MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
FROM: Cynthia Ho, Associate, and Angela Fontaine, Partner Calderwood & Harkness LLP 1285 Avenue of the Americas, 40th Floor New York, NY 10019
TO: Kevin Driscoll, Vice President, Supply Chain & Logistics Meridian Consumer Brands LLC 450 Park Avenue, 18th Floor New York, NY 10022
Martin Solberg, Principal, Operations Team Halcyon Ridge Capital Partners, LP 599 Lexington Avenue, 34th Floor New York, NY 10022
DATE: September 22, 2022
RE: Analysis of Revised Site Plan Impact — Proposed Lease of Building 4, Cranbury Commerce Center, 200 Prospect Plains Road, Cranbury, NJ 08512 (Block 24, Lot 17.04, Township of Cranbury, Middlesex County) — Stonebridge Industrial Realty Trust, LP, as Landlord
MATTER NO.: 1011-00007
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP for Meridian Consumer Brands LLC and Halcyon Ridge Capital Partners, LP. It is not intended for distribution to, or reliance by, any third party.
I. Executive Summary
The purpose of this memorandum is to analyze the legal and business implications of the revised site plan for Building 4 at Cranbury Commerce Center, which was delivered by Stonebridge Industrial Realty Trust, LP ("Stonebridge") to Meridian Consumer Brands LLC ("MCB") on September 14, 2022. As discussed in detail below, the revised site plan reflects conditions imposed by the Township of Cranbury Planning Board in connection with Stonebridge's parallel development of Building 5 on an adjacent parcel, and the resulting modifications to Building 4 are substantial.
By way of context, MCB and Stonebridge executed a non-binding Letter of Intent (designated LOI-2022-CCC-B4) on June 22, 2022, for a 10-year lease of approximately 297,500 square feet (consisting of approximately 285,000 square feet of warehouse/distribution space and approximately 12,500 square feet of finished office/mezzanine space) at an aggregate base rent deal value of $12,000,000. Lease negotiations have been progressing through drafts exchanged between Calderwood & Harkness LLP ("C&H"), as tenant's counsel, and Whitfield, Barr & Calloway LLP ("WBC"), as landlord's counsel, with Thomas R. Calloway serving as lead attorney for Stonebridge and Jennifer Pace as the responsible associate on the landlord side. C&H delivered its first markup of the landlord's initial draft lease on August 12, 2022. WBC delivered the landlord's second draft on September 2, 2022. C&H's second markup was substantially in progress and nearing completion when the revised site plan was disclosed on September 14, 2022, prompting this analysis.
Summary of Conclusion. The revised site plan materially alters the premises in ways that render the facility operationally deficient for MCB's East Coast fulfillment consolidation strategy. In particular, the revised configuration falls below MCB's documented minimum operational requirements in two critical categories — dock-high door count and trailer parking capacity — and introduces significant concerns regarding reduced warehouse square footage and diminished clear height in portions of the building. We recommend that MCB pause lease negotiations pending Stonebridge's delivery of final revised civil engineering drawings and MCB's internal reassessment of the facility's operational viability under the new configuration. If MCB ultimately elects to proceed with the Cranbury transaction, substantial renegotiation of both economic and operational lease terms will be required, and MCB should expect a materially different deal structure than what was contemplated under the LOI and the lease drafts exchanged to date. In the interim, MCB should take steps to identify alternative distribution center sites in the central New Jersey corridor as a contingency measure.
II. Background
A. The Transaction
MCB is a Delaware limited liability company headquartered in New York. It is a portfolio company of Halcyon Ridge Capital Partners, LP ("Halcyon Ridge"), a private equity firm with approximately $2.1 billion in assets under management. Halcyon Ridge acquired MCB in 2018. MCB manufactures and distributes shelf-stable consumer packaged goods — including snack foods, condiments, and specialty beverages — through mass-market retail, club, and e-commerce channels. For fiscal year 2021, MCB reported revenue of approximately $340 million and EBITDA of approximately $41 million. Given Halcyon Ridge's investment horizon and the strategic importance of supply chain optimization to MCB's margin profile, the Cranbury facility was identified as a critical infrastructure investment in MCB's value creation plan.
MCB currently operates two leased distribution centers to support its East Coast fulfillment operations. The first is located at 15 Kilmer Road, Edison, NJ 08817, under a lease that expires in February 2024. The second is located at 3200 Schantz Road, Allentown, PA 18104, under a lease with a longer remaining term. The Cranbury facility was intended to serve as a consolidation of the Edison operations into a newer, larger building with modern racking systems and automation capability. The consolidation strategy is designed to reduce MCB's per-unit fulfillment costs, increase throughput capacity during peak seasonal periods (particularly Q4 holiday season), and position MCB's distribution infrastructure to support anticipated revenue growth over the next several years.
Stonebridge Industrial Realty Trust, LP is a Maryland limited partnership managed by Stonebridge Industrial GP LLC. Stonebridge owns and operates approximately 14.5 million square feet of industrial, logistics, and flex properties across the Mid-Atlantic and Northeast regions. Stonebridge acquired Cranbury Commerce Center — a 62-acre, four-building industrial park located at 200 Prospect Plains Road, Cranbury, New Jersey 08512 — in 2019 for approximately $78 million. Building 4, the subject of the proposed lease, was originally constructed in 2001. Since its acquisition, Stonebridge has invested in capital improvements to Building 4, including a full roof replacement and an HVAC system upgrade, both completed in 2020.
MCB's tenant broker in the transaction is Daniel Tsui, Senior Vice President, Pinnacle Brokerage Group LLC, with offices in Parsippany, New Jersey. The landlord's broker is Patricia Emerson, Executive Vice President, Velthorn Realty Advisors LLC, with offices in Edison, New Jersey. Both brokers have been actively involved in the transaction since its inception and participated in the initial facility tour and LOI negotiations.
