Richmond’s final lease with Stone Brewing Co. reveals new details of the deal
The city of Richmond has released the final terms of a 25-year lease agreement with Stone Brewing Co. for a production facility in the city that will cost more than the anticipated $23 million.
The lease, signed on March 11 and released publicly on Tuesday, includes numerous changes from an initial document hammered out in December. One of the key changes is a section where both parties “acknowledge and agree” that the current estimated project costs for Stone’s new 200,000-square-foot brewery “exceed the parties’ original estimates” of $23 million.
According to Rich Johnson, a member of Richmond’s Economic Development Authority who is serving as a spokesman for the project, said in an email that problems with soil conditions at the site are the primary reason behind the expected overage of several million. With conditions poorer than expected, enhancements will be needed to the building’s foundation. “Like any project there are always many minor issues. The soils dominate the cost issues,” said Johnson, a volunteer member of the authority and the president and CEO of The Wilton Cos., a real estate company in Richmond.
Despite this new wrinkle, Johnson says the city doesn’t expect to commit more than $23 million in general obligation bonds to finance the building cost for the brewery, an amount that Stone would pay back in rents. “The EDA has no plan to ask for any more money nor to request any change in the debt service repayment,” he said.
According to the lease, the authority would cover about $1.1 million of an expected overage, and Stone would pay the remaining $1.1 million. If the project exceeds $24.1 million, San-Diego-based Stone — one of the country’s largest craft beer producers — would fund an overage not to exceed $3.5 million dollars. However, the lease says the authority would have to pay back that money with interest. Payments could be made directly to Stone or the amount could be deducted from Stone’s rent.
The lease sheds light on what rent payments might look like based on the original $23 million scenario. It says Stone would pay $148,545 per month based on a brewery rent constant of 7.75 percent.
The lease has been set up as a triple net lease, also known in the industry as an NNN. Under this form, the tenant pays all or part of the taxes, insurance, and maintenance associated with use of the property. These fees are in addition to the tenant's regular monthly rent.
Site work is underway on the project on a 14-acre site in Greater Fulton. The brewery building is expected to be complete by December. Stone expects to begin producing craft beer in Richmond in July 2016.
Thirty days before the beginning of the brewery rent commencement date, the lease requires an upfront security deposit from Stone. This would be in the form of a cash deposit of $600,000 for a term of seven years or an irrevocable letter of credit from a bank in that amount for the same term. In the event of a default, the lease says the landlord (the city’s economic development authority) “may use, apply or retain all or any portion of the security deposit for the payment of any rent, additional rent, or other charge payable by the tenant …” or for the payments of other sums that would fall to the landlord if the tenant defaulted.
The lease also sheds light on tenant allowances –money provided by the landlord for tenant improvements. It says that city’s EDA will pay a cash allowance equal to 3 percent of the brewery’s total project costs, (exclusive of the brewery tenant allowance), “but in no event more than $576,000.” Stone can use this money for costs, fees or expenses in connection with transactions connected with the lease and with development of the brewery premises.
The tenant allowance for the $8 million bistro restaurant and retail beer garden planned in phase two for the project would be 3 percent of that project’s total cost, or a cash allowance of no more than $200,400.
The final terms of the lease, kept under wraps during the negotiations with Stone, prompted some of the city’s other restaurateurs to complain about a lack of transparency. However, brokers in the city’s real estate community consider the deal a major economic development coup with Richmond beating out more than 300 other site proposals from 20 other states for the project.
To win the brewery, the city and state threw in incentives, including a $5 million grant from the Governor’s Opportunity Fund.
According to Johnson, the lease was negotiated with the help and support of both the city attorney’s office and the EDA’s outside counsel. “The EDA Board has confidence that this transaction will be successfully completed and be a significant boost to the Greater Fulton area, the city of Richmond at large and, in fact, the commonwealth of Virginia. The benefits will include, but not be limited to, jobs, taxes, increased tourism, national recognition and more. Stone will be an asset to RVA.”