MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED
FROM: Cynthia Ho, Associate, and Grace Nakamura, Associate, Calderwood & Harkness LLP
TO: Angela Fontaine, Partner, Calderwood & Harkness LLP Kevin Driscoll, Vice President, Supply Chain & Logistics, Meridian Consumer Brands LLC Martin Solberg, Principal, Operations Team, Halcyon Ridge Capital Partners, LP
DATE: June 28, 2022
RE: Review and Analysis of Letter of Intent (LOI-2022-CCC-B4) — Proposed Lease of Building 4, Cranbury Commerce Center, 200 Prospect Plains Road, Cranbury, New Jersey 08512, between Meridian Consumer Brands LLC (Tenant) and Stonebridge Industrial Realty Trust, LP (Landlord)
MATTER NO.: 1011-00007
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I. Executive Summary
This memorandum analyzes the non-binding Letter of Intent dated June 22, 2022, bearing reference number LOI-2022-CCC-B4 (the "LOI"), executed by Kevin Driscoll on behalf of Meridian Consumer Brands LLC ("MCB" or "Tenant") and by Rebecca Hartwell, Senior Vice President of Leasing, on behalf of Stonebridge Industrial Realty Trust, LP ("Stonebridge" or "Landlord"). The purpose of this memorandum is to provide a comprehensive review of the LOI's key economic and non-economic terms, identify favorable terms achieved during initial negotiations, flag open issues not addressed or insufficiently addressed in the LOI, and recommend negotiation positions for the forthcoming lease agreement.
The LOI contemplates a ten (10)-year lease of approximately 297,500 rentable square feet — comprising approximately 285,000 square feet of warehouse and distribution space and approximately 12,500 square feet of finished office and mezzanine space — at Building 4, Cranbury Commerce Center, 200 Prospect Plains Road, Cranbury, New Jersey 08512 (Block 24, Lot 17.04 on the Tax Map of the Township of Cranbury, Middlesex County, New Jersey). The aggregate base rent over the initial ten-year term, on a flat pre-escalation basis as characterized by the parties in the LOI, is $12,000,000 ($1,200,000 per annum). The LOI further provides for 2.5% annual compounding escalations, which will bring actual aggregate base rent with escalations to approximately $13,344,060 over the initial term. Additional economic terms include four (4) months of free rent, a tenant improvement allowance of $4,462,500 ($15.00 per square foot), landlord-funded base building work estimated at $1,850,000, and a security deposit in the form of a $300,000 irrevocable standby letter of credit with a burn-down schedule.
The LOI is expressly non-binding in its entirety except for three provisions that are binding on the parties: (a) mutual confidentiality obligations; (b) an exclusivity period running through September 30, 2022, during which Stonebridge has agreed not to market Building 4 or negotiate with other prospective tenants; and (c) broker commission obligations. These binding provisions are discussed in detail in Section IV of this memorandum.
The LOI further contemplates a limited guaranty from MCB's parent holding company, Meridian Holdings Inc., capped at twelve (12) months of base rent ($1,200,000), with a burn-off mechanism tied to MCB achieving and maintaining a specified net worth threshold. The guaranty framework is outlined only in summary fashion in the LOI and will require substantial negotiation in the context of a separate guaranty agreement.
A first draft of the lease is expected to be prepared and delivered by Stonebridge's outside counsel, Whitfield, Barr & Calloway LLP (the "Landlord's Counsel"), led by Partner Thomas R. Calloway and Associate Jennifer Pace. The LOI contemplates that such draft will be delivered promptly following LOI execution, and we anticipate receipt by approximately mid-July 2022.
By way of business context, MCB seeks to consolidate its current East Coast distribution operations, currently headquartered at its Edison, New Jersey distribution center (located at 15 Kilmer Road, Edison, NJ 08817), into a newer, larger facility with modern racking and automation capability to support East Coast fulfillment operations. MCB's existing lease at the Edison facility expires in February 2024, which provides a reasonable but not unlimited time buffer for completion of the Cranbury transaction and the operational transition.
This memorandum is organized as follows: Section II provides relevant background on the parties, the property, the brokers, and the transaction timeline. Section III sets forth a detailed summary of the key economic terms in the LOI. Section IV discusses the binding provisions of the LOI. Section V identifies open issues not addressed or insufficiently addressed in the LOI and presents our recommended negotiation positions for the forthcoming lease. Section VI outlines the anticipated timeline and next steps. Section VII concludes. Appendix A provides a tabular summary of all LOI terms with our corresponding comments and recommended lease positions.
II. Background and Transaction Overview
A. The Parties
Tenant. Meridian Consumer Brands LLC ("MCB") is a Delaware limited liability company with its principal executive offices located at 450 Park Avenue, 18th Floor, New York, New York 10022. MCB is a manufacturer and distributor of shelf-stable consumer packaged goods, including snack foods, condiments, and specialty beverages, sold through mass-market retail, club, and e-commerce channels across the United States and select international markets. For the fiscal year ended December 31, 2021, MCB reported revenue of approximately $340 million and EBITDA of approximately $41 million.
Tenant's Parent / Sponsor. MCB is a portfolio company of Halcyon Ridge Capital Partners, LP ("Halcyon Ridge"), a Delaware limited partnership and mid-market private equity fund with approximately $2.1 billion in assets under management. Halcyon Ridge's investment strategy is focused on consumer products, food and beverage, and specialty retail. Halcyon Ridge acquired MCB in 2018. MCB's direct parent entity is Meridian Holdings Inc. ("Meridian Holdings"), a Delaware corporation, which serves as the intermediate holding company in the organizational structure. Meridian Holdings is the entity contemplated as the guarantor under the limited guaranty referenced in the LOI.