B. The LOI and Lease Negotiation Timeline
The Letter of Intent (LOI-2022-CCC-B4) was executed on June 22, 2022, by Kevin Driscoll on behalf of MCB and Rebecca Hartwell, Senior Vice President of Leasing at Stonebridge, on behalf of the landlord. The LOI is expressly non-binding with respect to the principal economic and operational terms of the proposed lease, with three exceptions: (1) the confidentiality provisions, which bind both parties; (2) the exclusivity provision, under which Stonebridge agreed not to market Building 4 to other prospective tenants through September 30, 2022; and (3) the broker commission provisions, which establish the commission structure payable by Stonebridge to both Pinnacle Brokerage Group LLC (at a rate of 3.0% of the aggregate base rent deal value of $12,000,000, yielding a commission of $360,000) and Velthorn Realty Advisors LLC (at a rate of 1.5% of the same aggregate value, yielding a commission of $180,000), both payable by the landlord.
The LOI originally established a deadline for lease execution of September 30, 2022. By mutual written agreement of the parties, this deadline was subsequently extended to November 15, 2022, in recognition of the complexity of the lease negotiations and the volume of open business points.
The lease negotiation timeline to date is as follows:
• June 22, 2022: LOI executed.
• July 18, 2022: WBC delivered landlord's first draft of the lease to C&H.
• August 12, 2022: C&H delivered its first markup of the lease to WBC.
• September 2, 2022: WBC delivered landlord's second draft of the lease to C&H.
• September 14, 2022: Stonebridge delivered revised site plan drawings for Building 4 to MCB. C&H's second markup was substantially complete at this time but had not yet been transmitted to WBC.
As of the date of this memorandum, C&H has withheld transmission of its second markup pending clarification of the site plan issues described herein.
C. Original Premises Specifications
Under the LOI and the lease drafts exchanged to date, the premises are described with the following specifications:
• Total Rentable Area: Approximately 297,500 square feet, comprised of approximately 285,000 square feet of warehouse/distribution space and approximately 12,500 square feet of finished office/mezzanine space.
• Clear Height: 36 feet throughout the warehouse.
• Loading Docks: 48 dock-high doors and 4 drive-in doors (52 loading positions total).
• Trailer Parking: 85 trailer parking spaces in the truck court.
• Location: Building 4, Cranbury Commerce Center, 200 Prospect Plains Road, Cranbury, NJ 08512 (Block 24, Lot 17.04, Township of Cranbury, Middlesex County, New Jersey).
These specifications were confirmed during MCB's initial facility tour conducted on May 11, 2022, and were incorporated into the LOI as the basis for the lease economics and the operational assumptions underlying MCB's decision to pursue the Cranbury site.
III. The Revised Site Plan — What Changed and Why
A. Trigger: Township of Cranbury Planning Board Conditions
The revised site plan was not initiated by Stonebridge in connection with the MCB lease transaction. Rather, it was triggered by conditions imposed by the Township of Cranbury Planning Board in connection with Stonebridge's parallel pursuit of preliminary site plan approval for Building 5, a speculative industrial building that Stonebridge proposes to develop on an adjacent parcel within Cranbury Commerce Center (Block 24, Lot 17.05). Building 5 is a separate Stonebridge development project that is not part of the MCB transaction, but the Planning Board's conditions have had a direct and material impact on Building 4.
Specifically, as a condition of granting preliminary site plan approval for the Building 5 development, the Township of Cranbury Planning Board imposed three requirements affecting the Building 4 site:
1. Realignment of the shared internal access drive. The internal access drive that serves both Buildings 4 and 5 within Cranbury Commerce Center must be realigned to accommodate the new building footprint and traffic patterns associated with Building 5. This realignment affects truck circulation patterns for Building 4.
2. Expansion of the stormwater detention basin. The stormwater detention basin located on the west side of Building 4 must be expanded by approximately 1.8 acres to meet the Township's stormwater management requirements for the combined impervious coverage of both Buildings 4 and 5. This expansion encroaches on land previously available for Building 4 operations.
3. Relocation of Building 4's truck court. Building 4's truck court must be relocated from the south side of the building to the east side of the building. This relocation is necessitated by the access drive realignment and the new traffic circulation requirements imposed by the Planning Board.
Stonebridge delivered the revised site plan drawings reflecting these Planning Board conditions to MCB on September 14, 2022. The drawings were prepared by Stonebridge's civil engineering firm, though Stonebridge has not yet provided final civil engineering drawings approved by the Planning Board or a structural engineer's report addressing the interior impacts on Building 4.
B. Summary of Physical Changes to Building 4
The revised site plan results in the following changes to the physical specifications of Building 4 as compared to the original configuration described in the LOI and lease drafts:
Warehouse Space Reduction. The revised site plan results in a loss of approximately 24,000 square feet of warehouse space, reducing the warehouse floor from approximately 285,000 square feet to approximately 261,000 square feet. The total rentable area of the premises is thereby reduced from approximately 297,500 square feet to approximately 273,500 square feet (consisting of 261,000 square feet of warehouse/distribution space and 12,500 square feet of office/mezzanine space, the latter being unaffected by the site plan changes). The warehouse space reduction results from the reconfigured loading dock apron, which, in its new position on the east side of the building, cuts into the building's southeast corner and eliminates usable warehouse floor area in that section.
Loading Dock Reduction. The number of dock-high doors is reduced from 48 to 38, a loss of 10 dock-high loading positions. The number of drive-in doors is reduced from 4 to 2, a loss of 2 drive-in positions. In total, the building's loading capacity is reduced from 52 positions to 40 positions, a reduction of approximately 23%.
Trailer Parking Reduction. The number of trailer parking spaces in the truck court is reduced from 85 to 62, a loss of 23 spaces. This reduction results from the smaller truck court footprint on the east side of the building as compared to the original south-side configuration, as well as the loss of available land area due to the expanded stormwater detention basin on the west side.
