Welcome back. When last we tuned in, our hopeful theatre was looking for a space and about to target several neighborhoods, specifically in Wicker Park, Andersonville, Edgewater, Lincoln Park and the West Loop. We had established a few minimal criteria: 13’ ceilings, no posts, proper zoning, and PPA-compliance without major structural changes to the building. We had engaged two commercial brokers and were also haunting the Reader “space” listings as well as doing a few walkarounds.

Looking at the raw spaces is a more time-consuming process than one might wish. We couldn’t afford to buy, so I was expecting a rental process similar to that the Apartment People provide. I expected to be whisked around to four or five suitable sites and make a decision by the following Friday. The actual experience of shopping for a commercial property is quite different.

Apparently, one doesn’t look at a dozen spaces over a day. It can take up to a week to organize each viewing, even after you’ve located the building. A number of buildings are not leased by a broker but directly by the owners. There are also a variety of commercial landlords, each with their individual goals.

Professional Landlord. These folks are making a living by leasing various buildings around the city. They move the quickest, are very conscious of empty spaces and (at least the ones I met) are completely unscrupulous. The three I dealt with wanted a lease that week, three months deposit down, and made tremendous verbal assurances about the zoning and compatibility of their properties, none of which would be committed to writing.

The flip side of the evil professional landlord was the honest professional, a charming subspecies. Our conversations would go something like this:

Me: “Hi, my name is Jeremy Wechsler, I’m looking for a space with commercial zoning for a theatre.”

Honest Abe: “A movie theatre?”

Me: “No, live theatre.”

H.A: "I’ve got nothing.”

Me: “I’m looking at your reader ad for a space on 1000 Perfect Blvd?”

H.A.: “What sort of live theatre?”

Me: “Comedies, dramas, general rep kind of work. We’re a new company—”

H.A.: “I’ve got nothing.”

I decided after several calls, that I would have a tough time with these guys because they wanted either a) a stable tenant, b) feared the unknown, c) actually knew their building wasn’t zoning compatible.

Not zoning compatible? Can’t one get a variance? Aren’t there all those plush spaces up and down Ravenswood for example? Raw warehouse space just begging to be filled up with art?

No. If you are renting and talk to a landlord who says that he/she will help you get a variance if you lease, RUN AWAY. The zoning process is extraordinarily lengthy and expensive. In most of these leases, you will still be responsible for the space and the costs of rezoning, even if you get a variance—which is by no means assured. If you don’t, you’re stuck with the most expensive rehearsal space in the world. Either the landlord doesn’t know how difficult rezoning can be or doesn’t care as long as you are paying. Ask Mike Menendian at the Raven Theatre or Elayne LaTraunik at Chicago Jewish about zoning. Watch their faces twitch and their eyes get panicky. It’s like post-traumatic stress disorder but with paperwork instead of bullets. I couldn’t face it.

In general, the honest owners were looking for very specific types of tenants, a list that rarely included a theatre. While I’m not sure a full-time landlord is necessarily interested in a theatre tenant, there are some advantages you can offer the right one. Hosting a theatre may open up options for redevelopment grants in some neighborhoods and can also be used to reduce property taxes. In general, though, I thought these guys would be more interested in a bar or a business than a long-term lease for a theatre.

The long-term investment landlord was a different experience. These are folks who own the property and are basically holding it so it appreciates to resell in five or ten years. The goal in this type of property ownership is to invest as little as possible in the building while maintaining its resale value. These owners were more amiable to a theatre tenant. They were less aggressive about the quick decision, but far more hesitant to put any money into the project.

This is probably worth a moment, as I didn’t really understand this part of the commercial leasing process when we started: it is common in commercial leasing for the landlord to make a fair-sized initial investment in revamping the property. When Bank One creates another McBank, they don’t do the electrical and drywall work. They don’t install mechanicals and plumbing. The landlord is customarily responsible for all such fixed assets. Why? When your lease terminates, you can’t take those things with you. In fact, you usually can’t take them with you even if you pay for and install them yourself.

This provides a handy negotiating ground for theatres. Perhaps you have a contractor on your board or you may be willing to do the work yourself. Some landlords will cut you an attractive lease if you are improving the capital assets of their property while you inhabit it. But keep in mind, you cannot take the fruits of your labor with you. Did you design a wonderful bathroom, with some high end fixtures you scavenged from a home construction? You’re leaving it there. Are you paying to bring in 220V power for your lighting? That $2000 panel stays where it is when you move. I found it useful to consider that all these fixed asset improvements were like a bank-loan towards rent. Could we afford to pay for the improvements up front and make up the cost difference on the rental once we entered into a third lease year? No matter what, make sure your landlord is responsible for external structural considerations at the very least: tuck-pointing, roof work, etc. and be very explicit when working out the lease.

If you don’t want to be in the reconstruction financing business, it’s better to get the owner to front the money required for your tenancy. An experienced landlord should expect to provide some or all of the following: standard dry walling (perhaps insufficient for performance), floor and ceiling repair, painting, electrical, plumbing and ventilation work. Golly, that’s most of our costs! How nice of the landlord to build our theatre! Alas, there ain’t nothing for nothing. The owner finance this construction through a bank loan. The costs of the bank loan (including interest) are built into the cost of the lease. So why not just take out the loan yourself? For one, the credit of the landlord is probably better than the credit of 90 percent of operating theatres. Also, even if you can secure a loan, you may want to save it in case of construction difficulties or overages. Let the owner assume the risk as long as it won’t strain your rental budget to the breaking point in the future.

So how much of your construction cost will a landlord assume? That depends on the length of the lease and the owner’s goals. It is not uncommon to realize profit in a commercial lease starting the third year of the lease. In a long term relationship, that profit may not be realized until the fifth or seventh year. I took our annual lease cost, multiplied it by three and reduced it by 5 percent for a long term lease. Assuming a $50,000 annual cost and a lease term of five years: $50K x 3 x .95 = $142,000. This formula gave me a conservative idea of what to negotiate for. I then doubled this as an opening position in negotiations. I found having this view from the owners’ perspective invaluable, as it helped me make fairly accurate guesses about their responses to my offers.

For example, one space we considered was on the second floor of a building in Wicker Park. To make the space PPA and ADA compliant, the landlord would have to install an elevator (approximately $100K by my guess). While she seemed perfectly willing to do so, I knew the amount of the lease wouldn’t allow for her to also install air conditioning (which I consider a necessity in Chicago) and make money before the lease was up for renewal. We called back and forth for a few days discussing pricing, but she grew skittish once she started costing the work and I knew enough not to spend too much energy perusing that particular location.

Next month we’ll pick a space, meet our final landlord type and discuss the exciting world of commercial leases so we can get back to spending money on our actual project. As always, feel free to weigh in on the Performink message boards or our blog at http://www.theaterwit.org.

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