CRE Midwest

Reaping the rewards of rooftop leases while dodging the pitfalls

Reaping the rewards of rooftop leases while dodging the pitfalls,ph01
The Outsider rooftop bar and restaurant at the Kimpton Journeyman hotel is a big draw in downtown Milwaukee.

The rooftops of hotels and multifamily towers in cities across the Midwest today are increasingly home to restaurants, bars, gardens and cell towers, becoming money makers for the owners of these properties.

And these spaces are popular, offering visitors the chance to gaze across their city’s skyline. Just look at the lines that sometimes form at the hottest rooftop restaurants just to get up on the right floor.

But are building owners earning all of the profits for their rooftop space as they can? Often, they’re not, said Rod Carter, partner with the Milwaukee office of law firm Husch Blackwell.

That’s because building owners too often accept whatever offer restaurant or bar operators, or, increasingly, wireless carriers, make them, Carter said. Owners don’t think enough about the long-term value of their rooftop space.

“Say a wireless carrier wants to install antennas on a roof and says it will pay the building owner $30,000 a year,” Carter said. “Most building owners would be happy to get that offer. If the carrier puts a lease in front of them, they’d be happy to sign it without thinking of the long-term consequences. That could cost building owners future money.”

Why? Because that rooftop space in the near future might be worth even more than the $30,000 a year the wireless carrier is offering. If building owners sign a long-term lease, they might miss out on the potential of even more profits.

The rooftop boom

Carter said rooftops have steadily become in-demand spaces during the last five years, for both technology purposes – think antennas and cell phone towers – and for green initiatives such as rooftop gardens and entertainment uses such as restaurants and bars.

“Think of rooftops five or 10 years ago, it was rare that the general public had open-air spaces they would use,” Carter said. “What we are seeing today is that with a lot of the new hotel developments, rooftop bars is where it is at.”

Carter speaks from experience. As he looks out the 19th floor of his firm’s Milwaukee office, he can see plenty of green spaces dotting the roofs of city buildings.

That’s because Milwaukee building owners are increasingly using their rooftops for gardens and green initiatives, in addition to restaurants and bars.

The Kimpton Journeyman hotel in Milwaukee has its own business rooftop restaurant, the Outsider, which features expansive views of the city’s downtown skyline. It’s also packed on weekend nights, one of the most popular bars in the city.

The historic Pfister Hotel in downtown has taken a different approach. It has two beehives on its roof. The roughly 20,000 honeybees make honey that is used at the restaurants operated by the hotel.

The Pfister also runs a farm-to-table restaurant, which much of the food coming from not an outside farm but from the gardens atop its rooftop.

“When you think of farm-to-table, you think of bringing things in from a farm somewhere else,” Carter said. “This restaurant, they are growing food on the roof, along with the bee colony You wouldn’t have seen anything like that not too long go.”

Wireless carriers, too, are active in leasing rooftop space, Carter said. With the proliferation of smart phones, wireless carriers need more space. Rooftop locations, then, are becoming even more valuable.

Don’t sign it all away

What, then, should building owners do if they want to maximize the profit potential of their rooftop space?

Carter says that owners need to look ahead. What does the future hold for their building? Are they satisfied leasing out their rooftop space for a quick investment? Are they OK with tying up their rooftop space with a long-term lease?

Wireless carriers might ask for leases that run as long as 30 years. That might be a good situation for building owners who don’t have long-term plans for rooftop restaurants or bars. But it might handcuff other owners whose buildings are located in the trendier parts of town.

Carter recommends that building owners aim for rooftop leases that come with five-year renewable terms. That way, owners gain more flexibility. If they want to renew an existing lease, they can. If they decide that they can sign a more valuable lease with a new rooftop tenant, they can do that, too.

“It is important to have some say in the future of the rooftop,” Carter said. “Say you are a hotel owner. If you remodel the hotel in the future, you might want to put a restaurant up there. You want the right in five years to tell a wireless carrier that you are not going to renew their lease for an additional five-year term, that their lease with you is over.”

Then there are the more practical issues that building owners must consider. As Carter says, building owners must be certain that their roofs can handle their new uses.

Say you want to install rooftop gardens that your office building tenants can enjoy. That amenity might help you attract more tenants to your building. But can your roof handle the weight of rooftop gardens? Can it handle the watering needs?

Or maybe you’d prefer to lease your rooftop space to a restaurant. Can your roof handle the extra weight that comes with that? How much work will go into transforming your rooftop into a space that is safe enough, and aesthetically pleasing enough, for a restaurant use?

Oversight is an important issue, too. Building owners need to maintain control over any construction activity that takes place to transform their rooftop spaces. What if the wireless carrier renting space on your roof wants to reconfigure its antennas in a way that will harm the exterior appearance of your office building? What if a restaurateur wants to redesign its rooftop space three years into your lease?

As the building owner, you need to include clauses in any leases you sign stating that you have the right to review and approve any modifications, Carter said.

Finally, what about roof maintenance? When work has to be done on the rooftop, what advance notice do building owners have to give their rooftop tenants? What are the rules governing the relocation of any rooftop installation if maintenance work is required?

These are important questions to address in any lease agreement, Carter said.

Carter provides a good example of the thought that must go into rooftop leases. Say the roof of your office building contains a rooftop party deck. This provides a place for tenants to gather, and might make your building a more attractive one to companies seeking new space.

But say you also sign a lease with a wireless carrier, giving the carrier the right to install antennas. You might state in the lease that the antenna be mounted to the parapet of the building. This way, the antennas will provide great reception to any employees on the rooftop while also not being intrusive to those trying to enjoy the skyline views.

“Things like that can turn into a win-win,” Carter said. “If you are thinking of multiple uses for a rooftop, you want to make sure that no single use is too intrusive.”