Winning Negotiations with a Letter of Intent (LOI)
Once you have toured various properties and narrowed your search down a bit, it is time to make some proposals on the lease of space for your business. In commercial real estate, we typically refer to these proposals as a Letter of Intent, or LOI, for short.
Your LOI is where you will dictate the terms of a lease that you would be willing to sign if the property owner is in agreement with you. As is the case with all good negotiations, the initial foray of deal points is almost never agreed to. With negotiations, there is an expectation that both parties will go back and forth a bit before everyone is satisfied.
An important caveat that we put into all our Letters of Intent is that the terms discussed are NON-BINDING. You may want to have an attorney provide additional language for this idea, but the intent of an LOI is to float some basic thoughts on a potential deal so that you can go back and forth a bit to discover if a potential deal is to be had. As we will discuss, you will want to pursue multiple spaces at once, so you will need to be able to turn away from the spaces you do not agree to lease with. You don’t want to have lease obligations at multiple locations.
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A well-crafted and negotiated Letter of Intent will cover all the essential deal points in your lease so that the actual lease is very straightforward.
What you want to avoid is renegotiating the terms of the lease during the lease stage. At the actual lease stage, you will be spending money on your attorney at an hourly rate and these hours can add up fast. In contrast to the LOI we are discussing, your actual lease WILL BE legally binding so you will need an attorney to review the lease.
The following are just some of the types of negotiating terms you should consider in your Letters of Intent. Every lease of space is different so you may need to add or remove some of these terms from your LOI. Depending on whether you are leasing retail, office, or industrial space, you will have different types of requirements to include in your LOI.
Specific Items to Include in Your Letter of Intent (LOI)
- Property Address
- Allowed uses, exclusive uses, etc.
- Property Size
- Building Size
- Leasable Square Footage (LSF)
- Useable Square Footage (USF)
- Load Factor (This is how much shared common area you pay rent on, the difference between leasable and usable SF)
- Lease term (how many years will the lease be effective)
- Lease start date, rent commencement date, occupancy date
- Option terms and length (how many options and at what length of lease can you have the right for after the initial lease term)
- Lease rate (NNN, Gross, Modified Gross, Full Service Gross, etc.)
- Additional rent (NNN expenses, portions of NNN expenses – real estate taxes, as an example)
- Utilities (water, sewer, cable, phone, etc.)
- Cleaning and janitorial responsibilities
- Rights of 1st option to lease additional space
- Right of 1st option to purchase the building if ever sold, etc.
- Landlord’s work (how will the space be delivered to you? What timelines will you need and do they line up with lease term described above?)
- Tenant’s work (what can you do to the space above and beyond Landlord’s work? What timelines will you need and do they line up with lease term described above?)
- Use of amenities (truck docks, drive in doors, elevators, etc.)
- Additional storage
- Parking (both indoor and outdoor)
- Moving (timing, cost, etc.)
- Signage (façade, monument signs, building directory, etc. Who pays for which?)
- More items should be added depending on your specific business space needs
The list of items to cover with your Letter of Intent should be customized to your specific needs.
If you already lease space, go through and look at all the items in your current lease that you want to be sure to address. This is a great time to highlight items that may have been a source of stress in your current lease. If a lack of parking spaces has been an issue for your employees or customers, be sure to address receiving a minimum number of allocated parking spaces at your next location. Perhaps you constantly had to repair your AC in the summer. Make sure your new property owner must address and pay for the air conditioning maintenance in your new space.
Identify the most important items to negotiate with your letter of intent
Many items such as address and leasable square footage are what they are. These are not so much negotiation points as they are placeholders to make sure everyone is negotiating on the same space. In a multi-tenant building, it is important to make sure everyone is on the same page. While measurements aren’t necessarily negotiable since a space will have certain measurements defined, there are times when measurements can affect negotiations.
Sometimes spaces are not measured accurately. Always double check measurements to make sure you are not over paying for space you do not actually get to use. Many businesses are growing and flourishing and run out of space. If this is your scenario, be sure to negotiate a first right to lease any additional adjacent square footage that may become available in your building. This could be easier to do in the future than completely moving to a new location. You may as well have this as an option for future growth. In some cases, a property owner will own lots of commercial real estate and you can negotiate to stay within their portfolio. This could give you a first right to move into more space in the same building (non-adjacent space) or in another property owned by your Landlord.
Most real estate negotiations have two major factors that are the most important of all to negotiate.
Time and money. Typically, the more time you give your Landlord (longer lease length) the more they will do for you. The owner may spend more money on improving your space. A longer lease will allow the owner to offer more rent abatement (free rent) to you to help you get started in the new space.
A shorter term lease will not typically grant you additional build out funds or free rent, but it may give you the flexibility you need if you have a short term need. Depending on the situation, you may get a discounted rent for a space if it is a shorter term, but you are not likely to get an owner to spend money on your needs.
Understanding the time and money equations is important to negotiating the best lease for your business. These two items are negotiated frequently in commercial real estate and you should rely on your commercial real estate broker to coach you through these deal points. At any given time, different property owners are in different positions. Some need the rent immediately and will do whatever it takes, while others will be more patient and deliberate and not bend on deal terms as much as others.
Often, you can have your commercial real estate broker gather information for you that will help you determine how best to approach each property owner. Since each owner may be in a different circumstance now, getting this timely information could really help you in your negotiations.
You should identify multiple locations you would be satisfied with and then pursue them all simultaneously.
This is powerful step to take with your negotiations. 3-4 great options is an ideal scenario. The reason this is so important is that you can reach as far as possible with your deal terms. If you push too hard you have other great options to consider as well.
There is nothing worse than having only one location to consider. It can make you constantly wary about pushing too hard and blowing up the negotiation. If you ask for too much you run the risk of losing the lease on the face of the terms. Even more likely, the owner will simply lease the space to someone else. By having multiple options, you can push each negotiation to the max. And this is how you use a Letter of Intent to maximize your commercial lease negotiation.