Introduction: Negotiating and Preparing a Letter of Intent (“LOI”)
When negotiating a letter of intent (“LOI”), although it is my belief that the word “never” is one that rarely (if ever) should be used, it is my position that a tenant never has more leverage in its negotiations with the landlord than during the LOI preparation and negotiation stage. Once the LOI terms have been agreed to, although the deal is not truly effective until such time as the lease has been fully executed and delivered to all parties, simply put, once the lease has been prepared and while it is being negotiated, the tenant has most definitely lost a fair portion of its leverage.
Stated a bit differently, at the LOI stage it is my view that the landlord is either attempting to seduce a prospective tenant to lease space in its building, or alternatively, for an existing tenant to remain in its space to avoid vacancy and lease up costs (and the absence of revenue loss) associated with a tenant making like the Grateful Dead as they go Truckin’ to another building at lease expiration. Provided that the tenant concession cocktail and other tenant “asks” are rooted in reality and border on some semblance of reasonableness, never is there a better time for the tenant to ask of the landlord that which it truly desires. Although not a perfect analogy, on my first date with the woman who ultimately became my wife, given that I, like a landlord to a prospective tenant was trying to seduce her (in Joy’s case due to her inner and exterior beauty), when she mentioned that she couldn’t decide between the red snapper and lobster for her entrée – being the schmoozer and negotiator that I am – I of course said to Joy something along the lines of “how about we share the lobster as an appetizer, and you have the red snapper for dinner.” I trust the point is clear!
A few basic examples of why we at Leasing REality feel that a tenant has lost a significant portion of its negotiating leverage subsequent to the LOI stage are as follows:
- at that point having already foregone the other spaces it was once interested in (leaving itself with no fallback options if the lease it is then negotiating is not finalized);
- possibly being in a holdover situation at its current space (putting itself in a position where it may need to pay its current landlord 200% to 300% of the rental amount provided for in its lease if it holds over beyond the lease expiration date);
- being in a position where they need to open up their new location very quickly for financial reasons (such as accruing interest on a business loan or the ticking of the clock on preferred returns to investors); and/or
- having gotten a bit “financially pregnant” by hiring its leasing attorney, architect and other third party professionals.
Stressing yet again its importance, although a LOI is a non-binding document, nonetheless, it sets the playing field on which the parties will be negotiating the lease. Keep in mind that:
- most initial commercial lease drafts are arguably among the most one-sided, offensive legal documents known to mankind;
- although a commercial lease is of course a legal document, roughly 90% or more of the language contained in a lease is of a “business nature”;
- LOI’s are generally negotiated by brokers and owners (and not by attorneys); and
- right or wrong, with no offense intended to my legal brethren, the perception of many is that most attorneys are not necessarily considered to be well versed in the business aspects of what may or may not transpire over the course of a 10 to 15 year lease term. Consequently it is bewildering that more love, attention and detail is not contained in a LOI. Taking it a step further, given that many brokers are “Type A” and consider attorneys to be deal breakers and not deal makers – it is mind boggling that brokers, who technically earn their commission only when the lease is fully executed and delivered, too often place control of their leasing destiny and of the transaction almost solely in the hands of an attorney!
Getting back to word “leverage” my leasing brethren, it has been defined as the power to influence a person or situation to achieve a particular outcome. Stating what may or may not be the obvious, context in negotiations is quite powerful. In any world, leverage (along with knowledge) is power, and as the title of the Red Hot Chili Peppers’ song goes, leverage brings “The Power of Equality” to those possessing it!
In a landlord’s market, when advocating on their behalf, real estate professionals should feel empowered, but with some semblance of tact and reasonableness, when putting forth the message – with a little help from the virtual band Gorillaz – that “We Got the Power.”
Conversely in a tenant’s market – such as the summer of 2017 retail market across the USA – tenant advocates can and should know that – in the words of Grammy Award winning band Linkin Park – they are not “Powerless” but rather possess as a negotiating chip (in the words of none other than Madonna), the “Power of Good-Bye” to a landlord.
Once again stressing the importance of context, knowledge and market conditions when it comes to how a real estate pro should approach both letter of intent and lease negotiations, although their then message had absolutely nothing to do with the economic and business terms of a commercial lease, a good number of the song titles of hip hop and Rock and Roll Hall of Fame legends Public Enemy should be taken to heart and mind when doing so.
As a tenant advocate, you need to walk a very tight and fine line when you “Bring the Noise,” the “noise” essentially being the tenant concession cocktail and other pro-tenant protections that you plan on serving up to the landlord by somehow conveying the message simultaneously that:
- you’re not trying to “Fight the Power” and for the greater good of getting a deal done we as “Brothers Gonna Work it Out”; and
- when you are asking the landlord to “Give It Up,” as a tenant rep you clearly put forth the message of don’t worry “You’re Gonna Get Yours.”
If at the end of the day as a tenant advocate you are successful in doing so, you’ll leave the landlord’s side no choice but to say “He Got Game.”
Please know however, going to the well once more with Public Enemy as my wing men, that if you fail in properly advocating your client’s position, not only will the landlord send a message to the tenant’s side that they “Can’t Do Nuttin’ for Ya’ Man,” but even worse, they will move on to another prospective tenant by instructing their agent to cease negotiations and to “Shut ‘Em Down.”
That all said, playing off of the title of a song from Arcade Fire, hopefully I was able to “give you power” by adding a small ingredient or 2 to whatever your negotiating magic sauce may be. Until next time, be careful out there as you balance yourself atop the proverbial negotiating tight rope of life.