by: Tricia Steele, President
One of the most often repeated pieces of advice for entrepreneurs is to get a great attorney and accountant. Those that have seen the seedy underbelly of business know full well the devastating consequences that can come from a hastily executed agreement that goes south or lack of planning that leads to financial woes come tax time.
When property is involved, the importance of this advice is increased ten-fold. And for a non-profit that is relying on the governance of a board and support of contributions as well as customers, there is no way to overestimate why great legal and financial counsel are an absolute must.
Over the last five years of incubating the Makervillage initiative within my company before formally incorporating as a non-profit entity in 2015, I’ve negotiated and managed leases for seven different properties. I’ve had the painful realization that real estate is an industry where care for the customer is still considered optional. Landlords often give the impression that they are doing the tenant a favor by letting them rent their space, instead of the other way around. This can lead to extended disrepair, down time, unexpected expenses, and worse.
So, when I undertook the search and ultimate selection of a property to house Makervillage more permanently, it was with eyes wide open to the risks made possible not only by leasing but also embarking on a renovation project within a building I didn’t own.
Thanks to a terrific team of advisors, I had a tremendous amount of experience in my corner and a variety of opinions to consider. Many a coffee was spent with the likes of Layton Roberts, JT Watters, Ryan Earnest, and Wright Ledbetter evaluating real estate options and arrangements. Because not only should a startup consult legal and financial professionals, but build relationships with a variety of subject matter experts and experienced entrepreneurs willing to walk alongside on the journey.
I chose 252 N. 5th because the warehouse inspired me to think of what was possible, not only of the building but within it. I loved the idea of an industrial-esque space being converted into a place where ideas and projects were manufactured into existence every day. It fit the structural requirements to meet the ambitious 5-year plan of the organization and its board. And it allows us to drive the regrowth of an area of downtown ripe for flourishing.
I first attempted to negotiate purchasing the property, but discovered that the owners have a very different idea of what the building is worth than those willing to invest and improve it (like me!). So, alongside the help of Taylor English, one of the top real estate legal firms in Atlanta, we crafted what was called “arguably the most tenant-friendly lease” ever seen.
I want to share some of the sticking points because 1) I want others in lease negotiations to be aware of what is possible, and 2) our members, sponsors, and contributors deserve to feel absolutely confident in their investment of money, time, or volunteer energy.
Five Essential Protections on the Makervillage Lease
(or lease recommendations for all cowork facilities)
We chose to make a 10-year commitment to the property in exchange for reduction from market rate. So, we pay $2500 a month for about 10,000 square feet ($3/sq ft), and it begins increasing every other year after year #4. These increases are capped and tied to an objective index. There are many provisions in our lease, and I’d be happy to share the full document with anyone interested (or extra nerdy).
These are the five most powerful protections I recommend anyone undertaking a lease to consider:
1. Repair Clause
We defined critical repairs (roof, heating, water) and defined an expected repair time. If a repair is not started within 3 days from notification, then we are entitled to rent credit for every day of non-repair. On the tenth day, we are free to pursue and provide our own repair with reimbursement plus a 20% management fee due to us within the same month.
2. Detailed Non-Disturbance
All tenants everywhere are guaranteed a measure of quiet enjoyment of premises under the law. However, we explicitly defined any sort of bank action or default on the property mortgage as a Disturbance. This was important given the role of Makervillage in the community. It’s essential that we preserve trust with our members and sponsors that we were not going anywhere. In addition, we are entitled advance notice of any adverse action against the property, and we can seek relief from it in various ways.
3. Right of First Refusal
My original and ultimate goal is to buy the property, so I insisted that we have first dibs on the property if the owners changed their minds. The document establishing this right is actually filed with the deed in the county courthouse. Even if the owner goes belly up, our claim will travel with the deed itself. It includes a method for calculating value and all sorts of notification periods, so that there are never surprises.
4.SNDA with the Bank
Makervillage has a SNDA (Subordination, Nondisturbance, and Attornment agreement) with Northside Bank signed by its President. This document does a few things, but most importantly, it ensures that our lease and rights will be kept whole and intact, with all responsibilities and duties transferred to the bank on the unfortunate event of a default by the landlord. It also permits us to serve notice of any default of our lease terms by the landlord to be reported to the bank simultaneously. So, we have the power and influence of the lender working to be sure our landlord honors our terms.
5. Property Improvement Reimbursement
This one’s the kicker.
If the bank or another entity wants to buy or take possession of the property, and we have elected to waive our right of first refusal (ie. Not buy it), then the acquiring entity will be obligated to reimburse the costs of property improvements. This amount reduces annually by a reasonable percentage.
In addition to all this badass risk protection, I also carved the 10yr lease into two 5year terms, where we have a right to walk away without punishment/fee at year five if for some reason we absolutely need to. If we don’t exercise this right, then the lease automatically renews with the same terms. The landlord does not have the right to terminate the lease early. And we have defined our renegotiation period for subsequent leases at year eight so that there is not the possibility of being pushed out nearing the end of the term just because a better offer comes along after all our hard work and investment.
Here’s the deal. At some point over our first year, we have benefited from each one of these protections.
Due to our landlord’s delay on roofing repairs, we were not required to pay nearly $10k in rents. At one point (or several), the property was under foreclosure notice, and my attorney was able to literally walk one city block to work directly with the bank’s attorney in downtown Atlanta. I’ve served notice of default on multiple occasions and walked these issues through to resolution. These events are not surprises, but eventualities I prepared for with the help of great counsel. They’ve also been understanding to us and our needs, and certainly believe and support our work.
At every step of the way, I’ve sought to be fair, as wise as possible, and thoughtful about future possibilities and opportunities. It is my intention to honor my commitments always. Without investment in the legal counsel to draw up this strong agreement and my willingness to enforce it religiously, we would have suffered from not being able to open due to leaks AND being out money for four months. That fact alone means that our legal costs have returned 3x to Makervillage!
Operating a creative cowork facility in a small town is hard. But, if there are questions about my ability to guarantee our stability, it would be impossible.
There may be confusion or concern about the fact that our landlords find themselves in financial difficulty more frequently than would be tolerable for most. I want to be very clear that those things which may be shared from public record or just for public intrigue simply do not affect Makervillage, even if our address is involved.
If you have questions or concerns about any of the relationships connected to Makervillage, please please contact me. And if you have questions or concerns about your own property situation, I can refer you to an excellent attorney.