Brewbound Podcast: How Breweries Can Navigate Leasing Issues

[00:00:00] Justin Kendall: Next on the Brewbound podcast, everything you need to know about leasing a brewery space. Hello and welcome to the Brewbound podcast. I'm Justin Kendall.

[00:00:20] Zoe Licata: And I'm Zoe Licata.

[00:00:22] Justin Kendall: And we're, I guess I'm back and Jess isn't here this week. So we're subbing in and Tabbing Out. Jess had some other things to take care of. And if you can tell by my voice, I have something going on, but I don't have COVID. I don't have influenza and I got medically cleared today to travel. So I'm good, but I don't sound like myself.

[00:00:47] Zoe Licata: It just makes you sound more like a traditional podcast host. I think it's very, very fitting, particularly for this week where you guys are going to be recording a lot of stuff.

[00:00:59] Justin Kendall: That's right. We're going to be very dizzy. Jess and I, the reason I needed to get medically cleared was because we're heading to Sacramento to do the Brewbound podcast on location at the California craft beer summit in Sacramento. We're going to be there Wednesday through Thursday recording podcasts and talking to a lot of craft brewers and checking things out. We'll be on the trade show floor. So come visit us there, but, and Zoe won't be there. She'll be on some much needed PTO. Sorry, folks. Much deserved.

[00:01:31] Zoe Licata: Yeah, I will be driving up to Montreal on Thursday. So I'll report back on all things happening in Canada. But sorry to miss out on that. We had a really good time last year at CCBA. So excited to debrief on everything and all the conversations that you guys have.

[00:01:51] Justin Kendall: Yeah, and I'm excited to debrief on what you found out at the New England Craft Beer Summit. You were up in Maine. What happened?

[00:02:02] Zoe Licata: Yeah, it was an interesting summit this year. Found out that there is a new executive director of the Maine Brewers Guild. So around this time last year, we had heard the announcement also at the summit that the Maine Guild's director

[00:02:23] Justin Kendall: Sean Sullivan.

[00:02:24] Zoe Licata: Sean, thank you.

[00:02:25] Justin Kendall: He'd been there like a decade.

[00:02:27] Zoe Licata: Yeah. Sean Sullivan was leaving and he'd been there for 10 years. So it was kind of big news that there was going to be new leadership there. And Shay Cusick, I believe is how you say her name. She had come in and was leading there. And now we have found out that Sarah Bryan is the new executive director. So she had just started last week, like a couple of days before the summit, really throwing her out there. And she was shaking everyone's hands and greeting everyone. She was working the registration desk. She was getting everything done while she was there. So good to meet her. So that was kind of the big local news that came out of that event. The keynote speaker was the CEO of LL Bean, and he gave, honestly, it was a pretty relevant talk for someone that's not in Craft Beer, just talking about how you can create and sustain your business in a time where there's a lot of uncertainty out there. I mean, he was in an industry where, you know, they're mainly in apparel and outdoorsy things. And that was kind of pretty popular during the pandemic where people couldn't be inside. But then as soon as some of the lockdowns were ending, their sales were totally opposite. So he was just advising them on how you handle that. Also a lot of just like how you can balance your moral business goals with best business practices, because The Drop a lot of stuff about making sure they're being sustainable in a lot of their practices, having good work environments for their employees. And so he talked a lot about just overall a good business insights speech that I think a lot of craft folks really appreciated. But yeah, it was an interesting event. One of the standouts to me, there was multiple panels about exit strategies, which is something I hadn't seen yet. Not necessarily talking about like, okay, get out of there quick, but hey, if you are considering it, or if this is potentially something on the horizon, because it kind of could be for anyone at this point, make sure you're setting yourself up properly. But yeah, that definitely speaks to, I think, the current state of the industry.

[00:04:37] Justin Kendall: Yeah, that's a conversation that I've had with a few people over the years, whether it's Wynn Odell or Ken Grossman about just planning for that next phase, because You know, I think a lot of people in this industry weren't thinking about ever really exiting. I mean, some probably obviously were, some people are better planners than others, but I think that there were a lot of folks who were just gung ho and in this, you know, and it was a ride or die situation and things have sort of shifted and we've seen a lot of consolidation. We've seen. A lot of closures. We've seen a lot of bankruptcies. We've seen reorganizations. You know, it's a much different environment than it was in the mid 2010s when I started writing about this.

