on the roof in the 1940s and 50s so the walls, floors, and ceilings were all 12-18 inches of solid concrete. The build out became a soul sucking experience.
The church that St. Joseph Brewery is in wasn’t in brewery shape – so who paid for all the fix up was probably a big issue. Was it the renter/buyer, or the seller? image credit: Indianapolis Monthly
Along with physical issues, there are also important soft issues, things that have to do with the relationship between the landlord and the tenant. Things like build out costs and who pays for them as well can come up, as things like when it might be best to buy the building outright. There are other issues, things like tenant improvement dollars – does the tenant get credit on rent for the things that they do to increase the value of the space during their build out? Is there free rent while the build out is taking place? Does the rent start date take into account the lead time of trying to get permitted? Anything that reduces carry cost (money a brewery pays out for a space or equipment before you start to make money) is significant.
As the above discussion shows, there are important points for breweries to consider, many in fact. Lee & Associates works both sides of this equation, so they know how the landlord may react to requests. For example, they represented the landlord for HopCat in Broad Ripple and can use that to help new breweries. They have been both representatives of the landlord and representatives of breweries so they have seen both sides, and they know how one side can best negotiate against the other. It could come down to something as simple as whose documents you are using. Those documents are going to strongly favor the side providing them, so your representative needs to be looking out for your interests. The key phrase – everything is negotiable.
No two landlords are the same, so Lee & Associates’ extensive experience makes them valuable. They have worked with and/or know about just about every landlord in Central Indiana; they know what needs to be watched and when. There is no standard lease – but forms and agents work for the landlord, and most brewers don’t know that. If you need one more hidden issue – lease renewals might contain a rent bump, but there is nothing about rent bumps which is binding for the next deal – again, everything is negotiable. It’s better if everyone comes out with the best deal possible because they are often on both sides, so Lee & Associates can really find ways to negotiate what’s happening in the deal.
Not all craft beer real estate ideals with breweries. The Brewery Lodge in Michigan City is a good example. image credit: Dig The Dunes
But Lee & Associates goes beyond this – your relationship isn’t done when you sign the lease. They want your repeat business. They want to help brewers understand where things are going in the market and how this may affect you and your space. They can see things coming years before they occur, especially with the benefit of the RBB group, and a brewery should benefit from that vision.
No brewery is too small or too big or Lee & Associates, the key thing is the people. They build their business from relationships, not dollars spent. If the two aren’t a good fit, then they won’t be able to satisfy a brewery, and if it is, they will go to the ends of the Earth to help that brewery succeed. The quality of the people involved is much more important than the size of the transaction.
The nice thing about writing these articles is that while they may be aimed at the breweries and their needs, they also help the craft beer drinker understand some of the behind-the-scenes issues with which your favorite breweries are dealing. Knowing a bit about the issues involved with bringing you craft beer makes you a more knowledgeable consumer, and most certainly helps you empathize with some of the pricing and business decisions that your favorite breweries have to make. Knowledge is power – on both sides of the bar.
banner image credit: Craft Brewing Business
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