You found your perfect retail location for lease. Now what?
Your next step is to sign a “letter of intent” (LOI) to lease this commercial property. A letter of intent to lease is usually written as a non-binding agreement, where the potential Landlord and Tenant outline and agree to the major terms under which they are willing to settle, and enter into a commercial lease agreement. There is no standard form for an LOI, and each landlord or real estate professional generally have their own version for your use. Here are some common things you can expect to see, and we’ll try to break it down so you can actually understand what they mean.
First things first. Rent is the cornerstone of your negotiation process. Your rent is generally quoted as a price per square foot, per year. Here’s how it works out:
If you’re interested in a 1,600 square foot space, and the rent rate is $25 per square foot, you need to multiply 1,600 (square feet) by $25 (per square foot) to get your annual rent. In this example, you’ll be paying $40,000 per year in rent. If you’d like to figure out your monthly rental rate, simply divide your yearly rent rate by 12; which comes out to $3,333.34 monthly.
“Triple nets” (or NNN) are the ongoing expenses of your property, which include real estate taxes, building insurance, and maintenance. These expenses are in addition to paying rent and utilities. NNN are priced on a per square foot basis, so the same formula you used to calculate your annual and monthly rent will be the same way to calculate your NNN costs.
Lease Commencements and Rent Commencements
These may sound like the same thing, but they are very different. Lease Commencements are often referred to as your “delivery date,” which is the day that your lease term starts. Landlords generally make assign this date as the day they hand the keys to you, whether or not you have begun construction on the space, or are yet open for business. The Rent Commencement is the day you start paying rent. This can sometimes be several weeks or even months after your lease commencement date. The two dates should be outlined in your lease letter of intent.
Use and Exclusivity
This is where you and the landlord agree to a specific use of the space, which should also be described in your letter of intent. You’ll want to make sure you are in the clear from a zoning perspective with your municipality, and confirm your use is allowed by the landlord or the landlord’s other tenants, as bound to him by other lease agreements that may have “exclusivity rights.” Exclusivity rights or provisions give tenants the right to operate a particular type of business, as well as prevent other tenants from using their space in certain ways, with lasting implications for both landlords and tenants.
Assuming you and the Landlord have come to terms on your occupancy, the items outlined in letter of intent will be incorporated and drafted into your lease agreement. If you’re working with a real estate professional, ask them for a sample letter of intent to lease to review.