[00:05:27] Zoe Licata: Yeah. And things can happen pretty quickly. And it can be things like, I mean, you'll hear talking about later, like you can have these leasing issues that can come up quick, or we've seen lots of bankruptcy filings of certain bills that are not getting paid and things, things can happen pretty quickly. And so if Do you have your business set up or are you not the person to help kind of solve that situation? Who does that go to? Or are you ready to pass that business off to someone else? Is it the end of the business? There are so many different things. There was also conversations about, okay, do you want to form a B Corp? And then what does that mean if you wanted to exit after that? Like, what does that mean for employees? What do they get out of that? So a lot of different options out there.

[00:06:10] Justin Kendall: And that's a great segue for our featured interview this week, which is Melanie De Marco, an associate attorney with BPE Law Group in California. I'm going to have a conversation with her about leasing because that's become a bigger issue than I think that we've really realized in the past as we've seen Rents go up and people, you know, needing to renegotiate what their lease is or even, you know, renew and it's become a bigger issue. We've seen forgotten boardwalks sort of get their lease, I guess, you know, leased out from under them.

[00:06:49] Zoe Licata: Yeah, we saw, I would say, Bone Up here in Massachusetts. They had a lot of leasing issues that ended up with them closing their doors. If the continued impact of COVID-19 is the number one reason we've seen closures, leasing issues seems to be a pretty solid number two. It's cited by lots of breweries who are saying, like, we either can't afford to be here anymore, we're not allowed to be here anymore, or we just haven't found a space that's right for us right now.

[00:07:19] Justin Kendall: So Melanie De going to go over some of the things you need to watch out for in your lease. Some of the things that you should be pre-planning for, the conversations you need to be having with your landlord, how to discuss improvements, everything we'll go over. So stay tuned for that. But let's get into some of the news of the week. And Jess had a story this week about Sapporo Stone and their focus on beer. And part of that conversation that she had with Tom McGreevy, The Drop sales guy over there, and Zachary Keeling, the interim CEO, was that they're getting out of the hard seltzer and canned cocktail business.

[00:08:02] Zoe Licata: Yeah, that was interesting to see because that was quite different than I think the conversation we had with Stone last year when we were kind of talking about their plans for 2023. But they had, you know, those Buena Vida hard seltzers. They had the Buena Vista margaritas. They were in some of these spaces and seemed pretty focused on them. But now it's really looking at their core beer portfolio and going to focus on that as well as they got to keep up with that Sapporo production now, which is ramping up.

[00:08:36] Justin Kendall: Yeah, I would imagine as the companies integrated and that they began to ramp up production of Sapporo that, you know, you just look at your portfolio and some things just got to go that aren't really a focus area. I mean, it just makes sense.

[00:08:54] Zoe Licata: Yeah. I don't think any of us are going to be surprised by hard seltzer brands going away in the year 2024. Yeah.

[00:09:02] Justin Kendall: And Stone has found some success with its beer portfolio. It's one of those situations where the parts together are greater than just any one part. So they all are sort of contributing and firing away. So props to them for figuring out a way to find growth in this market.

[00:09:23] Zoe Licata: Yeah. Jess also has some great insights in there and how Sapporo is doing in the U.S. market. They've found a lot of success in chain retailers, particularly, and they're just been ramping up like just points of distribution in general and just sales here in the U.S. now that they have this ability to produce more here. So insiders can check out all of that there. But two pretty major companies doing pretty solid.

[00:09:53] Justin Kendall: Yeah. And one of the fun notes in there is just the focus on the on-premise and the growth that they found there, whether it's the sushi restaurants that they've got a dedicated team for. I think that that's, you know, very smart business move.

[00:10:09] Zoe Licata: Yeah, that makes a lot of sense. And we've heard from some smaller Asian-owned brands that found similar success in the on-premise of you have being a pretty niche focus has pretty great returns. We thought that would like Luda, Hertzeltzer, Doke Beer has had a lot of good partnerships lately and they are in these spaces where they know their consumers and it seems to work out well for them.

[00:10:34] Justin Kendall: Well, the other story or stories that were dominating our homepage over at Brewbound.com last week was the Constellation distributor meeting. And everybody knows Constellation Brands the high growth Mexican import brands, Modelo, Corona, Pacifico, even Victoria, Victoria. It was one that sort of surprised me with their numbers, but what I took away from being in Vegas with them was just. how focused they are, just the number of SKUs that they have, as opposed to the other major brewers. And the productivity of those SKUs is just, it really just shows that those brands are firing on all cylinders and that they're not over SKUing things, that they're staying focused and it's paying off for them.

[00:11:31] Zoe Licata: Yeah, this is something that we heard at the beer summit in Coronado earlier this year, too. You know, they pointed out that Modelo didn't like get any real brand extensions until pretty far into its life. So they've been very particular about what they're going to do with their brands and how they're going to expand it. And I mean, it seems to be working out and it is a lot different than particularly, you know, I don't know, five or more years ago, you were seeing tons of extensions coming out for brands all the time, especially from the major beer companies.