Clear Height Reduction. The revised site plan indicates a potential reduction in clear height from 36 feet to 32 feet in two eastern bays of the warehouse. This clear height reduction is attributable to structural modifications that may be required to accommodate the relocated truck court and the reconfigured loading dock area on the east side of the building. We note that Stonebridge has not yet provided a full structural engineering report confirming the precise clear heights in the affected bays, and this remains an open item requiring confirmation.
IV. Impact on MCB's Operational Requirements
A. MCB's Minimum Operational Thresholds
MCB's logistics modeling, conducted by Kevin Driscoll's supply chain team in the months leading up to the LOI, established specific minimum facility specifications that the Cranbury site must satisfy in order to support MCB's East Coast fulfillment operations. These thresholds were developed with particular attention to Q4 peak holiday season throughput requirements, during which MCB experiences a significant surge in order volume across its retail, club, and e-commerce channels.
The two most critical operational thresholds are:
• Minimum dock-high doors: 42
• Minimum trailer parking spaces: 75
The original Building 4 configuration, with 48 dock-high doors and 85 trailer parking spaces, exceeded both of these thresholds with a comfortable margin. The surplus capacity was viewed as an important feature of the Cranbury site, providing MCB with operational flexibility to absorb volume growth over the 10-year lease term and to accommodate seasonal fluctuations without the need for off-site staging or overflow arrangements.
B. Shortfalls Under Revised Site Plan
Under the revised site plan, the Building 4 configuration falls short of MCB's minimum operational requirements in both critical categories, as well as in warehouse square footage and clear height:
Dock-High Doors. The revised dock-high door count of 38 is 4 doors below MCB's minimum requirement of 42, representing a 9.5% shortfall. This deficiency would create significant bottlenecks during peak receiving and shipping windows, particularly during Q4 when MCB operates multi-shift dock operations to process the increased volume of inbound raw materials and outbound finished goods shipments. Each dock-high door represents a discrete loading/unloading position, and the loss of 10 doors from the original configuration (and 4 doors below the minimum threshold) would materially constrain MCB's ability to turn trailers efficiently during peak periods. Additionally, the loss of 2 drive-in doors (from 4 to 2) further limits MCB's flexibility for handling oversized or non-palletized loads, which constitute a meaningful portion of MCB's inbound freight profile (particularly for bulk packaging materials and certain raw ingredient shipments).
Trailer Parking. The revised trailer parking count of 62 spaces is 13 spaces below MCB's minimum requirement of 75, representing a 17.3% shortfall. Inadequate on-site trailer parking would require MCB to stage trailers at off-site locations, which would increase transportation costs (through additional drayage charges and driver detention fees), reduce operational efficiency, and undermine the continuous dock utilization model that is central to MCB's fulfillment strategy. MCB's logistics model assumes on-site drop-trailer capability for at least 75 units at any given time. Drop-trailer operations — in which loaded or empty trailers are staged in the yard for dock access on a scheduled basis — are essential to MCB's ability to maintain continuous receiving and shipping operations without interruption. A 17.3% shortfall in trailer parking capacity would require MCB to either (a) convert to live-unload operations for a significant portion of its inbound freight (which would increase dock dwell times and reduce throughput), or (b) lease off-site staging capacity (which would add cost and complexity to MCB's logistics operations).
Warehouse Space. The 24,000-square-foot reduction in warehouse area (approximately 8.4% of the original 285,000-square-foot warehouse floor) directly impacts MCB's planned racking layout and automation installation. The Edison consolidation plan was designed around the original 285,000-square-foot warehouse footprint, and the racking and automation layouts were engineered to that specific floor area. A reduction of 24,000 square feet will require MCB's warehouse design consultants to re-engineer the storage layout, potentially eliminating planned racking runs and reducing SKU capacity. This, in turn, may compromise MCB's ability to fully consolidate its Edison operations into the Cranbury facility, which was the core strategic objective of the transaction.
Clear Height. A reduction in clear height from 36 feet to 32 feet in the two eastern bays would eliminate MCB's ability to install the planned high-bay selective racking in those areas. MCB's warehouse design contemplates six-level selective racking throughout the warehouse, which requires a minimum clear height of approximately 35 feet (accounting for racking height, sprinkler head clearance, and OSHA setback requirements). A 32-foot clear height in the eastern bays would limit racking to five levels in those zones, reducing cubic storage capacity by an estimated 15% to 20% in the affected areas. Given that the eastern bays constitute a meaningful portion of the total warehouse floor, this reduction would have a material impact on MCB's aggregate storage capacity and throughput efficiency.
C. Assessment
In light of the foregoing, the revised Building 4 configuration fails to meet MCB's documented minimum operational requirements in two critical categories: dock-high door count and trailer parking capacity. The facility as reconfigured is operationally deficient for MCB's intended use — the consolidation of its East Coast fulfillment operations — without significant operational workarounds or alternative arrangements that would add cost, complexity, and risk to MCB's supply chain. These workarounds, if feasible at all, would substantially undermine the business rationale for the Cranbury lease, which was predicated on the facility's ability to serve as a modern, high-throughput distribution center capable of replacing the aging Edison facility.
We note that the shortfalls identified above are based on the revised site plan drawings delivered on September 14, 2022, which are preliminary in nature and have not been confirmed by final civil engineering drawings approved by the Township of Cranbury Planning Board. There is some possibility that the final drawings could yield slightly different specifications (e.g., a modest increase in trailer parking through more efficient truck court design), but we do not expect the fundamental deficiencies to be resolved through minor design adjustments.
V. Impact on Lease Economic Terms
The revised site plan has significant implications for the economic terms of the proposed lease, each of which we address below.
A. Base Rent
The LOI and the lease drafts exchanged to date are based on a total rentable area of approximately 297,500 square feet, with Year 1 annual base rent of $1,200,000 (equivalent to $100,000 per month), which translates to approximately $4.03 per square foot per year on a triple-net (NNN) basis.