Landlord. Stonebridge Industrial Realty Trust, LP ("Stonebridge") is a Maryland limited partnership managed by its general partner, Stonebridge Industrial GP LLC, a Maryland limited liability company. Stonebridge's principal office is located at 100 International Drive, Suite 600, Baltimore, Maryland 21202. Stonebridge owns and operates a portfolio of approximately 14.5 million square feet of industrial, logistics, and flex properties located across the Mid-Atlantic and Northeast corridors, including properties in New Jersey, Maryland, Virginia, Pennsylvania, and Connecticut. Stonebridge acquired Cranbury Commerce Center in 2019 for approximately $78 million, and the property has since been held within Stonebridge's portfolio as a core logistics asset.
B. The Property
The premises contemplated under the LOI (the "Premises") consist of Building 4, Cranbury Commerce Center, located at 200 Prospect Plains Road, Cranbury, New Jersey 08512, designated as Block 24, Lot 17.04 on the Tax Map of the Township of Cranbury, Middlesex County, New Jersey.
The Premises comprise approximately 297,500 rentable square feet in total, consisting of approximately 285,000 square feet of warehouse and distribution space and approximately 12,500 square feet of finished office and mezzanine space. The building features a 36-foot clear height, which is suitable for modern racking and automation systems. Loading and access infrastructure includes forty-eight (48) dock-high doors and four (4) drive-in doors, as well as eighty-five (85) trailer parking spaces in the associated truck court and yard areas.
Building 4 was originally constructed in 2001. Following Stonebridge's acquisition of Cranbury Commerce Center in 2019, Stonebridge completed a roof replacement and HVAC upgrade in 2020. The building is situated within a 62-acre, four-building industrial park known as Cranbury Commerce Center, which includes Buildings 1 through 4 and associated shared infrastructure, including access drives, utilities, stormwater detention basins, and common parking and circulation areas.
The Cranbury Commerce Center location is strategically positioned along the New Jersey Turnpike corridor with proximity to major regional transportation infrastructure, including the New Jersey Turnpike (Exit 8A), U.S. Route 130, and State Route 535, providing convenient access for truck-based distribution throughout the Mid-Atlantic and Northeast markets.
C. Brokers
Two brokerage firms are involved in this transaction. Both commissions are payable by the Landlord.
Tenant's Broker. Pinnacle Brokerage Group LLC ("Pinnacle"), based in Parsippany, New Jersey, acting through Daniel Tsui, Senior Vice President. Pinnacle has represented MCB in connection with the site search and negotiation of the LOI. Pinnacle's commission is set at 3.0% of aggregate base rent, totaling $360,000, payable by the Landlord pursuant to the terms of a separate brokerage agreement between Pinnacle and Stonebridge.
Landlord's Broker. Velthorn Realty Advisors LLC ("Velthorn"), based in Edison, New Jersey, acting through Patricia Emerson, Executive Vice President. Velthorn has represented Stonebridge in connection with the marketing and leasing of Building 4. Velthorn's commission is set at 1.5% of aggregate base rent, totaling $180,000, payable by the Landlord pursuant to the terms of a separate brokerage agreement between Velthorn and Stonebridge.
The total brokerage commissions for this transaction are $540,000 ($360,000 to Pinnacle and $180,000 to Velthorn), all payable by the Landlord.
D. LOI Execution and Timeline
The LOI was executed by both parties on June 22, 2022. The LOI contemplates that the Landlord's Counsel will deliver a first draft of the lease to MCB and its counsel promptly following execution of the LOI. Based on preliminary discussions with Landlord's Counsel, we anticipate receipt of the first draft lease within approximately three to four weeks of LOI execution, or by approximately mid-July 2022.
The LOI establishes September 30, 2022 as the deadline for execution of a definitive lease agreement. This same date serves as the expiration of the exclusivity period during which Stonebridge has agreed not to market Building 4 or negotiate with other prospective tenants for the Premises. Accordingly, the negotiation window is approximately three months from the date of this memorandum. While this timeline is achievable, we note that the lease for a facility of this size and complexity — particularly given the open issues identified in this memorandum — will require focused and efficient negotiation. We recommend that the team monitor this timeline closely and assess early in the process whether a request for an extension of the exclusivity period and lease execution deadline may be advisable.
III. Summary of Key Economic Terms in the LOI
A. Lease Term
The LOI provides for an initial lease term of ten (10) years. The commencement date of the lease (the "Commencement Date") is defined as the later of (a) the date of substantial completion of the Landlord's work (as described in Section III.G below) or (b) January 1, 2023 (the "Target Commencement Date").
We note that the LOI does not include a definition of "substantial completion," nor does it provide for an outside date by which the Landlord must achieve substantial completion. The absence of a defined outside commencement date creates risk for MCB, particularly given its operational need to transition out of the Edison facility prior to the expiration of the Edison lease in February 2024. We recommend that the lease include a clear, objective definition of "substantial completion" — for example, the date on which the Landlord has completed all Landlord's work in accordance with approved plans and specifications and a temporary or permanent certificate of occupancy has been issued by the Township of Cranbury — as well as a specified outside commencement date after which MCB would have the right to terminate the lease if substantial completion has not been achieved. We address these recommendations in greater detail in Section V.J below.
B. Base Rent
The LOI establishes the following base rent structure:
Year 1 Annual Base Rent: $1,200,000 ($100,000 per month).
Per-square-Foot Rate: Based on the total rentable area of 297,500 square feet, the Year 1 base rent equates to approximately $4.03 per square foot per annum on a triple-net (NNN) basis. This rate is competitive for comparable Class A industrial distribution space in the Cranbury/Exit 8A submarket, which, based on current market data, is generally ranging from $3.75 to $5.00 per square foot NNN for comparable facilities.