[00:12:08] Justin Kendall: So some of the news coming out of there, Modelo Especial is now a 200 million case brand. That's in the last 52 week period. So that brand is still, you know, crushing it. The Corona brand has a new ambassador and I learned the term internet daddy. Did you know this? Did you know who the internet daddy is?

[00:12:30] Zoe Licata: Yes, of course.

[00:12:32] Justin Kendall: This is news to me.

[00:12:35] Zoe Licata: Yes. Pedro Pesco.

[00:12:36] Justin Kendall: Pedro Pesco.

[00:12:37] Zoe Licata: The beloved, beloved Pedro Pesco, Internet Daddy Supreme.

[00:12:42] Justin Kendall: Grogu's keeper. Yep. So I guess he's always had that paternal instinct in him.

[00:12:48] Zoe Licata: Well, yes. And then he was on Last of Us. We're also a very paternal role. So we've all adopted him or had forced him to adopt us.

[00:12:58] Justin Kendall: And Peso Pluma. Do you know Peso Pluma?

[00:13:01] Zoe Licata: not as familiar with Peso Pluma, but I like the double P names that theme that is happening.

[00:13:07] Justin Kendall: Well, Carmelo Anthony breaks that chain. Yeah. So the former New York Knicks star, and I would be remiss if I didn't say that he was a Syracuse Orangeman, as Jess would, you know, be upset if we didn't throw that in there. But they're all Corona brand ambassadors going forward. Other things that sort of came out of there, Victoria has doubled in the last couple of years. It had been consistently a 3 million case brand, and now it's up to 6 million cases. It's only been in the last two years that it sort of broke from that flat 3 million plateau. So that was pretty interesting to me. And then Pacifico is way hot. number two beer in SoCal, number four in San Francisco, up strong double digits in like other major markets, that brand's crushing.

[00:13:58] Zoe Licata: Yeah, Pacifico kills it, particularly in California. Like I remember I had it, I didn't really have Pacifico much, like we over here in Massachusetts is more about Corona. But when I lived in California for a few months, everyone was drinking Pacifico, like particularly people my age, that's what you go to for your beer. And so it's still, it's really crushing it. Victoria stuff was super surprising to me because I feel like we don't really hear anything about Victoria. And so for it to double, it's kind of crazy.

[00:14:31] Justin Kendall: Yeah, they're really focused on the Mexican American consumer with that brand. And it's impressive what they've been able to do. And, you know, they can thank the Department of Justice for forcing AB to divest of those brands in the US.

[00:14:48] Zoe Licata: Yeah.

[00:14:48] Justin Kendall: Anyway, Brewbound Insiders can read all of that and much more. So many exclusives, new features like Around With, the latest one is with David Delane, the president of Prost Brewing in Colorado. It's the German-inspired brewery. They've built a whole new headquarters in North Glen, Colorado. So check that out, why he's bullish on investing in a brewery. at this time when, you know, there are definitely some headwinds out there. I think that that was pretty interesting. And we've got a whole bunch of these coming up, right?

[00:15:23] Zoe Licata: Yeah, we're trying to make this happen every week. We have one lined up with Katie Beale Brown, who's founded Lone River, you know, their ranch waters bought by Diageo coming just past the anniversary of that deal. So it's going to get some great insights from her. Yeah, we're trying to get lots of voices out there in this fun kind of segment. So if you have any recommendations, please send them to us because we are trying to connect with lots of people and really make this a weekly installment.

[00:15:58] Justin Kendall: Yeah. And I think we're really trying to get a feel for what's going on in the market because we're trying to feature breweries and, you know, companies of all different sizes to get a feel for, you know, what are the challenges they're facing? What are the opportunities they're seeing in their local markets? So I think in that regard, it's become a fun feature.

[00:16:19] Zoe Licata: Yeah, definitely.

[00:16:22] Justin Kendall: All right, let's play Another Round or Tabbing Out. And I hit the brand room in Vegas for Constellation Brands, and they were showcasing a lot of their new products. One of them is a Corona line extension. It's called Corona Sunbrew Brew, and it does not taste like beer. It is like the most fruit forward beer I think I've had recently. It's made with orange and lime peels, and it's really targeting the They use the term Zillennials, who are going on social media, TikTok, and taking a Corona and then adding some fruit flavors to mix it up. So they're trying to give those consumers what they want. And then they have two new FMBs. One is Shift, which is like this flavor changing. That's what they say. It's like, yeah, flavor changing FNB. And then they have The Drop, which is a nine percent ABV. It's essentially a lemon drop shot.

