Last month we looked at different types of landlords and what they might want out of your hapless theatre. Obviously, they want money. They want stability. They want market value. Therefore, it is the rare landlord that wants a theatre. So how do organizations find spaces that can attract an audience and not break the bank? There are landlords out there you can develop mutually satisfying relationships with. Here are some examples:

1. The Art-Loving Landlord is excited at the possibility of having a connection with your theatre. He/she may cut a good deal on the rent, or be willing to negotiate a lease that slowly ramps up the rental cost. They break even for a few years, you get running, everybody’s happy. These are obviously some of the best folks you can run across, and may eventually make for good board members (though there are tax implications to that).

2. The Investment Landlord. “I’ve got it. You fix it.” If you have the technical resources, you can fix up the property for the landlord as part of a reduced lease. Pay careful attention to your lease term. One owner we spoke to wanted repairs and corrections but would only agree to a year to year lease. We refused, arguing that we needed to make back our investments in his physical plant and not be ejected for condominium development. He refused to extend the lease beyond 18 months. Sure enough, when I drove by last week, the property is being turned into condos. But a deal made in good faith can often prove quite profitable both ways.

3. The Development Landlord. These guys are looking to improve the overall market value of the property by the introduction of a public attracting site. Perhaps it’s a multi-building development that wants to encourage higher priced restaurant leases. Maybe they are looking to secure a TIF grant and an arts organization offers just the right “neighborhood outreach” flavor. (TIFs are development grants to encourage development in particular areas. They are either in the form of tax reductions, cash towards build-out or both)

4. The Best Friend Landlord. This is an individual who already has a connection with you, your theatre, a board member, etc. who can be gently persuaded to take a chance on you. Your biggest risk in these deals is not poisoning the relationship by taking advantage of them. Be up front about your resources, your mission and your risks.

And where are these fabulous owners hiding? You can meet them through your leasing agent of course, but don’t neglect your co-workers, board members, company members and so forth. Remember, a theatre lease is not a normal real estate transaction. At the end of the day, the landlord will be banking on your group (or perhaps you, personally) to come through. He’s taking a risk and it is your job as the representative of your organization to make him want to take that risk. He has to have confidence in your ability to execute your side of the agreement. Your theatre’s mission is as important as its finances. Share production history, invite him to openings, etc. Treat the landlord as though you were courting a potential board member. The more personal the relationship, the better negotiations will go.

Our landlord is a mix of the first three categories. He and his partners purchased the property as a mixed-use development, with two commercial spaces, parking, three rental apartments, 10 condominiums and 2 luxury condominiums. Unfortunately, the luxury condominiums were rejected by the city as they were set too far back off the street to qualify for residential fire and postal services. This area, approximately 9200 square feet, needed another use. Few commercial businesses want a site without any street presence beyond signage and an access corridor. The neighborhood has little need for office space, so their potential applications were limited. In addition, the space was formerly a laundry garage and would require extensive upgrades to be suitable as a mixed use commercial space. It consists of three buildings, all of varying ceiling heights, and requires hundreds of thousands of dollars of renovation.

Faced with this prospect in an already expensive redevelopment effort, the partnership was strongly considering turning it into a parking lot before we came along. They could knock down the buildings, pave the lot, fence it and sell parking spaces to local residents. Not hugely lucrative, but positive on the balance sheet at the end of the day. How much more attractive would it be to develop the property into a performing arts venue with annual revenues for the next decade or two?

Getting into this space wouldn’t be a slam dunk, however. For one, it was a larger space than I had been considering and would require that I build a second theatre. We didn’t have the resources to produce more than three times a year, so I knew I’d have to go into the rental business to make the space break even. It also would require everything, from a new floor to a new second floor, drywalling and exterior work. We had raised about $450,000 but I suspected we would need much more cash to build the sort of theatre I wanted at this scale.