Aggregate Base Rent (Pre-Escalation Characterization): The LOI characterizes the aggregate deal value as $12,000,000, calculated as $1,200,000 per year multiplied by ten (10) years on a flat, pre-escalation basis.
Annual Escalation: The LOI provides for annual escalations of 2.5% per annum, compounding. The resulting escalation schedule over the ten-year initial term is as follows:
Aggregate Base Rent with Escalations: As shown in the table above, the actual aggregate base rent over the initial ten-year term, inclusive of the 2.5% compounding annual escalations, totals $13,344,060. This is $1,344,060 more than the $12,000,000 "deal value" characterized in the LOI.
We recommend that the lease clearly distinguish between the aggregate rent figure and the escalation schedule to avoid any ambiguity regarding the total rent obligation. The lease should include a detailed rent schedule as an exhibit, setting forth the annual and monthly base rent for each year of the term, incorporating the 2.5% compounding escalation, as set forth in the table above.
C. Free Rent
The LOI provides for four (4) months of free rent commencing on the Commencement Date (i.e., Months 1 through 4 of the lease term). During this free rent period, MCB will not be obligated to pay base rent.
The LOI is silent on whether the free rent abatement applies only to base rent or also extends to NNN operating expenses and other charges constituting "additional rent" under the lease. In many industrial lease transactions, the free rent period abates base rent only, while the tenant remains responsible for its proportionate share of NNN operating expenses during the abatement period. We recommend that MCB negotiate for full abatement of both base rent and NNN operating expenses during the four-month free rent period, or, at a minimum, that the lease clearly specify the scope of the abatement. Given the anticipated timeline for MCB to complete its tenant improvements and begin operations, the free rent period serves an important function in offsetting build-out costs and should be structured as favorably as possible.
D. NNN Operating Expenses
The LOI provides that the lease will be structured on a triple-net (NNN) basis. Under this structure, MCB will be responsible for its pro rata share of all property operating expenses, including real estate taxes, building insurance premiums, and common area maintenance ("CAM") charges.
The LOI estimates NNN operating expenses at $2.85 per square foot per year (based on 2022 estimates). Assuming 297,500 square feet, this translates to an estimated annual NNN expense obligation of approximately $847,875 for the first year of the term.
The LOI does not address key NNN lease provisions that will need to be negotiated in the definitive lease agreement, including:
• Controllable Expense Caps: We recommend negotiating an annual cap on increases in controllable operating expenses (i.e., CAM and management fees, excluding real estate taxes and insurance, which are generally not cappable) of no more than 3% to 5% per year on a cumulative, compounding basis.
• Audit Rights: MCB should have the right to audit the Landlord's operating expense records on an annual basis, with the ability to recoup overcharges and audit costs if overcharges exceed a specified threshold (e.g., 3% to 5% of the total charges).
• Reconciliation Procedures: The lease should require the Landlord to deliver annual operating expense reconciliation statements within a specified period (e.g., 120 days after the end of each calendar year) and provide MCB with the right to dispute any charges within a defined period following receipt of the reconciliation.
• Excluded Costs: The lease should include customary exclusions from operating expenses, including, without limitation, capital expenditures (except to the extent amortized over their useful life in accordance with GAAP and attributable to compliance with legal requirements enacted after the lease commencement date or bona fide cost savings), Landlord's financing costs, depreciation and amortization, costs of tenant improvements for other tenants, leasing commissions, management fees in excess of a market rate (typically 3% to 5% of gross revenues), costs arising from Landlord's negligence or willful misconduct, and costs of remediation of environmental conditions not caused by MCB.
E. Security Deposit
The LOI requires MCB to post a security deposit of $300,000, which is equal to three (3) months of Year 1 base rent ($100,000 per month × 3). The security deposit is to be provided in the form of an irrevocable standby letter of credit.
Proposed LC Issuer. MCB proposes to have the letter of credit issued by Harborview National Bank, N.A. ("Harborview"), MCB's primary operating bank, located at 300 Vesey Street, New York, New York 10281.
LC Format. The LOI specifies that the letter of credit shall be irrevocable and in standby format, with an "evergreen" auto-renewal feature subject to sixty (60) days' prior written notice of non-renewal from the issuing bank.
LC Burn-Down Schedule. The LOI provides for the following reductions in the letter of credit amount, subject to no uncured default by MCB at the time of each reduction:
• Reduction to $200,000 after Year 3 (i.e., effective on the third anniversary of the Commencement Date).
• Reduction to $100,000 after Year 6 (i.e., effective on the sixth anniversary of the Commencement Date).
Several items relating to the security deposit and letter of credit will require negotiation in the definitive lease agreement. We recommend addressing the following:
• Issuer Acceptability. The lease should confirm that Harborview National Bank, N.A. is an acceptable issuing bank under Stonebridge's requirements. We anticipate that Stonebridge may require the issuing bank to meet minimum credit ratings (e.g., long-term unsecured debt rated at least A- by S&P or the equivalent). Harborview is a well-capitalized national bank, and we do not anticipate this being an issue, but we should confirm.
• LC Form. The specific form of the letter of credit should be attached as an exhibit to the lease and agreed upon by the parties. We recommend negotiating a form that is commercially reasonable and consistent with Harborview's standard issuance practices.
• Transfer Provisions. The lease should address the mechanics for transferring the letter of credit to a successor landlord upon a sale or transfer of the building, including allocation of transfer fees.
• Draw Conditions. The lease should specify the conditions under which the Landlord may draw on the letter of credit (e.g., only upon the occurrence and during the continuance of an uncured Event of Default, or upon receipt of a notice of non-renewal without a replacement LC being delivered within a specified period). MCB should resist Landlord's ability to draw on the LC in the absence of an adjudicated or acknowledged default, to the extent commercially feasible.
