The Commercial Classroom: Letter of Intent (LOI) - by Edward Smith, Jr.

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners. 

Letter of Intent (LOI)

Our role as agents in a real estate lease transaction is to negotiate all the terms and conditions. The resulting agreed points are listed in a “Letter of Intent” (LOI) which is sent to the attorney who will be creating the lease. The LOI is not a binding agreement, only the lease is.

When we take a listing we have to determine the landlords “wish list;” the same holds true if we are representing the tenant. What is important to them? When representing a tenant, the landlord’s desired lease terms are known and the LOI serves as an offer. This creates the basis for the negotiations until a final “terms agreed” LOI is documented. Leases must be comprehensive and clearly state the facts about the space, who will be responsible for what, and who pays for what. Details are important; a good lease will cover all possible issues. 

The following is a list of items that need to be initially discussed with whichever side you are representing, landlord or tenant. Think of this as a “check list” for determining their position and level of importance on each issue. After the negotiations and agreements are reached these items become the basis for the LOI.

• Space: If office space, net useable s/f, loss factor or add-on factor,

• Rentable (billable) s/f: If retail or industrial gross s/f.

• Use of space: Business usage, certificate of occupancy, permits or licenses.

• Lease term: Define the initial term (length) of the lease and renewal, extension or expansion options.

• Rent: Base monthly rent or rent per s/f. What is included in base rent? Base rent to include? (i.e. heat, air conditioning, utilities, cleaning.)

• Additional Rent: Are there any additional charges to the tenant? (i.e. Common Area Maintenance (CAM), insurance, utilities, taxes or tax escalations?

• Utilities: Who pays?

• Taxes: Who pays?

• Rent escalations (increases)

• Condition of space: As is, broom clean

• Alterations or Tenant Improvements:  Landlord shall allow tenant to ____________, at tenant’s expense. Or construction requested to be paid for by landlord, work letter. 

• Concession period: If requested

• Occupancy date

• Commence of rent payments date

• Security deposit 

• Guarantees: Personal,  corporate, “good guy”

• Sign requirements

• Parking requirements for employees

• Building access: Hours open, overtime use of services

• Maintenance and repair: Who is responsible for what?

• Environmental

• Assignment and sub-leasing

• Liability insurance

• Termination options

• Defaults: Late payment of rent

• Disputes: Mediated or arbitrated

• Purchase option: If desired

• Right of first refusal: If desired

• ADA – Americans with Disabilities Act Compliance

• Building regulations: “Green” buildings

• Brokers commission: Fee to be paid, typically by the landlord

• Other issues unique to this situation.

The LOI is a tool to help the attorney draw the lease. Remember, in most cases the attorney has not been privy to these negotiations, so the LOI must cover everything. If some of these issues are not applicable to this situation, indicate so on the LOI so the attorney will know they have been discussed.

Once the lease has been drafted the real estate agent should review it to be sure all the terms agreed are included, nothing missed or added. Both parties to a lease need legal advice, so in addition to the agents review, the client needs an attorney to review the lease agreements content and the “legalese” parts of the document. 

Leases are contracts, in many cases for long periods of time, great care must be taken in their construction and in the review process; and it all begins with the LOI.

Edward Smith, Jr., CREI, ITI, CIC, GREEN, MICP, CNE, is a commercial real estate consultant, instructor and broker at Smith Commercial Real Estate, Sandy Hook, CT.