[00:17:25] Zoe Licata: Yeah.

[00:17:26] Justin Kendall: Yeah. So clearly not targeting, you know, my generation or at least me. So I got to try each of these new products and, you know, I can report back on what I thought of them, which ones I'm buying Another Round of. But just, you know, hearing about these three things, Zoe, are any of them speaking to you? Is there something in there that you'd find interest in?

[00:17:54] Zoe Licata: The one most likely for me to have Another Round up would probably be the Corona Sunbrew. I mean, I would want to at least buy it one time and try that. It seems interesting to me. I recently had, I don't think I'll name the product, but I had Another Round that was emphasizing the fruit in it and it kind of didn't hit the mark for me. I felt like it didn't really have a lot of flavor. So I'm still kind of searching for that nice beer fruit hybrid thing that could itch that scratch or scratch that itch.

[00:18:25] Justin Kendall: I know which one you're talking about and I won't let the cat out of the bag.

[00:18:29] Zoe Licata: Yeah. So yeah, that would definitely be the one. The shift is confusing to me. I think I said this when they first announced it was coming out. I don't know who asked for flavor changing F&Bs. I don't think anybody did. So that just seems like one of those random ones that would just be thrown out there. And then like they know it's just going to be for the initial hype and no one will really care after that. And then The Drop. I don't hate a lemon drop shot, but I'm going to be Tabbing Out on getting, you know, well, these are like 16 ounce can. Yeah. 16 ounce cans. of a lemon drop shot, essentially. I'm okay. I don't think I want to sip on a lemon drop. I guess they have lemon drop martinis, but even that, no thank you.

[00:19:15] Justin Kendall: See, I feel like The Drop, it's a lemon drop shot for a reason.

[00:19:20] Zoe Licata: Right, right.

[00:19:21] Justin Kendall: Like you get your quick fix and you're done, you know, and honestly, that's how I tried it was because they were giving out like the little like medicine cups of, you know, the product and they did the same for shift. And I think I was overthinking shift because I was like, all right, you know, like, yep, there's the, you know, watermelon taste and Oh, there's the other, you know, and it's like, I was really like concentrated on, on like the flavor shift. And I don't know if that was, if it's all psychological, you know, it definitely did. Taste like it, but I was like, am I just thinking about it so much that I'm making it happen or, or what?

[00:20:03] Zoe Licata: Yeah, is there their whole claim is like it hits different taste buds at different times type thing? Yeah. Yeah. Interesting. Okay.

[00:20:14] Justin Kendall: Yeah. And then sunbrew, like, very sweet, like sweeter than I even anticipated it would be. And I don't dislike sweet. I thought it was a solid product. But it does not drink like beer.

[00:20:27] Zoe Licata: Interesting.

[00:20:28] Justin Kendall: It has like, zero beer taste, or at least the sample I had, you know, I was sort of expecting that Corona experience and not at all. So I was definitely surprised, but I also think that that one has the most potential out of the three. I mean, I think that it could be a good on-premise challenger brand for some of the wheat beers out there. And it's not a wheat beer though.

[00:20:56] Zoe Licata: Yeah, that's what's interesting about it. I'm kind of disappointed to hear that it's super sweet. I don't want sweet anymore, but interesting.

[00:21:04] Justin Kendall: Well, they said it was hitting the sweetness that your generation craves. So I don't know.

[00:21:09] Zoe Licata: They keep saying this. I don't know where this information is coming from.

[00:21:15] Justin Kendall: I was talking to a wholesaler who was telling me that they think that everyone is overthinking like what Gen Z actually wants and what they actually do. I think that we are overthinking it. You know, we have all these conversations and it's like, it's not a monolith.

[00:21:33] Zoe Licata: Right. Also, like a good chunk of the Gen Z population can't even drink yet. So it's like making a lot of predictions or assumptions about a generation that you're only seeing a very small part of right now and their habits right now. And also, I think we have a accurate reputation of changing our minds pretty quickly. So trying to cater to trends that we have isn't necessarily going to work because they're likely going to change pretty fast.

[00:22:07] Justin Kendall: Well, let's wrap this up. Let's get to our featured interview Melanie De Marco from BPE Law Group in California. In the past few months, we've seen several breweries close citing issues with their landlords or leases from being priced out by increased rent to a landlord negotiating a deal out from under a brewery. These issues seem to be popping up with a little more frequency. So here today, our Melanie De Marco, an attorney with BPE Law Group in Sacramento, will help us navigate this with a few tips and tricks. Thanks for being here, Melanie.

[00:22:44] Melanie De Marco: Hi, Justin. Thanks for having me.