F. Tenant Improvement Allowance
The LOI provides for a tenant improvement allowance ("TI Allowance") of $15.00 per square foot, calculated on the total rentable area of the Premises. The TI Allowance totals $4,462,500 ($15.00 × 297,500 square feet).
The TI Allowance is a significant economic concession and will fund MCB's build-out of the Premises to support modern racking, automation infrastructure, and office improvements required for MCB's East Coast fulfillment operations. Given the scale of the TI Allowance, the disbursement mechanics will be a critical component of the lease negotiation. The LOI is silent on disbursement mechanics, and we recommend that the lease address the following:
• Disbursement Method. MCB should negotiate for progress-based disbursement of the TI Allowance (i.e., periodic draws during the course of construction, tied to completion milestones and supported by lien waivers and contractor certifications), rather than a single lump-sum payment upon completion. Progress-based disbursement will reduce MCB's out-of-pocket carrying costs during the build-out period.
• Retainage. A customary retainage amount (typically 10%) may be held by the Landlord pending completion of all punch-list items and delivery of final lien waivers.
• Deadline for Utilization. The lease should specify a deadline by which MCB must apply for and utilize the TI Allowance (e.g., within 12 to 18 months after the Commencement Date). MCB should negotiate for a reasonable utilization period to accommodate any phased build-out plans.
• Unused Allowance. We recommend negotiating the right to apply any unused portion of the TI Allowance as a credit against future base rent obligations. Landlords frequently resist this provision, but it is worth pursuing given the size of the allowance.
• Documentation Requirements. The lease should specify the documentation MCB must submit to draw on the TI Allowance, including invoices, architect certifications, lien waivers (conditional and unconditional, partial and final), and evidence of insurance.
G. Landlord's Work
The LOI describes the scope of work that the Landlord will perform at the Landlord's sole cost and expense prior to the Commencement Date (the "Landlord's Work"). The estimated cost of the Landlord's Work is $1,850,000, and this cost is the Landlord's responsibility and is not charged against the TI Allowance. The LOI describes the Landlord's Work scope at a high level as follows:
• New LED lighting throughout the warehouse space.
• ESFR (Early Suppression Fast Response) sprinkler system upgrade.
• Leveler replacement at all forty-eight (48) dock-high doors.
• Office refresh, including new carpet, paint, and ceiling tiles in the approximately 12,500-square-foot office and mezzanine area.
• Installation of six (6) electric vehicle (EV) charging stations in the car parking area.
The LOI specifies that the Premises will be delivered in "warm vanilla shell" condition upon completion of the Landlord's Work. A "warm vanilla shell" delivery condition typically contemplates a building that is weathertight and structurally complete, with a concrete slab floor, insulated walls, completed roof, HVAC systems serving the office areas, electrical and plumbing roughed in to building standard, fire suppression operational, and the other improvements described above, but without tenant-specific interior build-out or finishes (which would be addressed through the TI Allowance).
The LOI does not include detailed specifications, construction drawings, or performance standards for the Landlord's Work. Nor does the LOI address a completion timeline, the Landlord's obligations to use qualified contractors and new materials, warranties on the Landlord's Work, or MCB's remedies in the event of late delivery or defective work. These are critical items for the lease negotiation and are addressed in detail in Section V.H below.
H. Renewal Options
The LOI provides MCB with two (2) successive five (5)-year renewal options, which would extend the total potential lease term to twenty (20) years. Key terms of the renewal options as set forth in the LOI are:
• Renewal Rent. The base rent during each renewal term will be set at 95% of the then-prevailing fair market rent for comparable industrial/distribution space in the relevant submarket at the time of renewal.
• Notice Requirement. MCB must provide twelve (12) months' prior written notice to exercise each renewal option.
The LOI does not define "fair market rent," specify the methodology for determining fair market rent in the event of a dispute (e.g., appraisal or arbitration), or address conditions to the exercise of the renewal options (e.g., whether exercise is conditioned on the absence of an uncured default). We recommend that the lease address these issues as follows:
• Define "fair market rent" to include a specified methodology for determination, including a broker's opinion process followed by a three-appraiser arbitration panel if the parties cannot agree.
• Specify that the 95% discount to fair market rent accounts for the fact that no brokerage commissions, tenant improvement allowance, or free rent concessions will be provided during the renewal terms, and that these savings should be reflected in the fair market rent calculation.
• Condition the exercise of each renewal option on the absence of any uncured monetary or material non-monetary default at the time of exercise and at the commencement of the renewal term.
• Provide that the lease terms and conditions during each renewal term will be the same as during the initial term, except as to base rent.
I. Early Termination Option
The LOI grants MCB the right to terminate the lease after Year 7 of the initial term, subject to the following conditions:
• Notice. MCB must provide eighteen (18) months' prior written notice of its election to terminate.
• Early Termination Fee. MCB must pay an early termination fee equal to the sum of: (a) the unamortized portion of the TI Allowance; (b) the unamortized portion of brokerage commissions; and (c) six (6) months of base rent.
The LOI does not specify the amortization methodology to be applied to the TI Allowance or brokerage commissions (e.g., straight-line versus interest-bearing amortization), which brokerage commissions are included in the calculation ($360,000 payable to Pinnacle + $180,000 payable to Velthorn = $540,000 total, or only one of the two?), or whether the six-month base rent component is calculated at the then-current escalated rate or at a fixed rate. These details will have a material impact on the quantum of the early termination fee.
By way of illustration, assuming the early termination is effective at the end of Year 7 (i.e., seven years into the term with three years remaining), the early termination fee under a straight-line amortization methodology would be calculated approximately as follows:
• Unamortized TI Allowance: $4,462,500 × (3/10) = $1,338,750.
• Unamortized Brokerage Commissions: $540,000 × (3/10) = $162,000.
