In a commercial real estate lease transaction, all good intentions should be put in writing, but what does that mean?
You’ve combed through hundreds of properties. Toured countless spaces. Formulated the best space plan. And now, you’ve selected the property with which you want to move forward. So, what’s next? This is what I like to call, the “fun part!” The next step, in the process, is to request a Letter of Intent (LOI), also known as a Proposal, from the landlord. The landlord makes their first offer. You review it, then what’s next?
Understanding the LOI
An LOI usually consists of the following: Tenant Name, Landlord Name, Lease Term, Commencement Dates (Lease and/or Rent), Offering Price, Tenant Improvement (see Understanding Tenant Improvement Cost), and additional general information about the property. For example, take a look at this Sample Letter of Intent.
The purpose of the LOI is to lay out all the standard terms and conditions before heading into the lease. This also opens the door for counteroffers and negotiations.
Making Your Best Counter
This is your time to make your voice count! Most landlords expect a counter to the LOI. These documents are where everyone puts forth their “wish list”. For landlords, they tend to keep their asking price with increases and preferred terms. For tenants, this is an opportunity to put YOUR wish list into play as well. LOI’s are not usually accepted on the first go around. If yours is, as a landlord or tenant, awesome! The reality is, that is a rare occasion.
As a tenant, making a counteroffer can be critical. It is not just words on a paper. It sets the tone for the potential relationship between the landlord and the tenant. If you counter back too low, the landlord may lose interest in you as a tenant. An example of this would be:
|Landlord Offer: $15/NNN||Tenant Counteroffer: $6/NNN|
I hate to break it to you, but if the tenant chooses to counter back to the landlord at 50% or less of their asking price, the landlord will most likely choose to pass on a response. It would almost feel as an insult to them. At the same time, it is important to make sure that your counter is a price you are comfortable paying.
So, what should you consider in your counteroffer? First is to consider the market. Is the asking price in line with similar properties in the area? With the help of a commercial real estate professional, you can find this information. In fact, this information can also be researched by you through LoopNet. They allow limited public access but enough to get the information you need.
Next, consider your lease term, rent abatement, escalation, and build-out expense. One thing that we like to do at MacRo for our clients is rent spreadsheets. Take a look at this Sample Response Spreadsheet.
This spreadsheet allows us to see the landlords numbers compared to the preferred numbers of the tenant. You will see a column called “Compromise”. We use this to show our clients what we anticipate being the final response, upon which both tenant and landlord can agree.
Finally, and most importantly, make sure the rate and terms used are that which you and your company are comfortable with countering and accepting.
Bringing It Home for the Close, Literally
There are a number of factors involved in getting from searching for a space to actually moving in. I want to leave you with a few important takeaways for making a counteroffer:
- Know the market.
- You can counter back at more than just the price, such as term, build-out, and rent abatement.
- Remember, a Letter of Intent (Proposal) is NON-BINDING!
If you are interested in more information or have additional questions, feel free to contact me at email@example.com.
Ashleigh Kiggans, Vice President, joined the MacRo team in 2015. She plays a key role within the organization, assisting the leadership team across a wide range of initiatives, including market research, data analysis, client communications, and marketing while assisting with the sales and leasing transactional process.