[00:22:46] Justin Kendall: So excited to talk to you about this. And you're also going to be speaking about this at the craft brewers meetup in Sacramento, the California craft brewers summit.

[00:22:57] Melanie De Marco: Yeah. Yeah. We have a shop talk. We'll be on the floor. Don't know what day or time yet, but it'll be just a super informal little shop talk. I'm about half an hour on the floor of the expo. So anyone can stop by and come have a chat.

[00:23:12] Justin Kendall: Perfect. We'll be there too. We'll have the Brewbound podcast on location. So we'll have to meet up for a beer there, but let's dive in today and talk a little bit about the issues that are going on out there and some, you know, like I said, tips and tricks for people out there. So for those who are just signing a lease, what are some common things that they should be looking out for?

[00:23:35] Melanie De Marco: So, you know, this is a really, a really big question. And, you know, obviously, situation specific at times, you know, if you have something you're really interested in, or really need, of course, look for that. Some common things that I look out for, you know, with my clients, the first thing I want to do is make sure that They understand all of their obligations under the lease. A lot of people, you know, they get that big commercial lease and they skip to how much is the rent, how long is the term, and tend to think, okay, that's all I need to know, how can I pay, and how do I pay my bill, of course. But there's, you know, a lot of requirements in there and, you know, some of them are are simple, you know, notice requirements. What specific steps do you need to take if there's damage or if you need maintenance? Things like that. Are you required to be open for certain hours? You know, what are you allowed to do for signage? Does your landlord have to approve of it? The first thing is I go through and I make notes to make sure my clients understand everything that they need to do to comply with the lease, not just, you know, paying their rent on time. And a big one in that is insurance requirements. A lot of commercial landlords, you know, they have their template and a big one I see, you know, fairly often is a requirement for auto insurance. And if your business doesn't have any company cars or if you're not driving for business, you know, that probably isn't required and it's probably something you can negotiate out. You know, you don't want to be on the hook for things that aren't applicable to you or aren't necessary and that are going to cost you money in the long run. Another thing is the permitted use. You know, people tend to gloss over that. It says like running a brewery, and they're like, yeah, cool, that's what I do. But is that gonna include operating a tap room? Is that gonna include, what if you wanna serve food? Is it gonna include restaurant activities? Is your landlord gonna be okay with that? Do they know that's what you wanna do? That's another thing where I see people, they say, yep, I'm opening a brewery, and it just says brewery, and they kind of move on from there, and they get in trouble down the line.

[00:25:35] Justin Kendall: So they really need to be going through these contracts with a fine tooth comb to see what the actual terms are.

[00:25:43] Melanie De Marco: Absolutely. I know it's a very sometimes long, always boring contract, but you know, it really is in your best interest to, to do your best to get through it all. You know, people say, Oh, it's just boiler plate, but that boiler plate is really, really important because it's listing out all the requirements, all the things that you have to comply with during the term of your lease. And not only the things that you're going to require, be required to comply with, but You know, your landlord, too. What are they responsible for? And being able to hold them to those, you know, hold them accountable for those responsibilities. Are they not maintaining the common areas appropriately? Are they overcharging for the common area maintenance? Things like that.

[00:26:24] Justin Kendall: Obviously, they should consult an attorney or someone like you to go through these things to sort of, you know, have a leg up in these negotiations.

[00:26:37] Melanie De Marco: Yeah. I mean, it is one of those things that, you know, I've had clients ask, well, are you going to negotiate my, my rent down enough to pay for your bill? And that's not really what we're, you know, what the attorneys are there for. The attorneys are going to help negotiate the legal issues, not necessarily the business terms. So, you know, you're going to come to the agreement on what you think you can pay for rent and what you, you know, want that term to be. But. Really, the attorney is going to look out for all those little legal obligations that are kind of in between.

[00:27:07] Justin Kendall: With the current real estate market as it is that you're seeing out there in California, which is, you know, one of the most populated states for breweries. How much negotiating power do brewers and renters have at this point? Is it a very negotiable market or is it one where the landlords really have the negotiating power at this point?

[00:27:35] Melanie De Marco: some things have tightened up a lot, you know, some of those other terms. I think brewers definitely have power right now to negotiate what they would consider the big things, of course, the rent rate, the term, things like that, TIs, tenant improvements, things like that, you know, where I've seen landlords sort of trying to tighten up as, you know, all those other terms in between. And I think part of that is, you know, coming off of a tough, couple years after the pandemic, you know, renters are starting to come back, but a lot of landlords saw, you know, situations where they lost renters or the renters weren't making the rent and had to decide what to do with that. And I think landlords are now just being a little bit more strict on those terms. And that's, you know, again, why it's really important to read the whole lease and know what all those terms are. You know, before it was like, well, you're paying your rent, it's probably good. And I think now you're seeing landlords start to be strict on kind of all those other requirements, you know, really checking, do you have all your insurance? Do you have everything in place? Does your signage comply? Things like that.