• Six Months' Base Rent (at Year 8 Rate): $1,426,423 × (6/12) = $713,212.
• Total Estimated Early Termination Fee: approximately $2,213,962.
We address the open issues relating to the early termination mechanics in greater detail in Section V.D below.
J. Limited Guaranty
The LOI references a limited guaranty (the "Guaranty") to be provided by MCB's direct parent holding company, Meridian Holdings Inc. ("Guarantor"), a Delaware corporation with a registered agent care of Cascade Systems, 1209 Orange Street, Wilmington, Delaware 19801.
The key terms of the Guaranty framework as outlined in the LOI are:
• Guaranty Cap. The Guarantor's liability under the Guaranty is capped at twelve (12) months of base rent, or $1,200,000 (based on Year 1 base rent).
• Burn-Off. The Guaranty will be released and of no further force or effect upon MCB achieving and maintaining a net worth of $75,000,000 for two (2) consecutive fiscal quarters, as certified by MCB's independent auditor, Ashford & Whitmore CPAs LLP, located at 750 Third Avenue, 22nd Floor, New York, New York 10017.
The LOI provides only this high-level framework for the Guaranty. The Guaranty will be documented in a separate guaranty agreement, and there are numerous significant terms that remain to be negotiated. We address the Guaranty in detail in Section V.A below. In our view, the Guaranty negotiation is one of the most consequential workstreams in connection with this transaction, and we recommend that it be prioritized in parallel with the lease negotiation itself.
IV. Binding Provisions of the LOI
Although the LOI is expressly non-binding with respect to the principal lease terms summarized in Section III above, three specific provisions of the LOI are designated as binding and enforceable obligations of the parties. These binding provisions are discussed below.
A. Confidentiality
Both MCB and Stonebridge have agreed to maintain the confidentiality of all terms and conditions of the LOI and the ongoing negotiations relating to the proposed lease. This is a standard mutual confidentiality obligation. The confidentiality provision survives the expiration or earlier termination of the LOI and remains in effect regardless of whether the parties ultimately execute a definitive lease agreement.
The scope of the confidentiality obligation as stated in the LOI appears reasonable and customary for a transaction of this nature. We recommend confirming that the confidentiality provision includes appropriate carve-outs permitting disclosures by each party to its respective affiliates, officers, directors, members, partners, employees, attorneys, accountants, financial advisors, lenders, and other professional advisors who have a need to know such information in connection with the proposed transaction, as well as disclosures required by applicable law, regulation, judicial or administrative process, or applicable securities reporting obligations. If such carve-outs are not expressly stated in the LOI, they should be confirmed or, at a minimum, addressed in the definitive lease agreement's confidentiality provisions.
B. Exclusivity
During the exclusivity period, Stonebridge has agreed not to market Building 4 for lease to, or negotiate with, any other prospective tenants. The exclusivity period runs through September 30, 2022, which is coterminous with the deadline for execution of the definitive lease agreement set forth in the LOI.
The exclusivity provision is a binding obligation of the Landlord and provides MCB with meaningful negotiating leverage and assurance during the lease negotiation period. It ensures that Stonebridge cannot use competing tenant interest as a pressure point during negotiations, and it protects MCB's investment of time and resources in the lease negotiation process.
We note, however, that the exclusivity period is finite and expires on September 30, 2022. If lease negotiations extend beyond that date — which is possible given the number of open issues identified in this memorandum — Stonebridge would be free to resume marketing the Premises and engaging with other prospective tenants. We recommend that the team assess early in the negotiation process whether the September 30, 2022 deadline is achievable, and if not, prepare a request for an extension of the exclusivity period. Any such extension request should be made well in advance of the September 30 deadline and ideally before substantive lease negotiations reach an advanced stage, when MCB's leverage to obtain an extension will be greatest.
C. Broker Commission Provisions
The LOI confirms that the Landlord is solely responsible for the payment of both brokerage commissions in connection with the transaction:
• Pinnacle Brokerage Group LLC (Tenant's broker, represented by Daniel Tsui, Senior Vice President): 3.0% of aggregate base rent = $360,000.
• Velthorn Realty Advisors LLC (Landlord's broker, represented by Patricia Emerson, Executive Vice President): 1.5% of aggregate base rent = $180,000.
The broker commission obligations under the LOI survive termination of the LOI and are governed by separate brokerage agreements between each brokerage firm and Stonebridge. This is an important protection: even if the LOI terminates without a lease being executed, the brokerage commission obligations will continue to be governed by those separate agreements, and neither MCB nor the Landlord can avoid commission liability based on termination of the LOI alone.
We recommend confirming the following:
• MCB has no direct commission liability to either broker under any agreement, understanding, or arrangement, whether written or oral.
• Copies of the separate brokerage agreements between Pinnacle and Stonebridge, and between Velthorn and Stonebridge, should be obtained for our files for reference and to confirm that no terms in those agreements create any direct or indirect obligations for MCB.
• The lease should include mutual broker representation and indemnity provisions in which each party represents the broker(s) with whom it has dealt in connection with the transaction and agrees to indemnify the other party against any claims by any other broker or finder claiming a commission by, through, or under the indemnifying party.
V. Open Issues Not Addressed or Insufficiently Addressed in the LOI — Recommended Negotiation Positions
The LOI, while providing a solid framework for the principal economic terms of the transaction, leaves numerous critical lease provisions unaddressed or addressed only in summary fashion. This section identifies the most significant open issues and presents our recommended negotiation positions for each. We invite the client team's input on these recommendations and on any additional business considerations that should inform our approach.
