Leverage: Negotiating and Preparing a Letter of Intent (“LOI”)
Trying to take a step down from my virtual soapbox without pulling my hamstring, given the content of my prior LOI segment regarding the how, when and why tenant and landlord leasing professionals need to take advantage of whatever market leverage they may have going into the preparation and negotiation of an LOI, let’s bring the conversation back to the LOI itself.
When you are on the landlord side, your marching orders are to keep the LOI and whatever definitions may be contained therein as narrow as possible. Pretending that the LOI provision is a door, – it should be so narrow that you could only get through it walking sideways while sucking in whatever belly you may have! By doing so, it will be the most expeditious path to luring the prospective (and quite possibly ill-prepared) tenant into the lease negotiation stage and – as already stated previously – tenants will experience a significant loss of negotiating leverage!
Conversely, when advocating for a tenant, leasing professionals should be as detailed yet as broad as possible wherever possible when it comes to preparing and/or negotiating the LOI provisions. Why you ask? Simply put, by doing so the attorney negotiating the lease itself will have as much leeway and ammunition when doing so – and redundancy aside not to be considered as if he or she is a PITA (yeah, you know, that’s an acronym for being a PAIN IN THE ASS)! Not only should certain LOI provisions be a bit more detailed than others (such as use, assignment and subletting, landlord and tenant work, renewal options and good guy guarantees if any), generally many LOI provisions should be so broad so that if they were an entrance to a building, you could drive an 18 wheel tractor trailer through such entrance sideways.
Once again, as in life, brokers need to bring a proper balance to the bargaining table. Tenant advocates need to (1) take into account the context of current market conditions, deal size, competition for the space and the nature of who in fact the landlord and tenant are and, (2) be careful to not overkill the negotiations nor bring a nuclear warhead to the bargaining table when only a creative mind, a sharp tongue and their laptop or iPhone is necessary.
The bottom line here is that there is no hard and fast rule as to how large or small the LOI should be, but as a general statement, it is preferable for a landlord’s LOI to be in the range of 2 to 3 pages, and for a tenant’s LOI to be somewhere in the range of 4 to 7 pages. Once again, market and deal context should rule the day.
On a 250,000 square foot building I represented (circa 2014) on Long Island with most of the space becoming available due to an expiring 30 year triple-net lease, on a 50,000 square foot space, building ownership received quite a few LOI’s exceeding 20 pages in length. Although not all of the requested concessions and pro-tenant provisions were acceptable, the landlord and I were not jumping up and down upon receipt of the long winded LOI, given the then “flat at best” market and the fierce competition among building owners to secure tenants. Please know though that if similar 20 page LOI’s were presented in 2014 to a sophisticated New York City landlord in a hot market, the proposal would have been shown its rightful place in the bottom of a garbage can or shredder bin.
What will follow over the remaining segments is an informal case study, based off of the initial drafts of a number of pro-tenant “Letters of Intent from Hell” I had once ghosted for a few residential brokers in New York City who were attempting to dabble in the art of commercial leasing a few years back. Although I will touch on nearly 40 lease provisions, a good number of which do not often see daylight in many LOI’s, I am hopeful that you will be to appreciate my foregoing “rant” a bit more clearly after you complete – with props out to the Grateful Dead – the long and somewhat strange trip you are about to embark on!