The Details Are in the LOI

By Priscilla Cervantes

Looking into leasing a commercial space for a branch and/or back office operations can be a daunting task, from finding a desirable location, determining if the space is suitable for your needs, and negotiating the lease.  But, before delving into the lease negotiations, the first step is generally entering into a non-binding letter of intent (LOI).

What is the purpose of an LOI?

The LOI serves various purposes, but the primary purpose is to outline a general working understanding between the parties on the salient deal points prior to commencing negotiations of the lease and other minor details.  The LOI can also help uncover fundamental disagreements and accelerate negotiations of the lease, among other things.  Although an LOI is generally non-binding, it serves an initial good faith commitment of the parties to move forward with the transaction.

What should the LOI include?

Generally, your broker or legal counsel will be responsible for drafting and negotiating the LOI.  The LOI will, naturally, include all the basic information such as the parties (landlord and tenant), full address of the property and the proposed premises.  While the deal points may vary for every transaction, some of the most common and most important deal points to negotiate in the LOI include:

• Anticipated use;
• Term and extension options;
• Commencement date;
• Rent and annual rent increases;
• Security deposit;
• Tenant improvements and/or tenant improvement allowance;
• Signage; and
• Parking.

Anticipated Use

While the landlord typically attempts to impose limitations on the permitted uses of the premises, as a tenant, you should attempt to keep the permitted uses as broad as possible.  For example, as a bank or credit union, use the terms “financial institution” rather than “bank” or “credit union” and include office use, the installation and operation of an ATM (if you intend to install one), and “any use not prohibited by law” in the permitted use deal point.  Avoid enumerating the types of financial services and products that would be provided, as that can change over time and could limit your permitted uses.

Term and Extension Options

The initial term for financial institutions is usually between five (5) to ten (10) years.  However, depending on your business goals and needs, you may wish to negotiate for a shorter term (e.g., five (5) years) and multiple extension options.  For example, rather than agreeing to an initial term of 10 years with a five (5) year extension option, negotiate for an initial term of five (5) years, with two (2) five (5) year extension options.  This would give you greater flexibility as business needs change over time.  However, landlords may want a longer term commitment in exchange for additional concessions, and ultimately you will need to decide how important this deal point is for your financial institution.

You should also negotiate for predetermined rent for each extension term for predictability which ideally would follow the predetermined annual rent increases, as further discussed below.

Commencement Date

When determining the commencement date, you should account for the extent of work required, including the time needed for preparing the plans and obtaining any necessary permits.  This is one of the most important deal points as the commencement date is tied to when you begin paying rent.  Landlords typically want to have a hard date or x number of days after execution of the lease (e.g., 150 days), but these dates often are arbitrary and don’t make sense.  That said, the commencement date should be a date that is more closely aligned with when all improvements would be completed and you will be fully operational.  Also, you could negotiate to include extensions for force majeure as well as any permitting required and landlord delays.

Rent and Annual Rent Increases

In addition to the base rent for the first year of the term, you should include pre-negotiated annual rent increases which ideally would be a fixed percentage such as, for example, three percent (3%).  Although landlords will often want the rental rate for extension options to be based on the current fair market rental value, you should negotiate to have these increases be continuous into the extension options as well, which is not uncommon.

You may also wish to attach a schedule to the LOI setting forth the base rent and predetermined increases throughout the lease term, including the extension options.

Security Deposit

Typically, financial institutions tend to be lower risk tenants and therefore you should negotiate to be exempt from providing a security deposit.  To the extent that a landlord insists on a security deposit, you can negotiate having the security deposit decrease over time, sometimes referred to as a “burn down” of the security deposit.

Tenant Improvements and/or Tenant Improvement Allowance

If the premises require any initial work, the LOI should indicate who will be responsible for it and the details should be included as an exhibit to the LOI.  If the landlord will be completing the build-out, negotiate for remedies such as rent credits for delays in delivery and early access to the premises to allow you to install your furniture, fixtures, equipment, millwork, and telephone/data cabling.

If the landlord is providing a tenant improvement allowance (TIA), negotiate to apply any unused portion of the TIA to rent.

Signage

If you have any specific signage requirements (e.g., design elements) or desire signage in a specific location, you may want to get the landlord’s consent before the lease is signed and include this as a deal point in the LOI to avoid disputes later.

Parking

If you require a specific number of reserved or unreserved parking spaces, this should be included in the LOI.  As a financial institution, you may also want a designated parking space for the ATM as well.

The Upshot

As mentioned above, while the foregoing are some of the most common deal points, they may vary for every transaction.  For example, having expansion rights or a right of first refusal may be important to your financial institution and therefore you may want to include that as a deal point in your LOI before moving forward.  There could also be other concessions from the landlord such as a free rent period that you would want to include in the LOI.  The purpose is to get all of the most important items in the LOI to make sure there is a “meeting of the minds” at the outset before proceeding with the transaction.