Legal Blog

Ed Talks: Real Estate Tenant Letters of Intent (LOIs) – 10 Negotiation Tips

Welcome to “Ed Talks,” a new video series by Offit Kurman business and real estate attorney Ed Bloom. In these short, 5–10 minute segments, Ed dissects real estate-related legal topics to offer practical, easy-to-grasp advice for tenants, landlords, developers, business owners, and anyone else who may be involved in a real estate transaction. With over 30 years of experience handling real estate and corporate transactions, Ed has a broad range of legal knowledge that comprises litigation, negotiations, workouts, lending, leasing, and licensing. As a business attorney, he frequently represents clients on mergers and acquisitions, as well as corporate structure, software licensing, expansions, and succession.

1. Describe the Premises

Describe the premises you are leasing with specificity. Spell out, for example, the amount of square footage you are leasing, and do not allow the landlord to change it. Designate a suite number: suite 500 is certainly better than suite 550. Attach a diagram—remember, a picture is worth a thousand words.

2. Specify the Rent

Set forth the rent in dollars per square foot, and include any rent escalations. Almost every lease provides the rent goes up commencing with the second year; a number around 2.5% most likely favors the tenant over the landlord. Specify the amount of rent abatement. Most leases will provide some amount of free rent, such as 1–12 months, sometimes paid over a period of time. Get as much rent abatement as you can.

3. Focus on Options

Flexibility is key. Include options—options to expand, options to extend, options to terminate. Maximize that flexibility.

4. Specify the Security Deposit

All leases have a security deposit. Designate, in dollars, the amount of the security deposit. If you perform well during the first two years, possibly include burnoff revisions so the security deposit is reduced over time. You should also provide for a letter of credit, which decreases the amount of cash required up front, and—most important—avoid personal guarantees.

5. Include the Amount of Buildout Allowance

Most landlords will provide an allowance to build out the space—remember, it’s never enough. Sometimes you may have what’s called “turnkey”: where the landlord builds out the space for the tenant. Attach details. You want to make sure you get what you bargain for. If a landlord is providing an allowance put it in dollars per square foot, so if during the negotiations the square footage is changed, your allowance changes. Finally, avoid any fees paid to the landlord.

6. Define the Condition of the Space

When the landlord tenders the space to you, it’s in what’s called “shell condition.” The landlord should provide as much as possible, anything not provided by the landlord you may end up paying for—so watch out for any potential expenses.

7. Include Reasonableness Language

One of the critical aspects of your LOI is to include “reasonableness” language for assignment and subletting. Doing so provides you with maximum flexibility. You will not want to negotiate this part in the lease, so get it upfront in the letter of intent.

8. Specify the Commencement Date

The lease should not commence until all the landlord’s work is complete. If it’s not completed by a certain date, the landlord should pay a holdover cost if you have to stay in your current space. And, if the work not completed by an absolute date, you should have a right to terminate. You need a hammer to protect your rights.

9. Specify Brokers

The brokers are your friends. Name the brokers in your LOI and require the landlord to pay all commissions.

10. LOIs Should Be Non-Binding

Probably most important: the LOI should be non-binding. That is, either party can walk away. If the tenant finds a better deal, or circumstances change, you should not be obligated until the lease is fully executed. Have a question about anything I have written here, or need guidance for a real estate transaction? Please feel free to get in touch. To contact me, click here.

ABOUT EDWARD BLOOM

EdBloom_lores2Edward A. Bloom practices real estate and transactional law. His practice is primarily concentrated on real estate development, real estate litigation, real estate workouts, real estate and corporate lending, leasing, licensing, corporate and transactional matters. Mr. Bloom has over 30 years of experience on all types of real estate and corporate matters. He counsels developers, owners and users on acquisitions, dispositions, financing and development projects. He has extensive experience on all types of lease matters. He regularly represents tenants in the negotiation of leases from 5,000 to 100,000 square feet in size. Mr. Bloom has drafted and negotiated numerous work agreements for tenant build-out in connection with leasing matters. He has represented lenders, borrowers and asset portfolio purchasers on loan workouts, restructurings and foreclosures.