Under the revised site plan, total rentable area decreases to approximately 273,500 square feet. If the annual base rent is adjusted proportionally on a per-square-foot basis at $4.03 per square foot, the revised Year 1 annual base rent would be approximately $1,102,205 (equivalent to approximately $91,850 per month), representing a reduction of approximately $97,795 per year. Over the 10-year lease term (before accounting for annual escalations), this proportional adjustment would reduce the aggregate base rent deal value by approximately $977,950, from $12,000,000 to approximately $11,022,050 (in nominal, pre-escalation terms).
Alternatively, and we believe more appropriately, MCB may argue that the rent reduction should be greater than a simple pro rata adjustment based on square footage, on the grounds that: (a) the facility in its revised configuration no longer meets MCB's minimum operational specifications, which fundamentally diminishes its value to MCB as a tenant; and (b) the value of the premises is diminished not merely in proportion to the square footage lost but in proportion to the operational utility lost — including the reduction in dock count, trailer parking, and clear height, none of which is captured by a per-square-foot rent adjustment alone. A facility with 38 dock-high doors is worth meaningfully less to a high-volume distribution tenant than a facility with 48 dock-high doors, even holding square footage constant. This argument supports a rent reduction in excess of the pro rata amount and potentially a renegotiation of the per-square-foot rate itself.
We note that this is a negotiation point rather than a legal entitlement, given the non-binding nature of the LOI. MCB has no contractual right to demand a specific rent level, but it has significant practical leverage: Stonebridge knows that the revised site plan has diminished the facility's appeal, and Stonebridge will be motivated to retain MCB as a creditworthy tenant for a 10-year term.
The annual escalation structure of 2.5% compounding, as set forth in the LOI and lease drafts, would apply to whatever revised base rent is ultimately agreed upon by the parties.
B. Tenant Improvement Allowance
The LOI and lease drafts provide for a tenant improvement allowance ("TI Allowance") of $15.00 per square foot of total rentable area. Under the original premises specifications, this yields a TI Allowance of $15.00 × 297,500 = $4,462,500.
If the TI Allowance is recalculated on a pro rata basis using the revised total rentable area of approximately 273,500 square feet, the TI Allowance would be $15.00 × 273,500 = $4,102,500, a reduction of $360,000.
MCB should strongly consider negotiating to maintain the original $4,462,500 TI Allowance notwithstanding the reduction in rentable area, or, in the alternative, to negotiate a higher per-square-foot TI Allowance rate that compensates for the increased complexity and cost of MCB's buildout under the revised configuration. The basis for this position is twofold:
First, MCB's buildout costs may actually increase as a result of the site plan revision. The reconfigured loading dock apron and the irregular building footprint resulting from the southeast corner modification will require custom racking layouts, non-standard automation track routing, and potentially additional structural support for equipment that would have been straightforward to install in the original rectangular warehouse floor plan.
Second, the reduced clear height in the two eastern bays (potentially 32 feet instead of 36 feet) may necessitate alternative and more expensive racking solutions in those zones, such as very-narrow-aisle (VNA) racking with specialized lift equipment, which carries a higher capital cost per pallet position than the standard high-bay selective racking that MCB had planned to deploy.
The TI Allowance recalculation methodology — whether calculated on a per-square-foot basis, a fixed-dollar basis, or some hybrid approach — should be expressly addressed and agreed upon in any revised term sheet or lease amendment before further negotiation of the lease document itself proceeds.
C. Landlord's Work
Under the LOI and lease drafts, Stonebridge is responsible for completing a defined scope of landlord's work prior to the lease commencement date, at landlord's sole cost and expense, and not charged against the TI Allowance. The original landlord's work scope, with an estimated cost of approximately $1,850,000, includes the following:
• New LED lighting throughout the warehouse;
• ESFR (Early Suppression, Fast Response) sprinkler system upgrade;
• Leveler replacement at all dock doors;
• Office refresh (carpet, paint, ceiling tiles) in the 12,500-square-foot office/mezzanine;
• Installation of electric vehicle charging stations (6 units) in the employee parking area.
The revised site plan will require Stonebridge to modify the landlord's work scope in several respects:
• Leveler replacements: The number of dock positions requiring leveler replacement will decrease from 52 (48 dock-high + 4 drive-in) to 40 (38 dock-high + 2 drive-in), which should reduce the cost of this line item.
• Structural work in eastern bays: If the clear height reduction in the eastern bays is attributable to structural modifications required by the truck court relocation, Stonebridge may need to perform additional structural work to address or mitigate the clear height reduction. MCB should seek to understand whether any structural remediation is possible to preserve the 36-foot clear height in those bays.
• LED lighting and ESFR sprinkler layout redesign: The reconfigured warehouse footprint will require redesign of the LED lighting layout and ESFR sprinkler head placement to ensure code compliance and adequate coverage of the modified floor area.
• Truck court construction: The relocation of the truck court from the south side to the east side of the building entails substantial civil construction work, including demolition of the existing south-side truck court, new concrete paving, grading, drainage, and striping for the east-side truck court. A threshold question is whether this truck court relocation cost is borne entirely by Stonebridge or whether Stonebridge will seek to allocate a portion of the cost to MCB (whether directly or through reduced concessions elsewhere in the deal). MCB's position should be that the truck court relocation is entirely a landlord responsibility, as it arises from Stonebridge's voluntary decision to pursue the Building 5 development and the resulting Planning Board conditions — none of which was initiated or requested by MCB.
MCB should insist that any and all incremental costs arising from the site plan revision be borne entirely by the landlord and that the landlord's work scope be revised in writing, with a detailed line-item cost estimate, before MCB agrees to any revised lease terms. Additionally, the delivery condition of the premises — warm vanilla shell with completed landlord's work — should be expressly confirmed and maintained in any revised lease. MCB should not accept any degradation of the delivery standard as a consequence of the site plan changes.