[00:28:40] Justin Kendall: And I think that there's probably something to be said about assumptions of what's included in the lease versus what's actually in the lease.

[00:28:49] Melanie De Marco: Yeah, absolutely. You know, I often look at those common area maintenance fees on on a triple net lease where they're passing all the costs through the tenants. You know, how are they splitting that up? Is it pure square footage? Are you going to get a calculation? Have you seen past bills? Do you know what that's going to cost you? You know, the base rent is one thing, but how much more is this going to cost you over the life of the lease?

[00:29:13] Justin Kendall: So we talked a little bit about new renters, but on the flip side, I sort of set it up that, you know, a lot of existing renters out there are having issues with their landlords. So for someone who may be nearing the end of their lease, what are some tips that they need to know for either locking down another lease or renegotiating?

[00:29:36] Melanie De Marco: If you're coming to the end of your lease term, it's really your chance to reevaluate what you need and maybe what wasn't working in your old lease. We talked about the permitted use. Did it only say brewing and selling beer and now you want a kitchen? Things like that, it's really your time to sit down and reevaluate what you want from your lease. Do you want any upgrades, equipment, remodels? Things like that, you can kind of negotiate who's gonna bear the cost of that and maybe bake that into, you know, your future rents or get some sort of allowance from that for staying longer. And also address any maintenance concerns, not just do you want any fun upgrades, but like, is there anything that's not working that your landlord's not doing correctly? That's the time to bring that up and kind of use that all to negotiate your new lease and what that's gonna look like. know Another Round is do a little research and just know kind of what the comparable market rate is when it comes time to renegotiate look your landlord is always going to want to raise your rent just they are so knowing what the market rate is can help kind of combat your land they're just coming and saying well it's going to be a you know 10 percent raise or just some kind of raising the rent for the sake of raising the rent because it's time. So really coming in armed with a little bit of knowledge, even knowing what other breweries in your area are paying is just super helpful.

[00:31:08] Justin Kendall: So how soon should you be looking at those negotiations? Like, are we talking a year out? Longer? Shorter? What makes sort of a good negotiating window to start with?

[00:31:20] Melanie De Marco: Start early, you know you don't want to sign your five year lease and on day four say hey what about an extension of course, you know, once you have a proven model and you know you're going to want to stay start those negotiations as early as possible. Really the earlier you start the more negotiating power you're going to have. If you're two weeks out from the end of your term, your landlord knows you have nowhere to go. And then it's going to be very difficult, if not impossible, for you to move on that short notice. And they may know that that means you're willing to pay a higher rent just to avoid moving. Especially since breweries, they have a lot of heavy specialized equipment in there. You just don't want to get stuck. However long you think it's going to take to negotiate, give yourself longer. Once you know you're proven you're going to stick around, go ahead and give it a try.

[00:32:07] Justin Kendall: So say I may not have been the most diligent with staying on top of when my lease was going to expire and it has expired. And, you know, we've been, maybe we're a month in and I've already paid, you know, the rent and, you know, things are going well and the landlords accepted it. And, you know, but I come to the realization that, oh, I don't have a lease and I need to negotiate. If I'm in that position, you know, how should I sort of approach things?

[00:32:36] Melanie De Marco: That's really tough. It's a tough situation to be in, you know, because at any time, the landlord could always realize what's happening. The first thing to check is, is there a penalty for holding over? Some rents will say, you know, if you stay past your term, then you pay 150% rent. If that exists, pay that. Don't get yourself in a huge back rent situation. And, you know, no matter how much you want to think, oh, it was a mutual mistake, the landlord didn't catch it either. The truth is you agreed to it way back when you signed your original lease and you do owe it. And paying that additional rent now will avoid you, you know, down the line, if they never notice, having a huge back rent bill by the time you realize, no, I need to, I need to deal with this. But in general, you know, that's a tough situation. I've had clients in that situation that were in a building 15 years, no one realized they were over. So my client brought it up, trying to be the good person. Hey, can we renegotiate? Turns out, you know, their landlord had their daughter handling things at that point. And she was completely unreasonable. We made a super generous offer above market rate paying for repairs. And she still said no. And it's just sort of it is what it is. They're, you know, mutual mistake or not, they're not obligated. So that's a really tough one. You know, if you hold over, generally speaking, in California, and I think most states, it's the same, your month is considered to shift to a month-to-month. So all those other lease terms are still going to be in effect. So you could just stay and wait it out, but you're always in danger of, of course, the landlord figuring it out. So cultivating a good relationship with your landlord, like that's one of those times where that's going to be super important so that you can work something out.

