Before putting pen to paper on a fresh new lease, it’s often recommended to draft up a Letter of Intent. An LOI, as it’s called in the industry, helps prospective tenants edge forward to signing a lease that’s inclusive of their plans for the property in years to come.
These documents vary from deal-to-deal and can span the length of 10 to even 25 pages, depending on the scenario. With that in mind, I’ve put together a key list of components that can apply to any deal and skill level when preparing a LOI.
From the start, you’ll want to identify the tenant. Establish the interested party, whether you’re representing a company or an individual investor. Early on, you’ll want to note if you or your client is willing to personally guarantee the lease.
Next, pick a lease term and preferences for renewal. Generally, if a tenant agrees to sign a five-year lease, they’re offered a five-year option to renew.
Be sure to clarify the address and location. If there’s outlying space around the property, clarify its ownership in the letter in detail. Don’t be afraid to get technical.
You’ll want to identify both the lease and rent commencement. Landlords often are tasked with completing on-site projects or will start the rent dates later at the request of the tenant. Often, the lease and rental dates vary, so be sure to account for that in your letter of intent. Use the LOI to clarify the rental cost, method of payment and identify any potential provisions to rent as the lease ages. If the rent is projected to rise by a fixed percentage each year, put it in writing.
Tenants can also request to include an exclusivity clause in the letter of intent, meaning the landlord will be restricted from renting space to competing businesses in a surrounding plot of land. Keep in mind that malls and large retail spaces are especially challenging to pose an exclusivity clause and are often rejected by landlords.
It’s critical as an investor to consider expenses, especially prior to signing a lease. Consider suggesting a cap on triple net property expenses to, say, five percent to provide you with a safeguard down the road.
In the same vein, don’t forget to discuss a tenant improvement allowance, which guarantees repairs by the landlord prior to move-in. If you want plumbing, spell it out in a separate and detailed exhibition to accompany the letter.
Now’s also the time to negotiate a security deposit. Publicly traded companies are often the largest opponents of the request and frequently use LOI to argue against them.
Money aside, a letter of intent allows you to detail aesthetics with the landlord, such as signage. Now’s the time to clarify what the landlord allows for the property. This can go a long way in marketing your business during the lifespan of the lease.
As an aside, remember to consult with an attorney during negotiations of this capacity. Try to establish timelines with the landlord and encourage an agreement to work together in faith to form a lease that’s mutually beneficial to all involved.
Troy Muljat is a Washington State certified commercial appraiser and broker with over 25 years of experience in the commercial real estate industry. He holds the Certified Commercial Investment Member (CCIM) and Certified Property Manager® (CPM) designations through the National Association of Realtors.He specializes in brokerage, leasing, property management, development, and commercial appraisal.Visit TroyMuljat.com for more information about Troy.