D. Security Deposit / Letter of Credit
Under the lease drafts, MCB is required to deliver an irrevocable standby letter of credit ("LC") in the amount of $300,000, representing three months of Year 1 base rent at $100,000 per month. The LC is issued by Harborview National Bank, N.A.
If the monthly base rent is reduced as a result of the revised site plan, the LC amount should be recalculated proportionally to maintain the three-month relationship. For example, if the revised monthly base rent is $91,850, the LC amount would be approximately $275,550.
The LC burn-down schedule — under which the LC amount is reduced to $200,000 after Year 3 and to $100,000 after Year 6, in each case conditioned on no uncured monetary or material non-monetary default by MCB — should remain on the same relative basis (i.e., proportional reductions keyed to the revised LC amount). The specific burn-down amounts would be recalculated accordingly once the revised base rent is agreed.
E. Brokerage Commissions
Broker commissions under the LOI are calculated as a percentage of the $12,000,000 aggregate base rent deal value. Pinnacle Brokerage Group LLC is entitled to a commission of 3.0% ($360,000) and Velthorn Realty Advisors LLC is entitled to a commission of 1.5% ($180,000), both payable by the landlord.
If the aggregate base rent deal value is reduced as a result of the square footage decrease, the commission amounts may be subject to corresponding adjustment under the separate brokerage agreements between Stonebridge and each broker. This is primarily a landlord-side issue, as the commissions are payable by Stonebridge and the brokerage agreements are between Stonebridge and the respective brokers. However, MCB should be aware of the potential impact on broker motivation and engagement: a reduction in commission amounts may dampen the brokers' incentive to facilitate the transaction, and MCB's tenant broker, Daniel Tsui, should be kept informed of MCB's position and timeline so that he can continue to advocate effectively on MCB's behalf.
F. Free Rent Period
The LOI and lease drafts provide for a free rent period of 4 months from the Commencement Date, during which MCB is not obligated to pay base rent (though MCB remains responsible for its share of operating expenses and real estate taxes during the free rent period). This concession was negotiated to provide MCB with an economic cushion during the initial move-in and ramp-up period as MCB transitions operations from the Edison facility to Cranbury.
The 4-month free rent period should remain unchanged at a minimum. MCB may consider requesting an expansion of the free rent period (e.g., to 5 or 6 months) as additional consideration for the disruption caused by the site plan revision and the delay in lease execution. Whether Stonebridge would agree to an expanded free rent period will depend on the overall economics of the renegotiated deal, but MCB should be prepared to raise the issue in negotiations.
G. Early Termination Option and Renewal Options
Early Termination Option. The lease drafts include an early termination option exercisable by MCB after Year 7 of the lease term, upon 18 months' prior written notice to the landlord and payment of a termination fee equal to the sum of: (a) unamortized TI Allowance (amortized on a straight-line basis over the initial 10-year term with interest at 7% per annum); (b) unamortized brokerage commissions (amortized on the same basis); and (c) 6 months' base rent at the then-current rate. If the TI Allowance amount and the base rent amount change as a result of the site plan revision, the early termination fee formula will need to be recalculated accordingly. The mechanics of the formula should remain the same, but the inputs will change.
Renewal Options. The lease drafts include two successive five-year renewal options at 95% of then-prevailing fair market rent, exercisable by MCB upon 12 months' prior written notice. These terms should not be altered as a result of the site plan revision. However, MCB should be aware that the fair market rent determination at the time of renewal exercise will be based on the facility's configuration as it exists at that time — i.e., the revised configuration — and the reduced dock count, trailer parking, and clear height may affect the appraised fair market value of the premises. This is not a term that requires renegotiation now, but it is a consideration that MCB's asset management team and Halcyon Ridge should bear in mind when evaluating the long-term economics of the deal.
VI. Impact on Guaranty
The lease drafts include a limited guaranty of MCB's lease obligations, to be executed by Meridian Holdings Inc., a Delaware corporation (registered agent c/o Cascade Systems, 1209 Orange Street, Wilmington, DE 19801), in favor of Stonebridge. Meridian Holdings Inc. is MCB's parent entity within the Halcyon Ridge portfolio structure.
The guaranty is capped at 12 months' base rent, which under the original Year 1 base rent of $1,200,000 per year ($100,000 per month) yields a guaranty cap of $1,200,000. If the Year 1 base rent is reduced as a result of the revised site plan (e.g., to approximately $1,102,205 per year, or approximately $91,850 per month, under a pro rata adjustment), the guaranty cap should be correspondingly reduced to 12 months of the revised Year 1 base rent.
The guaranty includes a burn-off provision under which the guaranty is released entirely upon MCB achieving and maintaining a net worth of not less than $75,000,000 for two consecutive fiscal quarters, as certified by MCB's independent auditor, Ashford & Whitmore CPAs LLP. The burn-off threshold of $75,000,000 and the certification mechanism should remain unchanged, as these provisions relate to MCB's financial condition rather than the physical characteristics of the premises. MCB should confirm, however, that the timing of the net worth measurement and the form of the auditor's certification are consistent with the terms negotiated in C&H's markups.
VII. MCB's Legal Rights Under the LOI
A. Non-Binding Nature
The Letter of Intent (LOI-2022-CCC-B4) is, by its express terms, non-binding as to all of its principal commercial and operational provisions. The only binding provisions of the LOI are: (1) the confidentiality obligations, under which both parties agreed not to disclose the existence or terms of the proposed transaction to third parties other than their respective advisors; (2) the exclusivity provision, under which Stonebridge agreed not to market Building 4 to other prospective tenants through the exclusivity period; and (3) the broker commission obligations, which establish the commission structure payable by Stonebridge to Pinnacle Brokerage Group LLC and Velthorn Realty Advisors LLC.