[00:34:31] Justin Kendall: What are some favorable terms that maybe I should shoot for if I want an advantageous lease?

[00:34:39] Melanie De Marco: The biggest thing I have people come to me and they're like, I just want a simple lease. But honestly, the simple leases, which I think to most people equates to a short lease, those are the ones people fight over. So don't be scared of a super long lease. Of course, in a favorable lease, you want to see a reasonable rate. you know, market rent. I like to see fixed rate increases instead of something variable that, you know, you can't predict. So, like, some will say it based on, like, market conditions or CPI, things like that. But I always prefer if we can get it to get fixed rate increases. That way it's just easier for planning. Renewal options are a really big thing. We were talking about what happens at the end of your lease. Negotiating in the beginning for a renewal option gives you as the brewer, the tenant, the option to decide, do I want to stay and already have some mechanism for figuring out that rent value agreed to. You're not in a situation where if you don't agree, you can't stay. You've already figured that out in the beginning. We definitely talked about permitted use clauses, but Another Round that needs to be clear is those common area maintenance costs. Sometimes it just says, and you split everything else. And it's like, well, how is it based on square footage? Is it based on usage? If someone is, I don't know, a tanning facility with a bunch of tanning beds, they're going to use a lot of power, right? So what costs are you splitting? What are you not? Who's maintaining what? And get some estimates for what those costs are going to be.

[00:36:11] Justin Kendall: I'm glad you brought up improvements because that's one thing that I'm curious, you know, how should renters approach the topic with their landlord?

[00:36:19] Melanie De Marco: Be super upfront. If you need a lot of improvements, make that very clear. Like, I love your space. I want to be here, but here's all the things I'm going to need to do. Here's how much it's going to cost. A lot of landlords when they're negotiating lease for the first time will give some sort of allowance for 10 improvements they'll pay for a portion of that and look at. what you can get, make it clear, you know, I'm going to need to put $200,000 into this place to make it feasible for me and make that clear how much that's going to cost. And, you know, a landlord that needs someone there is going to generally help with that. Of course, you know, everything is landlord specific, but I would be super front, have estimates. If you have, you know, if you can get them prove how much you're going to invest in their space.

[00:37:11] Justin Kendall: Well, how can brewers sort of weigh the cost of improvements versus the long-term value of the lease, or how should they?

[00:37:19] Melanie De Marco: Well, the biggest one is those tenant improvement allowances. If you're getting $150,000 in a tenant improvement allowance, that lease might be more valuable to you, even if you're paying a higher rent than the next place over that isn't giving you that allowance. It could cost less over the life of the lease. If you have rent that'll cost you $400,000 over the total lease term, but you get 150 in a TI allowance, then the actual cost of that lease is down to 250. If you go somewhere else, even if you get somewhere that's 300,000 over the life of the lease and rent, but they don't give you that TI allowance, you have a big upfront cost. that you're going to have to bear by yourself. And in the end, it still ends up costing you more, even if you're paying a lower monthly rent. So I think looking at your business and what kind of is better for it, you know, can you shoulder a big upfront cost? versus, you know, maybe if you shoulder that upfront cost, you get a lower rent, like what's better for your business and what's going to help it long term. Maybe you can shoulder that upfront cost, but you're worried about cash flow, in which case maybe you share those costs of those initial investment in exchange for, you know, lower rent or vice versa.

[00:38:40] Justin Kendall: So we've seen a rash of closures, many citing landlord issues. Maybe this has always been an issue and, you know, we just haven't been privy to it, but why do you believe it's seemingly become more prevalent in the last, I don't know, year or so?

[00:38:57] Melanie De Marco: Probably the biggest thing is rising, I guess, real estate costs, but rising costs of things in general. You know, it costs more to maintain the building, it costs more to do all the things. You know, especially in urban areas, real estate costs have been rising, especially in California where I'm located, but some of it isn't just the cost of even maintain the property or to buy the property but the cost of owning it. I had a client recently they had a triple net lease so they're paying all the expenses and their landlord died and now in California there's no parent-child exception to reassessment so that property that had been held by that landlord for you know decades is now reassessed and it almost doubled their total rent. because the taxes went up so substantially. And definitely, you know, kind of coming out of the pandemic when a lot of commercial landlords were selling, trying to get out of the commercial space, a lot of those taxes have gone up now too.

