After you’ve done your research, worked with your tenant representation broker, participated in site tours, and figured out your budget, the perfect commercial real estate property is finally in your sights.
Unlike most residential real estate deals, commercial real estate is complex, complicated, and often progresses at a glacial pace. Existing tenants may need time to vacate. Major systems will need maintenance and upgrades. Build-out details will need to be verified and finalized. But until the ink is dry, prospective tenants don’t want to let a suitable property pass them by.
The answer? A signed Letter of Intent (LOI), declaring your formal interest in purchasing or leasing a commercial real estate property.
What’s a Letter of Intent (LOI)?
A letter of intent is used to alert a property owner that you’re interested in leasing or purchasing a commercial real estate property. Also, it provides the landlord with a more concrete view of how you’ll use the property should they commit to a lease agreement with you. It doesn’t include every detail (that’s what the lease agreement will cover), but it provides an overview of your intentions and creates a starting point for a commercial real estate negotiation.
Depending on the complexity of the commercial real estate deal, the length of the LOI could range anywhere between a single page to as many as 20. And while an LOI isn’t a legally binding contract, unless both parties agree to make it so, it’s a worthwhile document to prepare and produce as it requires the property owner to stop other negotiations while you prepare to make a formal offer.
When Does a Letter of Intent Come into Play?
As with every aspect of a commercial real estate purchase or lease, it’s important to get as much as possible into writing. Typically, letters of intent are drafted by the tenant’s real estate broker after the tenant has toured the property and has conducted informal conversations about the nature of the lease agreement and what the landlord is prepared to offer in terms of renovations, upgrades, built-out allowances, and rent structure.
As a tenant, you should do your research and tour as many suitable properties as you can before you submit a letter of intent. Whether a letter of intent is a legally-binding document or not is up to the tenant and the property owner, but most are not. However, providing a letter of intent to a prospective landlord shows them you’re serious about pursuing the property and intend to enter negotiations regarding a lease agreement.
Providing a letter of intent also offers the tenant the ability to show a lender that you have a tentative proposal of purchasing or leasing a commercial real estate property.
What’s Typically Included in a Letter of Intent?
- Names of each party in the negotiation process, including the name of the tenant or person responsible for the lease or purchase and the name of the landlord.
- Address and suite number of the property you’re negotiating to lease.
- Square footage of the property.
- Type of rent (Gross, Net, or Percentage Lease).
- Operating expenses and a breakdown of who is responsible for property expenses.
- Signage cost (dictating whether any needed signs will be free or paid).
- Parking costs (free or paid).
- Sublease rights (whether the tenant will be able to sublease their space).
- Profit sharing on subleases (and who will keep the profit if a sublease is negotiated for a higher amount than the current tenant was paying).
- Free or abated rent (how much – if any – rent will be provided free of charge to the tenant and when).
- Early occupancy agreements that explain whether or not a tenant can move in prior to the lease free of charge and for how long.
- Expiration date for the letter of intent (usually between 5-10 business days).
- Legalese that explains the LOI isn’t a binding document and is merely an instrument for use in negotiating a commercial real estate lease and is not a binding contract in any way.
- For restaurants or specialized industries, it’s important to dictate that your commitment to lease the property is dependent on receiving approval from the city or county to operate in that location.
Benefits and Downsides of Letters of Intent
LOIs carry a few primary benefits. First, they’re faster and less expensive to draft than purchase agreements, which can be legally-binding. Second, they don’t require tenants to provide any earnest money toward securing the property, allowing flexibility and cash flow should the deal fall through. Finally, they allow tenants the ability to provide documentation to a potential lender, which can advance the financing side of the negotiation while the landlord considers your tenancy.
However, there are a few drawbacks to drafting and providing an LOI. They add yet another step into an already complicated negotiation process. While LOIs do offer landlords a window into your desired terms, you’ll still need to go back and re-negotiate everything when it comes to actually signing the commercial real estate lease. Any additional negotiation steps will add time and money to both sides, with attorney fees piling up every time the contract changes.
LOIs also aren’t always legally binding and there should be clear messaging in the letter that dictates whether or not it is. While that can be useful to tenants that may need to back out of an offer for unforeseen circumstances or should another, more suitable property comes on the market, it can also allow the landlord the ability to consider multiple offers with more favorable terms.
Because of the brevity of producing and sending an LOI, it’s important for tenants to carefully consider their options before instructing their tenant representation broker to draft one. While they aren’t always legally binding, it’s important to draft an LOI in the same way. Don’t risk signing a letter of intent without fully understanding the full scope of its power and the legal consequences that may result later. After all, it’s cheaper to proceed – and draft – carefully rather than risk a messy legal fight down the road.
This article was originally written & published BYhttps://www.officespace.com/blog/commercial-real-estate-letters-of-intent-everything-you-need-to-know#more-4051 )