Using a Master Lease to Convert Sweatshops into Art Studios

[Mark Castator]

Investment Info:

Industrial other investment in Los Angeles.

Cash invested: $106

ARTIST STUDIO CONVERSION
We obtained a Master Lease for 2500 sq ft in a five story industrial building downtown. We approached the building owner with the idea of converting the available space into smaller art studios. This would eliminate the heavy traffic of the labor intensive apparel industry and the high maintenance it required to the building. All of this appealed to the building owner.

What made you interested in investing in this type of deal?

Artists always need studio space and smaller spaces are not available at at low cost. So I knew the market was there. We were already in the building with our studio and wanted to convert the building from sweatshops into an artist community.

How did you find this deal and how did you negotiate it?

The landlord wants to improve the quality of his building. We offered the tenants that would start the process. The building owner agreed to all the needed tenant improvements. LADWP installed new LED lights at no cost through a Green initiative.

How did you finance this deal?

We got pre-lease agreements with deposits on three of the studios before we signed the master lease. This more than covered all of the move-in costs.

How did you add value to the deal?

The smaller studio spaces meant we were able to charge more per square foot than we were paying on the lease.

What was the outcome?

We were able to increase rents overall by 75%.

Lessons learned? Challenges?

The greatest challenge is finding quality artist/tenants. Not only do we want tenants that can pay the rent, but we are also looking for good artists that will add to our art community. This means we decided to grow slow to begin. We believe this a winning strategy longterm that will build a buzz to fill future studios quickly. This seems to be working as we are already creating a waiting list.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I've been told commercial real estate is all about relationships. I believe that is true. Because of the great relationship we have built with our building owner we were able to work out a deal that is advantageous to both of us. He has another larger building and was approached by another group to do the same kind of conversion. But he came to us with the deal. We are looking to start that project next year.