[00:40:01] Justin Kendall: How would you describe the rental market for brewers post-pandemic and I guess currently?

[00:40:09] Melanie De Marco: Yeah, kind of in that same vein, it's just everything is more expensive. It just is. Seemingly people are, you know, coming back to the office, people are Tabbing Out more. A lot of landlords actually like repurposed or redeveloped some of their properties during the pandemic. And again, kind of touching on what we talked about earlier, it led to a lot of lease terminations or people not renewing because the landlord was going to do something with that property because You know, the rent market wasn't great back then, at least on the commercial side. So now people are starting to come back, but landlords are just a lot more strict and things are more expensive. Even if you think, look at all these empty spaces, you know, landlords are still being picky.

[00:40:55] Justin Kendall: You're seeing sort of a challenging market for brewers at the moment, or is that unfair?

[00:41:02] Melanie De Marco: I think that's fair in that. It just, I think, is taking more time to find the right space, especially I see it with clients who are working with a broker, which typically in that case, you know, were brought in a little bit earlier. You know, I think it's just taking longer to find the right space to find kind of all the things that you need.

[00:41:24] Justin Kendall: One of the things that we see with brewery spaces is what we like to call hermit crabbing. And that's where one may close, but another brewery ends up taking its place. Why is that? Is it because these spaces are so specialized?

[00:41:39] Melanie De Marco: Yeah, I mean, like you said, brewery spaces often have specialized equipment, they have ventilation systems, you know, pretty unique layout designs. So when another brewery closes, Another Round just may find it more cost effective to step into an existing space that already has everything they need. There's also, you know, some other reasons for that. And it happens in, I think, a lot of industries. But if that space is already approved for brewing activities, you may not have to deal with like approval processes for, you know, zoning or regulatory compliance. You already probably have kind of that tap room or tasting room atmosphere in there. You know, another thing is, yes, the place closed, but there was already people going there knowing it was a brewery. There may be customers out there that went to that brewery that now can't. So when you move in, you may inherit kind of an already existing customer base. A big one I think is for new brewery owners, you know, taking over an existing space, I think can be perceived as less risky than starting from scratch. It's kind of already there, generally has lower upfront costs. So it's a lot of things, kind of the main one being it's easier.

[00:42:50] Justin Kendall: As we wrap up here, you know, when weighing the cost of a lease, what intangible things should breweries also consider?

[00:42:59] Melanie De Marco: The kind of obvious ones are going to be location and visibility, you know, do you have foot traffic, nearby attractions, overall appeal to your target audience, kind of the overall vibe and atmosphere is your whatever your brand image is not going to fit with a community. you know of course you want to look at is there competition in the area and that could go both ways really you know if there's a lot of breweries or bars or similar businesses that could be an indication of a thriving craft beer scene on the other hand it can mean increased competition so really kind of doing that research and taking a look at how will you fit into the existing community there and on that note you know are there local events you can get involved with and become kind of part of the community in that way How can you integrate yourself into that? Another sort of maybe more obvious one is, you know, your access to your suppliers and your other resources. Is it going to be easy for them to get in and out? You know, are you going to be way out in the middle of nowhere where it's going to be tough? Another Round that I think sometimes gets overlooked is what are the future plans for the area? You know, maybe it's great now when you're in a little downtown, but someone plans to plop a big old apartment building across the street. You know, a growing neighborhood, it could mean new opportunities, but it could also lead to changes in kind of what that local culture is. So taking a look at what you think the community is gonna look like, you know, in the future, do you see a lot of new construction? You know, is it changing in a way that'll be harmful for your business or helpful?

[00:44:35] Justin Kendall: Well, anything else that you'd like to add that maybe I haven't asked or we should be thinking about?

[00:44:40] Melanie De Marco: I think just as sort of a recap, I think the really, the biggest one is don't be afraid of a long lease. Yes, it's annoying and super boring, but it really is worth reading. And generally it has more clearly defined requirements and is actually easier to follow at the end of the day. Don't be fooled into thinking, you know, the simple one page lease is going to be better for you. That's not always the case. If it scares you, hire an attorney or find someone who can sit through it all. Just make sure you really, really know kind of everything that's going on in your lease, not just how much is the rent and where do I pay?

[00:45:15] Justin Kendall: I appreciate it, Melanie. Thanks for breaking it down for us. And we'll look forward to seeing you in Sacramento.

[00:45:22] Melanie De Marco: Absolutely. Yeah. See you there.

[00:45:24] Justin Kendall: And that's our show for this week. Thanks to Zoe for hanging out with me. Thanks to our audio team for all The Drop. And thanks to all of you for listening. We'll be back next week.