Letter of Intent (LOI) Retail space negotiations are complicated and time-consuming. Once you have located the retail space which is ideal for your business, the next step is to negotiate an agreement which protects you and is acceptable to the landlord. Industry practice for retail space is to negotiate a letter of intent before negotiating the lease.
Use an Attorney! Engage an attorney to assist in the letter of intent negotiation. It probably seems that the letter of intent is informal and can easily be negotiated without an attorney. However, there are issues you should address in the letter of intent which may not be obvious if you have not previously negotiated letters of intent for retail.
Wow! This is Complicated Common factors for a retail space letter of intent include: defining the parties (leasor and leasee aka landlord and tenant), defining the space, defining the rent including any percentage rent, defining the basis for calculating sales or net income if they are involved in calculating rent, the initial term, any renewal options, rent for renewal options period, the day at which lease payments commence, the date of occupancy, the condition of the space when the landlord provides it to the tenant, tenant improvement allowances provided by the landlord, who performs the tenant improvements, is the tenant required to use union labor for tenant improvements, is the tenant required to use a general contractor for tenant improvements (TI), who pays for the cost of the ADA compliance, who maintains what (i.e roof, HVAC, electrical, plumbing, etc), who pays which expenses, calculating the payment for CAM (common area maintenance), free rent, and identification of the broker and payment of the brokerage fee if relevant.
You Mean There is More! Other issues which you may want to address in the letter of intent include expense escalations, co-tenancy issues, eminent domain, foreclosure, maintenance standards, definition of the amount of leaseable space, personal guarantees, purchase option, subleasing, required hours of operation, dedicated parking, who is responsible for obtaining variances related to signage and usage of the retail space, expansion options, first right of refusal, can the tenant keep the TI allowance not needed for construction, can the landlord relocate the tenant if the space is needed to accommodate another tenant, late payment fees, the mechanics of providing notice of default and any options for the tenant to cure the default, mechanics of dispute resolution between the landlord and tenant, and a right to terminate if your sales do not stabilize at a minimum level.
Complete LOI First Complete and obtain an executed copy of the letter of intent before beginning on the lease agreement. The primary objective of the letter of intent is to negotiate and agree upon the business issues. The lease documents these agreements. Discuss fees to negotiate the lease with your attorney. Agree upon an hourly rate and estimate of the total fees. Agree the attorney will call if it appears the cost is going to exceed the estimate.
The following sections of the leasing retail space article focuses upon issues which merit commentary.
Percentage Rent Percentage rent -- make sure the agreement regarding percentage rent is clear. If percentage rent is based on sales, define sales. For example, is sales-tax remitted to the city and state included in sales? It is even more difficult to define net profits, which is why most percentage rent leases are based upon sales instead of profits. Attempt to look at the definition of net profits from a detached perspective. If you gave the definition to a six grader, could they understand it?
Renewal Options Renewal options -- tenants love them and landlords prefer to avoid them. In general, a larger number of shorter renewal options are better for the tenant. In addition, shorter notice periods to announce the tenants intend to renew are desirable for the tenant. Landlords prefer as much notice as possible regarding whether or not the tenet plans to renew.
Renewal Option Rental Rates Renewal option rental rates -- tenants typically want fixed rental rates for renewal periods. Landlords typically want the rental rate based upon market rent. Agreeing upon market rents can be difficult and expensive. Reasonable people can disagree regarding the level for market rent for a retail space. For example, should the premium for an end-cap space be 10% or 100%? Retail space is not fungible. It recently signed lease for retail space within the same center provides insight into market rent. However, in most cases it will not clearly defined market rent.
The Market Research and Consulting division of O'Connor & Associates provides information necessary to make decision to commercial real estate professionals. Occupancy and Rental Data, ownership and management information are routinely gathered for four major land uses ? multifamily, office, retail and industrial. This information allows investors to compare competitive properties, facilitate business decisions and track market and submarket performance. In addition the data is useful to brokers who for example continually monitor Houston retail space leasing, Houston office space leasing, Houston industrial space leasing, Houston apartments, Dallas apartments, Ft. Worth apartments, Austin apartments, and San Antonio apartments.
Parking Research whether the retail space you are considering has adequate parking. Consider both the local Government code and feedback from tenants within the center. Also consider visiting a center four to six times prior to signing a lease.
Multiple Visits If you visit the center for the six times at different times in the day and week, it will give you a better feel for the adequacy of parking as well as other potential issues related to the center. It would be overkill to visit each center you are considering four to six times. However, this can provide invaluable intelligence for retail space before you make a serious financial commitment.
Allowable Use? Retail space is often subject to rules established by the landlord, deed restrictions and local government restrictions. Research these issues prior to investing much time or money in a retail space option. For example, a tenant within the center may have obtained the exclusive right to sell food within the center. If you are considering opening a coffee shop which also sells pastries and sandwiches, you would either have to obtain a variance or move on to the next option.
Approval Process If the approval process for the deed restrictions or local government are subjective, obtain written information regarding the restrictions and the approval process. Also consider visiting with both the retail tenant rep broker and tenants within the retail property.
Condemnation Plans? Research the possibility of a condemnation proceeding. Visit with the relevant city, county or highway department officials to determine whether there are any plans to widen any of the streets contiguous to the retail center. If there are firm plans for roadway expansions, research the details thoroughly. It is difficult to develop a successful retail establishment. It would be most unfortunate to develop such an establishment and have to move after only one or two years.
Why Did Previous Tenant Leave? This section considers the history of tenants who previously occupy the space you are considering and special issues for a new center. Once a space has made it to the "short list", research why the previous tenant left the retail space. If it was a location for a chain which filed for bankruptcy or an individual who retired and shut down the store, it is not too troubling.
If Previous Tenant Failed However, if it is someone who operated a business similar to the one you are contemplating, and the business fails, serious due diligence is appropriate. In this event, you should attempt to speak to the proprietor who previously occupied the space. You may also want to speak to the tenant who occupied the space prior to him. Visiting with other tenants regarding the history of the space as well as the history of the center and the prosperity of their businesses can provide excellent insights.
Proposed Center If you are considering renting space in a proposed shopping center, serious caution is warranted. Is the concept or theme for the shopping center tested? Or is the developer trying to introduce a new team or mix of businesses for this retail property. There is clearly much higher risk that the property will not be successful if the owner is experimenting with a new concept. While you may decide it is the ideal location for your retail space, be aware that the risk of a poorly performing retail center is higher with an experimental concept.
Have National Tenants Committed? You will certainly want to research which other tenants have committed to the shopping center. If nationally recognized retailers have committed to lease in the shopping center, you can feel comfortable that they had done meaningful due diligence and believe the concept is workable.
Developer's Experience Separately, what is the developer's experience? Is this his first retail development or has he developed 10 or 20 properties over the last five years? If the proposed property is a retail strip center, and the fundamental characteristics of the center are sound, leasing from an inexperienced developer is probably a reasonable risk. Also consider obtaining the work history or r'sum? of the developer. Does his recent history indicate a pattern of successes or failures?
Strip Centers Desirable characteristics for a retail strip center include a hard corner location, space which is parallel to at least one of the streets, and a relatively modest size (perhaps 10,000 or 20,000 ft.?). Ideally, it would also have an anchor tenant, perhaps a nationally recognized convenience store. However, many strip centers do not have an anchor tenant.
Don't Do It Renting space from an inexperienced developer building an experimental concept is probably taking an unnecessary and inappropriate level of risk.
The Market Research and Consulting division of O'Connor & Associates provides information necessary to make decision to commercial real estate professionals. Occupancy and Rental Data, ownership and management information are routinely gathered for four major land uses ? multifamily, office, retail and industrial. This information allows investors to compare competitive properties, facilitate business decisions and track market and submarket performance. In addition the data is useful to brokers who for example continually monitor Houston retail space leasing, Houston office space leasing, Houston industrial space leasing, Houston apartments, Dallas apartments, Ft. Worth apartments, Austin apartments, and San Antonio apartments.
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