As a consequence of the LOI's non-binding nature, MCB has no binding obligation to execute the lease and retains full discretion to walk away from the transaction at any time prior to lease execution, for any reason or no reason. The revised site plan does not trigger a breach by either party under the LOI, because the LOI does not contain representations, warranties, or covenants regarding the site plan, building specifications, or the physical configuration of the premises. Stonebridge made no binding commitment in the LOI that Building 4 would be delivered in the configuration described therein.
While this analysis provides MCB with comfort that it faces no legal liability for declining to proceed, it also means that MCB has no contractual basis to compel Stonebridge to deliver the facility in its original configuration. The original specifications described in the LOI were part of the non-binding business terms. MCB's leverage, therefore, is commercial and practical rather than legal: Stonebridge wants to lease Building 4 to a creditworthy tenant on a long-term basis, and MCB is such a tenant. This commercial dynamic provides MCB with meaningful negotiating power, but it is not a legal right.
B. Exclusivity and Deadline
The LOI originally established an exclusivity period and lease execution deadline of September 30, 2022. This deadline was extended by mutual written agreement to November 15, 2022. As of the date of this memorandum, the extended deadline is approximately eight weeks away.
MCB should be mindful of the approaching deadline. If MCB wishes to preserve its negotiating position and its exclusivity protection, it should take one of the following courses of action:
1. Seek a further extension of the LOI deadline. MCB could request that Stonebridge agree to extend the exclusivity period and lease execution deadline to a later date (e.g., January 31, 2023 or later) to allow time for the site plan issues to be resolved, for MCB to conduct its operational reassessment, and for the parties to renegotiate the lease terms as necessary. Any such extension should be documented in a written amendment to the LOI, signed by both parties.
2. Communicate conditioned willingness to proceed. MCB could affirmatively communicate to Stonebridge that MCB's willingness to continue lease negotiations is expressly conditioned on satisfactory resolution of the site plan issues, including delivery of the specific information and deliverables described in Section X.B of this memorandum. This approach preserves the dialogue without conceding any term or accepting the revised configuration.
MCB should avoid allowing the November 15, 2022 deadline to lapse silently without any communication to Stonebridge, as this could be interpreted as a loss of interest and could undermine MCB's negotiating position. After the exclusivity period expires (or if no further extension is agreed), Stonebridge is free to market Building 4 to other prospective tenants, and MCB would lose any contractual exclusivity protection it currently enjoys under the LOI.
C. No Waiver
MCB should take care, in all communications with Stonebridge, WBC, and any third parties, not to take any action that could be construed as acceptance of the revised site plan, acquiescence in the changes to Building 4, or waiver of MCB's right to insist on the original configuration (or a satisfactory alternative). In particular:
• MCB should not execute any document, send any email, or make any verbal statement that could be interpreted as agreement to proceed with the lease based on the revised configuration without having fully evaluated and negotiated the implications.
• Any communications with Stonebridge or WBC should include an express reservation of MCB's rights, including the right to decline to proceed with the lease on any terms.
• C&H will include appropriate reservation-of-rights language in all of its correspondence with WBC going forward.
VIII. Environmental Considerations in the Context of the Site Plan Revision
A Phase I Environmental Site Assessment ("Phase I ESA") for the subject property was completed by Blackthorn Environmental Consulting, Inc. (Report No. BEC-2022-0814, dated August 5, 2022). The Phase I ESA was commissioned by MCB as part of its due diligence and was conducted in accordance with ASTM Standard Practice E1527-21.
The Phase I ESA identified no Recognized Environmental Conditions (RECs) on the subject property (Block 24, Lot 17.04).
However, the Phase I ESA did identify one Controlled Recognized Environmental Condition (CREC): a historic dry-cleaning operation located on adjacent Block 24, Lot 16, which is not part of Cranbury Commerce Center and is not owned by Stonebridge. This former dry-cleaning site has a Classification Exception Area ("CEA") established by the New Jersey Department of Environmental Protection ("NJDEP") for tetrachloroethylene ("PCE") in groundwater. Per NJDEP records reviewed in the Phase I ESA, the CEA does not extend onto the subject property (Block 24, Lot 17.04), and no groundwater contamination attributable to the dry-cleaning site has been identified on the subject property.
The relevance of this environmental finding to the site plan revision is as follows: the expanded stormwater detention basin on the west side of Building 4 involves significant earthwork, including excavation and regrading of approximately 1.8 acres. MCB should confirm with Blackthorn Environmental Consulting whether the detention basin expansion area was within the geographic scope of the original Phase I ESA. If the earthwork associated with the detention basin expansion extends into areas that were not covered by the original Phase I assessment, a supplemental environmental review may be warranted — particularly given the proximity of the CREC on Block 24, Lot 16 and the potential for PCE migration in groundwater.
Additionally, the construction of a larger stormwater detention basin could alter subsurface hydrology in the area, including groundwater flow patterns. While the existing CEA does not extend onto the subject property under current conditions, changes in groundwater flow resulting from the detention basin expansion could theoretically affect the direction or rate of PCE plume migration. This risk, while likely low, should be evaluated by Blackthorn as part of any supplemental environmental review.
MCB should also ensure that the environmental indemnity provisions in the lease — as negotiated in C&H's markups of the landlord's draft — adequately cover any environmental risks associated with:
• The stormwater detention basin construction itself, including any contamination discovered during earthwork;
• Any potential migration of the PCE plume from Block 24, Lot 16 onto the subject property, whether or not attributable to the altered groundwater flow from the basin expansion; and
• Any remediation obligations that may arise in the future in connection with the CREC.
C&H's first markup of the lease included robust environmental indemnification provisions running in favor of MCB as tenant, including a landlord indemnity for pre-existing conditions and conditions arising from landlord's activities on or adjacent to the premises. These provisions should be reviewed in light of the site plan revision to ensure they remain adequate.