A. Limited Guaranty Structure and Burn-Off
As discussed in Section III.J above, the LOI provides only summary terms for the limited guaranty from Meridian Holdings Inc. — specifically, a guaranty cap of $1,200,000 (twelve months of Year 1 base rent) and a burn-off triggered by MCB achieving and maintaining a net worth of $75,000,000 for two consecutive fiscal quarters, as certified by MCB's independent auditor. However, numerous significant terms require negotiation in the separate guaranty agreement, including the following:
Scope of Guaranteed Obligations. The LOI does not specify whether the Guarantor's obligations extend only to base rent or to all of MCB's obligations under the lease (including additional rent, NNN charges, damages, and indemnity obligations). We recommend limiting the Guarantor's obligations to base rent and additional rent only, capped at the stated $1,200,000 maximum. Stonebridge may push for a broader scope covering all lease obligations, but the purpose of the cap is to provide a defined and limited exposure, and the scope should be consistent with that objective.
Definition of "Net Worth." The burn-off threshold is stated as "net worth" of $75,000,000, but the LOI does not define how "net worth" is to be calculated. Key questions include whether net worth is calculated in accordance with generally accepted accounting principles (GAAP), whether adjustments are required (e.g., exclusion of goodwill, intangible assets, and intercompany receivables), and whether the definition aligns with how MCB's financial statements are currently prepared. We recommend defining net worth on a GAAP basis, and we should review MCB's most recent audited financial statements to assess whether the $75 million threshold is achievable within a reasonable timeframe and whether any definitional adjustments are necessary.
Auditor Certification Process. The LOI provides that the net worth threshold must be certified by MCB's independent auditor, Ashford & Whitmore CPAs LLP. The guaranty agreement should specify the form and timing of such certification, as well as the Landlord's rights in the event that the auditor is unable or unwilling to issue such a certification. We recommend that the certification be delivered within thirty (30) days following the end of the second consecutive fiscal quarter in which MCB has met the threshold.
Landlord's Right to Financial Information. Stonebridge will likely request the right to receive MCB's and the Guarantor's annual financial statements on a regular basis (e.g., within 120 days of the end of each fiscal year). We recommend agreeing to this request subject to appropriate confidentiality protections, including a requirement that the Landlord treat such financial information as confidential and not disclose it except to its lenders, advisors, and as required by law.
Permanence of Burn-Off. A critical issue is whether the burn-off is permanent — meaning that once the Guaranty is released, it cannot be reinstated — or whether the Guaranty is subject to a "spring-back" provision that reinstates the Guaranty if MCB's net worth subsequently falls below the threshold. We recommend negotiating for a permanent burn-off without reinstatement. A spring-back provision creates ongoing contingent liability for the Guarantor and undermines the benefit of the burn-off mechanism.
Guarantor's Defenses and Waivers. The guaranty agreement will include customary waivers of suretyship defenses. We should review these waivers carefully to ensure they are not overly broad and do not waive defenses that the Guarantor should properly retain, including defenses based on fraud, illegality, or the Landlord's material breach of the lease.
Exhaustion of Remedies. We recommend that the guaranty agreement require the Landlord to first exhaust its remedies against MCB (the Tenant) before pursuing a claim against the Guarantor under the Guaranty, unless MCB is the subject of a bankruptcy or insolvency proceeding.
Governing Law. We recommend that the guaranty agreement be governed by New York law, consistent with the governing law provision that will apply to the lease itself (subject to customary exceptions for real property matters governed by New Jersey law).
"Good Guy" Guaranty Structure. We strongly recommend negotiating a "good guy" guaranty structure, under which the Guarantor's obligations are limited to lease obligations accruing through the date that MCB surrenders the Premises and vacates in broom-clean condition, rather than a broad continuing guaranty that extends to all obligations through the end of the lease term. A good guy guaranty provides meaningful protection to the Landlord (assuring that it will receive rent through surrender) while capping the Guarantor's exposure at a defined and manageable level. This structure is customary in the New York/New Jersey market, particularly for private equity-backed tenants.
B. SNDA Requirement
The LOI is entirely silent on whether the Landlord will deliver a Subordination, Non-Disturbance, and Attornment Agreement ("SNDA") from its existing mortgage lender or lenders.
An SNDA is essential to protect MCB's leasehold interest in the event of a foreclosure or other enforcement action by the Landlord's lender against the property. Without an SNDA, MCB's lease could be extinguished upon a foreclosure, leaving MCB without a right to remain in possession of the Premises. Given that Stonebridge acquired Cranbury Commerce Center for approximately $78 million in 2019 and likely financed a substantial portion of the acquisition price with mortgage debt, we should assume that an existing mortgage encumbers the property.
Recommendation. We recommend that the lease include a requirement that, as a condition to lease execution and delivery, the Landlord deliver an SNDA in a form reasonably acceptable to MCB from any existing mortgagee, ground lessor, or other party holding a lien or encumbrance on the property that is senior to MCB's leasehold interest. In addition, the Landlord should be obligated to obtain and deliver an SNDA from any future mortgagee or ground lessor. MCB's obligation to subordinate its leasehold interest to any mortgage or ground lease should be expressly conditioned on MCB's receipt of adequate non-disturbance protection.
The SNDA should, at a minimum, provide that: (a) MCB's lease will not be terminated or disturbed by any foreclosure, deed-in-lieu of foreclosure, or other enforcement proceeding, so long as MCB is not in default beyond applicable notice and cure periods; (b) MCB will attorn to any successor landlord; and (c) any successor landlord will be bound by the terms of the lease, including the Landlord's obligations to deliver the TI Allowance and perform the Landlord's Work (or provide equivalent credit).
C. Co-Tenancy Protections
The LOI does not address co-tenancy considerations within Cranbury Commerce Center. Building 4, the subject Premises, is one of four buildings in a 62-acre industrial park, and the buildings share common access drives, utilities, and stormwater detention basins. MCB's operations — including truck traffic, trailer parking, and loading dock access — depend on the proper functioning and maintenance of this shared infrastructure.
There are several potential scenarios that could adversely affect MCB's use of the Premises:
• Vacancy in Adjacent Buildings. If one or more of the other buildings in the park become vacant, the Landlord may reduce its maintenance of common areas and shared infrastructure, potentially impacting MCB's operations.
• Construction or Redevelopment Activity. If the Landlord undertakes construction, renovation, or redevelopment of adjacent buildings (including potential future development on Block 24, Lot 17.05, which could accommodate a fifth building), construction activity could impair MCB's access to the Premises, loading docks, and truck court, or create noise, dust, and other nuisances that disrupt MCB's warehouse operations.
• Incompatible Uses. Leasing of adjacent buildings to tenants with incompatible uses (e.g., heavy manufacturing, hazardous materials handling) could create environmental, safety, or operational concerns for MCB.
Recommendation. We recommend negotiating lease provisions that protect MCB's use and access in the following ways:
• The Landlord should be obligated to maintain all shared infrastructure (access drives, utilities, detention basins, common parking areas) in good repair and condition regardless of the occupancy status of other buildings in the park.
• The lease should include a covenant that the Landlord will not undertake construction, development, or other activities on adjacent parcels within Cranbury Commerce Center — including any future Building 5 development on Block 24, Lot 17.05 — that materially impair MCB's access to the Premises, loading docks, truck court, or parking areas, or that materially interfere with MCB's operations.
• MCB should have the right to abate rent and, in the event of a material and prolonged impairment, the right to terminate the lease, if the Landlord's activities at adjacent parcels materially impair MCB's operations, access, or truck court functionality for a continuous period exceeding a specified number of days (e.g., 60 to 90 consecutive days).
• The Landlord should represent and warrant that no current or planned use of adjacent buildings involves hazardous materials or other uses that are incompatible with MCB's warehouse and distribution operations.
D. Early Termination Mechanics
As noted in Section III.I above, the LOI establishes MCB's right to terminate the lease after Year 7 with eighteen (18) months' prior written notice and payment of an early termination fee, but the details of the early termination mechanics are insufficient. The following issues need to be resolved in the lease:
Amortization Methodology. We recommend that the TI Allowance ($4,462,500) and brokerage commissions ($540,000) be amortized on a straight-line basis over the ten (10)-year initial term. This is the simplest and most tenant-favorable approach. The Landlord may seek to amortize these costs on an interest-bearing basis (e.g., using a specified interest rate), which would increase the unamortized balance at any given point in the term. We should resist an interest-bearing methodology.
Brokerage Commissions Included. We recommend confirming that the "brokerage commissions" component of the early termination fee includes both the Pinnacle commission ($360,000) and the Velthorn commission ($180,000), for a total of $540,000. The Landlord may take the position that only commissions actually paid by the Landlord should be included; we should confirm the total amount and seek a fixed dollar figure in the lease rather than an open-ended reference.
Six-Month Base Rent Component. We recommend that the six-month base rent component of the early termination fee be calculated at the then-current escalated base rent rate as of the effective date of termination. Assuming termination at the end of Year 7, the then-current annual base rent would be the Year 8 rate of $1,426,423, resulting in a six-month payment of approximately $713,212. This is the most logical and market-standard approach. We should resist any attempt to calculate this component at a rate higher than the then-current rate.
Effective Date and Surrender. The lease should specify the effective date of termination (i.e., the date that is eighteen months after MCB delivers the termination notice), and MCB's obligations with respect to surrender of the Premises on or before the effective date, including restoration obligations and removal of alterations and improvements.
Survival of Early Termination Right. We recommend that the early termination right be personal to MCB and not transferable to an assignee or subtenant, unless the assignment is a permitted transfer to an affiliate or in connection with a change of control. This approach should be acceptable to the Landlord and is consistent with market practice.
E. Assignment and Subletting Flexibility
The LOI does not address assignment and subletting, which is a critical provision for MCB as a portfolio company of Halcyon Ridge. Given the private equity ownership structure and the possibility of future restructurings, add-on acquisitions, platform divestitures, or a sale of MCB, the lease must include flexible assignment and subletting provisions that accommodate the full range of potential corporate transactions.
Recommendation. We recommend negotiating the following provisions:
(a) Permitted Transfers Without Landlord Consent. Assignments to affiliates, subsidiaries, and entities under common control with MCB or Halcyon Ridge should be permitted without the Landlord's consent, subject only to prior written notice and delivery of an assumption agreement (and, if applicable, a guaranty from the assignee's parent entity). For purposes of this provision, "control" should be defined broadly to include direct or indirect ownership of 50% or more of the equity interests or voting power, or the power to direct the management and policies of the entity.
(b) Transfers in Connection with Corporate Transactions. Assignments in connection with a merger, consolidation, reorganization, or sale of all or substantially all of MCB's assets should be permitted without Landlord consent, provided the successor entity has a net worth and/or creditworthiness at least equal to that of MCB at the time of the assignment or at the time of lease execution (whichever is greater), as reasonably determined by the Landlord. This provision is essential to preserve flexibility for Halcyon Ridge to execute an eventual exit transaction (whether by sale, IPO, or merger) without being constrained by the lease.
(c) Subleasing. MCB should have the right to sublease a specified portion of the Premises (e.g., up to 30% to 40% of the total rentable area, or a defined square footage) without the Landlord's prior consent, subject to prior written notice and compliance with reasonable conditions (e.g., the sublessee's use must be consistent with the permitted use under the lease, and the sublease must be on terms consistent with the prime lease). Subleases of a larger portion of the Premises should be subject to the Landlord's consent, not to be unreasonably withheld, conditioned, or delayed.
