Evan, great article. Thank you. I have a question on a unique deal…
My family and I own and operate a Ranch and Winery on 4,300 acres. http://www.SixSigmaRanch.com. We’ve signed an LOI with a large “glamping” outfit (luxurious tents and small cabins) to install 150 sites on 140 of our 4,300 acres. For the contract, we need a termination clause. As they will invest a large sum in infrastructure, they want us to pay unamortized expenses in the event of a break-up. I understand their reason, but prefer not to saddle our property with that expense in the unlikely event that we need to sell. Can you share common practice for long-term contracts (they’re asking for 30 – 50 years) with large tenant-funded investment? How do I make them comfortable that we won’t boot them without reason, but avoid a big financial commitment at an unlikely but inopportune time?
Lower Lake, CA
Nice to hear from you! I’m actually originally from Sonoma County and am familiar with the wine industry. My dad, John Tarver, has worked in the industry for many years for brands like Benziger, Toasted Head, Matchbook, and more.
Anyways, this is definitely a unique deal. Could I ask some questions regarding the unamortized expense? Specifically, are they requesting a sum equal to the amount invested? If it’s not amortized, is there no interest expense at all, or is it all interest? Is it a monthly payment? Annual?
My gut tells me that you should be able to write in a clause that removes these unamortized expenses after a specific time period. For example, if it’s a 50-year contract, perhaps the unamortized expenses are removed after year 10 or year 15. You could even structure it so the amount of the expense declines over time, protecting you the longer you keep the contract in place.
Ultimately, you shouldn’t be liable for paying any more than their initial investment, and to be honest, if they expect to earn significant income from this placement, then I would expect them to take on this contract risk as part of their overall investment. I would, of course, speak with a legal contract professional about this matter, he or she should be able to tell you industry standard, if any.