IX. Status of Lease Drafting
C&H's second markup of the landlord's second draft lease (received from WBC on September 2, 2022) was substantially complete as of September 14, 2022, when the revised site plan was disclosed. However, as noted above, C&H withheld transmission of the second markup to WBC pending analysis of the site plan issues and consultation with MCB and Halcyon Ridge.
Key terms that remained open or bracketed in the second markup prior to the site plan revision include:
• Landlord's work scope and delivery timeline. The parties had not yet reached agreement on the final scope of landlord's work, the timeline for completion, and the consequences (e.g., rent abatement, termination right) of landlord's failure to complete the work by the target delivery date.
• TI Allowance disbursement mechanics. The specific procedures for MCB's requisition of TI Allowance funds, including lien waiver requirements, inspection rights, and payment timing, remained under negotiation.
• Co-tenancy protections. MCB had requested certain co-tenancy protections relating to the occupancy and operational status of the other buildings in Cranbury Commerce Center, which Stonebridge had not yet fully accepted.
• Guaranty burn-off timing provisions. Certain details regarding the timing and mechanics of the guaranty burn-off, including the measurement period and the form of the auditor's certification, remained open.
The site plan revision introduces a substantial number of additional open items that must be resolved before the second markup can be finalized and meaningfully transmitted to WBC. These include, at a minimum:
• Rent adjustment to reflect the reduced rentable area (and, MCB would argue, the reduced operational utility);
• TI Allowance recalculation methodology (pro rata, fixed dollar, or enhanced per-square-foot rate);
• Revised landlord's work scope, cost estimate, and delivery timeline;
• Updated premises description and rentable area figures throughout the lease and all exhibits;
• Dock-high door count, drive-in door count, and trailer parking space specifications as lease exhibits or incorporated into the premises description;
• Delivery condition standards for the reconfigured space, including clear height confirmation in all bays;
• Environmental indemnity review in light of the detention basin expansion; and
• Recalculation of all economic terms that are derived from the base rent or rentable area (LC amount, guaranty cap, early termination fee, etc.).
C&H recommends that the second markup not be transmitted to WBC until the site plan issues are substantially resolved at the business level between MCB and Stonebridge. Transmitting a markup based on the original premises specifications would be counterproductive, as it would be immediately superseded by the site plan changes. Conversely, transmitting a markup reflecting assumed revised terms before those terms are agreed upon at the business level would risk prejudicing MCB's negotiating position.
X. Recommendations
Based on the analysis set forth in this memorandum, we offer the following recommendations for MCB's consideration.
A. Pause Lease Negotiations
We recommend that MCB formally pause lease negotiations with Stonebridge until MCB can fully assess whether the revised facility configuration can support MCB's East Coast fulfillment operations. The pause is warranted by the magnitude of the changes to Building 4 and by the fundamental uncertainty regarding whether the Cranbury facility, as reconfigured, remains viable for MCB's intended use.
The pause should be communicated in writing to landlord's counsel (WBC) to preserve MCB's rights, establish a clear record of the reason for the pause, and avoid any implication that MCB has accepted the revised site plan or waived its objections to the changes. C&H will prepare this written communication as discussed in Section XI below.
B. Request Specific Deliverables from Stonebridge
Before MCB can meaningfully reassess the facility's viability under the revised configuration, MCB should request the following deliverables from Stonebridge, each of which is essential to MCB's evaluation:
1. Final civil engineering drawings for the revised site plan, approved (or at minimum, submitted to) the Township of Cranbury Planning Board, showing the precise building footprint, truck court layout, dock door locations and configurations, trailer parking layout with space count, stormwater detention basin boundaries, internal access drive alignment, and all related site improvements. Preliminary or conceptual drawings are insufficient for MCB's purposes; MCB needs engineered plans from which its logistics and warehouse design teams can conduct accurate operational modeling.
2. Structural engineer's report prepared by a licensed professional engineer, confirming clear heights in all bays of the warehouse — including, critically, the two eastern bays where a reduction from 36 feet to 32 feet is anticipated. The report should identify any structural modifications required to accommodate the truck court relocation and should confirm whether the 36-foot clear height can be preserved in the eastern bays through alternative structural approaches.
3. Revised landlord's work scope and cost estimate reflecting the new configuration, including a line-item breakdown of the cost of each component of landlord's work and identification of any new work items (e.g., truck court construction, structural modifications) arising from the site plan revision.
4. Stonebridge's position on economic adjustments — specifically, Stonebridge's proposed rent per square foot under the revised configuration, its proposed TI Allowance recalculation methodology, and its position on the allocation of incremental construction costs arising from the site plan changes. MCB needs to understand Stonebridge's view of the revised deal economics before MCB can assess whether the transaction remains commercially viable.
C. Internal MCB Operational Reassessment
Concurrently with the request for deliverables from Stonebridge, Kevin Driscoll's supply chain team should conduct a detailed operational feasibility analysis of the revised Building 4 configuration. This analysis should specifically address the following questions:
• Dock capacity: Can 38 dock-high doors and 2 drive-in doors accommodate MCB's Q4 peak-season throughput requirements, potentially with operational modifications such as extended dock operating hours, shift scheduling adjustments, cross-docking protocols, or other measures? If so, what are the incremental costs and operational risks associated with these modifications?
• Trailer parking: Can 62 on-site trailer parking spaces be supplemented by off-site staging arrangements, shared trailer yard agreements with other tenants at Cranbury Commerce Center, or other alternative arrangements? If so, what are the incremental costs (drayage, yard rental, driver detention) and logistical complexities?
• Warehouse footprint and clear height: Can the reduced warehouse space of 261,000 square feet and the potentially reduced clear height of 32 feet in the eastern bays accommodate MCB's planned racking and automation layout, potentially with design modifications such as alternative racking types (e.g., VNA, push-back, or drive-in racking) or reconfigured automation pathways? If so, what are the capital cost implications for MCB's buildout?
• Consolidated cost impact: If any or all of the above workarounds are feasible, what is the total estimated incremental cost to MCB (both capital and ongoing operational costs) compared to the original configuration? This incremental cost should be factored into MCB's renegotiation of the lease economics — MCB should not bear the cost consequences of changes that were driven entirely by Stonebridge's decision to develop Building 5.
D. Consider Alternative Sites
Given the operational deficiencies identified in this memorandum, MCB should instruct Daniel Tsui at Pinnacle Brokerage Group LLC to begin identifying alternative distribution center sites in the central New Jersey corridor as a contingency measure. This is a prudent step regardless of whether MCB ultimately elects to proceed with the Cranbury transaction, as it provides MCB with leverage in negotiations with Stonebridge (by demonstrating credible alternatives) and protects MCB against the risk that the Cranbury transaction cannot be salvaged on acceptable terms.
MCB's existing lease at 15 Kilmer Road, Edison, NJ 08817 does not expire until February 2024, which provides approximately 16 months of runway from today's date for MCB to identify, negotiate, and secure an alternative facility if necessary. While 16 months is a relatively compressed timeline for a distribution center relocation of this scale (particularly given the lead time required for racking installation and automation fit-out), it is sufficient if the contingency site search is initiated promptly.
E. LOI Deadline Management
The extended LOI exclusivity period and lease execution deadline of November 15, 2022 is approximately eight weeks away. MCB should make a decision within the next two to three weeks regarding its preferred approach:
• (a) Request a further extension. MCB could request that Stonebridge extend the LOI deadline to a date that provides sufficient time for the site plan issues to be resolved, the operational reassessment to be completed, and the lease to be renegotiated. A reasonable extension might be to January 31, 2023 or February 28, 2023. Any extension request should be conditioned on Stonebridge's delivery of the information and deliverables described in Section X.B above.
• (b) Allow the deadline to lapse. MCB could allow the November 15, 2022 deadline to pass without seeking an extension. This would result in the expiration of MCB's exclusivity protection, freeing Stonebridge to market Building 4 to other prospective tenants. MCB would, however, incur no binding obligation or liability by allowing the deadline to lapse. This approach carries risk in that MCB could lose the Cranbury opportunity if another tenant emerges during the marketing period.
• (c) Formally terminate discussions. If MCB's operational reassessment concludes that the revised configuration is not viable and cannot be made viable through reasonable workarounds or lease concessions, MCB could formally notify Stonebridge that it is withdrawing from the transaction. This would be a definitive step that should only be taken after a thorough evaluation.
We recommend approach (a) — requesting a further extension — as the most balanced course of action at this time. We can advise further on the specifics of the extension request once MCB's operational reassessment is underway and MCB has a clearer view of the facility's viability under the revised configuration.
F. Preserve Rights / No Waiver Communications
As discussed in Section VII.C above, all communications with Stonebridge and WBC should include an express statement that MCB does not accept or acquiesce in the revised site plan and does not waive any of its rights, including the right to decline to proceed with the lease on any terms. C&H will include appropriate reservation-of-rights language in all of its correspondence with WBC going forward, and we recommend that MCB include similar language in any direct communications with Stonebridge personnel (including Rebecca Hartwell and any Stonebridge project managers or engineers).
XI. Next Steps
The following next steps are recommended, with target dates where applicable:
1. C&H formal letter to WBC. C&H will prepare and deliver a formal letter to Whitfield, Barr & Calloway LLP (attention Thomas R. Calloway and Jennifer Pace) outlining MCB's concerns regarding the revised site plan, requesting the specific deliverables listed in Section X.B above, and reserving all of MCB's rights. Target delivery: week of September 26, 2022.
2. MCB internal operational review. Kevin Driscoll to initiate the internal supply chain review and operational viability assessment of the revised Building 4 configuration, as described in Section X.C above. We recommend that this review be completed within three to four weeks to allow sufficient time for renegotiation or, if necessary, pursuit of alternatives.
3. Halcyon Ridge sponsor direction. Martin Solberg to advise on Halcyon Ridge's sponsor-level appetite for continued pursuit of the Cranbury transaction versus a pivot to a contingency site search. Given the magnitude of the site plan changes and the potential impact on the deal's economic returns, Halcyon Ridge's investment committee may wish to reassess the transaction within the context of MCB's overall capital allocation plan.
4. Hold second markup of lease. C&H will continue to hold its second markup of the lease in draft form and will not transmit the markup to WBC until the business-level resolution of the site plan issues. Transmitting the markup prematurely would be counterproductive for the reasons described in Section IX above.
5. LOI deadline monitoring. C&H will monitor the November 15, 2022 LOI deadline and will advise MCB and Halcyon Ridge on extension or lapse strategy as the deadline approaches, informed by the progress of MCB's operational review and the status of discussions with Stonebridge.
6. Fee estimate update. C&H fees incurred through the date of this memorandum are approximately $72,000, against the original engagement estimate of $85,000 to $125,000. The site plan revision and the associated additional legal work — including preparation of the formal letter to WBC, analysis of the revised lease economics, potential renegotiation of lease terms, environmental review coordination, and contingency planning — will likely cause total fees to approach or modestly exceed the high end of the original estimate. We will provide an updated fee estimate once the path forward is determined and we have greater clarity on the scope of remaining work.
We are available to discuss this memorandum and the recommended next steps at your convenience. Please do not hesitate to contact Angela Fontaine at (212) 555-4100 or Cynthia Ho at (212) 555-4127 with any questions.
CALDERWOOD & HARKNESS LLP
By: ________
Angela Fontaine, Partner
By: ________
Cynthia Ho, Associate
XII. Appendix / Attachments (Referenced)
The following appendices are referenced in this memorandum and will be provided under separate cover or are attached hereto: