Signing a commercial loi to lease new space for your company can be like walking a tightrope. On one hand, you want to get the best deal possible while at the same time you also don't want to negotiate so aggressively that you talk yourself out of a great space. Here are some basic principles that can help get your next commercial loi accepted.
Understand the Landlord's Needs
A commercial loi is a tool to achieve a meeting of the minds between you and your future landlord. As such, if you're going to craft a document that gets your landlord to enter into a negotiation with you, it helps to understand what your landlord wants. Some landlords have known ways of doing business and if you are working with one of those landlords, you are more likely to succeed by following their individual quirks.
When you don't know your landlord's particular preferences, you can work with your broker to make educated guesses based on the type of landlord. A large institutional owner like a publicly traded REIT or pension fund will usually look at the total value of all of the net income they get from the lease -- regardless of how they get it -- discounted to the present day. Investment funds like syndications that sell properties will want a lease that maximizes the property's value at the time of sale. Mom and pop private owners are usually more worried about stability and might take a less attractive deal in the near term.
Start with an Aggressively Reasonable Commercial LOI
Once you understand your landlord's profile, craft a commercial loi that represents your best offer that has a chance of being accepted. Remember that your initial loi is the first step in a negotiation, so you're going to have to give yourself room to compromise. For example, if you know the market is $35 to $40 net for a given building and you're willing to pay $37, don't offer that up front. Instead, write the offer somewhere between $34.50 and $35.50. This way, the landlord knows that he has someone serious at the table while you still have room to negotiate before you hit your price ceiling. Offering $30, by the way, would paint your offer as non-serious and run the risk of having you excluded from the competition for the space.
Listen To Your Broker
It goes without saying that you need to have a commercial real estate broker representing you. Once you hire a good one, though, listen to his or her counsel. Your broker knows about the landlord, knows about the market and has insider knowledge as to what it takes to get a commercial loi accepted. At the same time, your broker also knows what you want, what you need and where to strike a balance to achieve your big picture goals. The perspective that the broker brings will help you to get the space you want. In addition, he or she doesn't get paid unless you get your commercial loi accepted and successfully negotiate a lease or purchase, so his or her interests are completely aligned with yours.
There are many other details that go into writing a successful commercial loi. However, if you get these basics right and listen to your broker, you are much more successful to ultimately get a good space at a fair price.
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