How much more? Fortunately, all the decisions about what sort of space you want/can afford are much easier to determine if you have a specific location. There are several spreadsheets I used to profile different locations. I’m posting the final version on our Web site (www.theaterwit.org/performink/spacebudget.zip) if you’d like to take a look at it. They basically took the square footage, cost per square foot, potential revenues and expenses for the space to let me see what sort of trouble we’d be getting into. This allowed me to do “what-if” scenarios to determine what I could afford. I plugged in rental rates from comparable sized spaces around the city, then called theatres with similar sizes to determine utilities, etc.

Usually, the landlord would tell me the cost per square foot and we’d negotiate from there. In this case, it was a little backward. This landlord was much more interested in what we wanted to do with the space, our group’s history and financials, than a specific cost. We spoke for a half hour and he seemed very interested but non-committal about price. I suspect he hadn’t yet fixed a price in his head for profitability on the lot. He asked for an offer letter that would lay out rough terms.

I was a little taken aback since I’d never had to offer terms from scratch, but this apparently isn’t unheard of in commercial leasing.  So, what does one cover in an offer letter? What are the terms of the lease? Your leasing agent can probably provide a template for this offer letter, but you can also get our template at www.theaterwit.org/performink/offerlettertemplate.zip. Here are some of the points you should address:

1. Use. What do you want to use the space for. Be complete. If you want a bar in the theatre, say so. If you are going to hold monthly raves, be up front. Being coy will only bite you later.

2. Square feet/Cost per square foot. How many square feet do you believe are involved? Feel free to ask for a plan from the landlord. How much per square foot annually do you want to pay?

3. Term/Options/Escalations. How long is the initial lease going to last? When does the rent increase? How many options are you asking for before you renegotiate the lease?

4. Lease Commencement/Rent Abatement. When does the lease start? How soon will you need to complete construction and get into production so you can start paying rent?

5. ecurity Deposit.  What is the security deposit you are offering on signing? (Usually 3 months)

6. Real Estate Taxes. Who pays the real estate taxes? Independent developers usually pass this cost directly onto the tenants. Larger companies amortize it against the lease term and build it into the rent.

7. Maintenance. Who maintains shared areas? How about the physical structure

8. Insurance. What types and how much? Who insures the building?  Are you carrying business insurance? How much?

9. Lessee/Lessor Work. What construction responsibilities will be assumed by whom?

10. Tenant Improvement Allowance. It’s common for the landlord to budget a certain dollar amount for the tenant to use for physical improvements to the space independent of the Lessor’s Work. The amount depends on the total lease term and amount. In a long term lease, this can be as much as two years worth of rent.

11. Utilities. Who is responsible for utilities service (water, electrical, etc)?

12. Parking/Signage Rights. Where can your audience park (if parking is available)? What signage rights do you have for the front of the building.

Weirdly, this letter is delivered by the real estate agent, but you write it. The trick, of course, is to provide terms that are to your advantage, that recognize the appropriate value of the space to the landlord. Use your leasing agent to help you fill in this letter and pull data from appropriate comparables. Review this letter with your architect, who will be invaluable with the language. I invested some money in my architect to draw up some preliminary plans, mainly because I felt that the landlord was excited by the idea of a theatre and would respond well to seeing some specifics of our vision. This is by no means required at the offer letter stage. This cost us approximately $1,500.

While the architect was drawing up plans, I was conferring with anyone I could find who handled commercial real estate. How much money could I expect the landlord to invest? What did things like air conditioning cost? How about drywall? What was the projected inflation rate to determine a reasonable annual rent increase? All told, it took us nearly four weeks and 12 informational interviews to deliver an offer letter that I was comfortable with. I recommend you take your time. Commercial leases work slower than residential leases, particularly for properties not being actively marketed. How slow? Well, I first saw the space in March, 2004. Is the lease signed yet, 18 months later? Nope. Why? Next month: the commercial lease review process.

As always, visit our Web site at www.theaterwit.org to contact me with any questions or topics you’d like to see covered in more detail.

P.S. Current expenditures, for those keeping track, are $23,500. 

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