(d) Recapture Rights. The Landlord should have no right to recapture the Premises (i.e., to terminate the lease and relet directly to the proposed assignee or sublessee) in connection with any assignment or subletting request. Recapture rights effectively give the Landlord a veto over MCB's ability to monetize its leasehold interest and should be eliminated.
(e) Excess Rent Sharing. To the extent the Landlord insists on an excess rent sharing provision (under which any sublease or assignment rent in excess of MCB's base rent is shared between MCB and the Landlord), we recommend resisting this provision entirely or, if necessary, limiting the Landlord's share to no more than 50% of net excess rent (after deduction of MCB's reasonable transaction costs, including brokerage commissions, legal fees, tenant improvement costs, and free rent provided to the subtenant or assignee).
(f) Change of Control at Fund Level. A change of control at the Halcyon Ridge fund level — including fundraising activities, changes in fund investors (limited partners), changes in fund management, or the formation of successor funds — should not constitute an assignment or change of control requiring the Landlord's consent under the lease. This is a critical provision for private equity-backed tenants and must be addressed explicitly.
F. Environmental Indemnity
The LOI does not address the allocation of environmental risk between the parties, which is a significant omission for a lease of industrial warehouse and distribution space.
MCB has retained Blackthorn Environmental Consulting, Inc. ("Blackthorn") to perform a Phase I Environmental Site Assessment ("Phase I ESA") of the property. The Phase I ESA is currently underway, and results are expected prior to the execution of the definitive lease agreement. We anticipate receiving the Phase I ESA report by early August 2022.
Cranbury Commerce Center is a 62-acre industrial park that has been in use for over twenty years. Building 4 was originally constructed in 2001, and prior uses of the site and adjacent parcels are not fully known at this time. Environmental conditions may exist on the property or on adjacent parcels that could migrate to or affect the Premises. New Jersey has a robust environmental regulatory framework, including the New Jersey Industrial Site Recovery Act ("ISRA") and the New Jersey Spill Compensation and Control Act, which may impose environmental obligations on tenants and landlords in connection with certain transactions and operations.
Recommendation. We recommend negotiating the following environmental provisions in the lease:
• Landlord Representations. The Landlord should represent and warrant that, to its knowledge, there are no existing environmental conditions at the Premises or on adjacent parcels within Cranbury Commerce Center that would materially impair MCB's intended use of the Premises, and that the property is in compliance with all applicable environmental laws, including ISRA and NJDEP regulatory requirements.
• Landlord Environmental Indemnity. The Landlord should indemnify MCB against all claims, losses, damages, liabilities, and costs (including remediation costs, fines, penalties, and attorneys' fees) arising from: (a) environmental conditions existing on the property prior to the Commencement Date; (b) environmental conditions caused by the Landlord, its agents, employees, contractors, or other tenants of Cranbury Commerce Center; and (c) environmental conditions migrating onto the Premises from adjacent properties, including other parcels within Cranbury Commerce Center.
• Tenant Environmental Indemnity. MCB should agree to indemnify the Landlord against environmental conditions caused solely by MCB's operations at the Premises during the term of the lease. This is a reciprocal and appropriate allocation of environmental risk.
• Compliance with Environmental Laws. The lease should clearly allocate responsibility for compliance with environmental laws, including ISRA, between the Landlord and MCB. Generally, the Landlord should be responsible for pre-existing conditions and building structural/systemic environmental compliance, while MCB should be responsible for environmental compliance related to its own operations and any hazardous materials introduced by MCB.
• Reservation of Rights Based on Phase I ESA. We reserve the right to adjust and supplement these recommendations based on the findings of the Phase I ESA once the Blackthorn report is received. If the Phase I ESA identifies recognized environmental conditions ("RECs") or other concerns, additional protections may be warranted, including requirements for the Landlord to conduct a Phase II investigation, escrow arrangements for remediation costs, or specific indemnification provisions addressing identified conditions.
G. Casualty and Condemnation
The LOI contains no provisions addressing the parties' rights and obligations in the event of a casualty (e.g., fire, flood, or other damage or destruction) or a condemnation (i.e., the exercise of eminent domain by a governmental authority). These are fundamental provisions in any commercial lease and must be addressed in the definitive lease agreement.
Recommendation. We recommend negotiating the following:
Casualty.
• If the Premises are damaged or destroyed by a casualty event and the Landlord reasonably estimates that restoration cannot be completed within two hundred seventy (270) days after the date of the casualty, MCB should have the right to terminate the lease upon written notice delivered within thirty (30) days after receipt of the Landlord's restoration estimate.
• If the casualty occurs during the last two (2) years of the initial term (or any renewal term), MCB should have the right to terminate the lease regardless of the estimated restoration period.
• During the period of restoration, base rent and additional rent should abate in proportion to the portion of the Premises that is unusable by MCB as a result of the casualty.
• The Landlord should be obligated to restore the Premises to substantially the same condition that existed immediately prior to the casualty, using commercially reasonable efforts and proceeding with due diligence.
Condemnation.
• If all or a material portion of the Premises (including the truck court, loading docks, or a substantial portion of the parking areas) is taken by condemnation or eminent domain, MCB should have the right to terminate the lease.
• In the event of a partial taking that does not give rise to a termination right, base rent should be equitably abated to reflect the reduction in the rentable area and utility of the Premises.
• MCB should have an independent right to seek a condemnation award from the condemning authority for the value of its leasehold interest, its investment in tenant improvements, moving and relocation expenses, and loss of business, provided that such award does not reduce the Landlord's award for the fee interest in the property.
H. Landlord's Work — Specifications, Timeline, and Remedies
As discussed in Section III.G above, the LOI describes the scope of the Landlord's Work at a high level but does not include detailed specifications, construction drawings, performance standards, a defined completion timeline, or remedies for late or defective delivery.
Recommendation. We recommend that the lease address the following: