Last updated 20th August 2019.
New York office space is a competitive market. If you find office space you like, even if you’re not sure it’s “the one,” you should consider making an offer by submitting a commercial letter of intent. Why?
- Don’t wait for the perfect office space: If you pause too long on an office space you are even remotely interested in, another tenant will scoop it up. The more offers you make on suitable office spaces, the more likely you are to end up in one, even if it’s not your first choice. An unfortunate reality in commercial real estate is that even the most done deal can fall through at the last minute. In which case you want to be ready to move on the next best available space.
- Don’t worry about submitting the commercial letter of intent: Making an offer on an office space is a non-binding step in the leasing process. You can withdraw at any time without penalty, making it a low-risk, proactive move that can yield a high reward.
- Show the landlord you’re serious: Submitting a letter of intent is the best way to communicate to landlords that you’re interested in leasing their property and that you’re prepared to enter into negotiations with them. Which means they’ll take you a lot more seriously.
Submitting a Commercial Letter of Intent
If you’ve never been through the process of leasing office space, the letter of intent can quickly get you up to speed on some of the terminology and conditions you’ll find in an actual lease. The commercial letter of intent is typically a short document one to two pages in length. It lays out basic lease terms that you and the landlord need to agree on: the amount of rent you’ll pay, the term of the lease, whether renovations are allowed and who is on the hook for the cost of renovations (a Tenant Improvement Allowance, for example, accounts for the landlord’s contribution to the cost of renovations) are all considerations the letter of intent can surface. Your broker submits it for you, and it can help frame lease negotiations down the line.
Think of it like a preliminary, rough outline of the lease.
How to write a Commercial Letter of Intent
Most commercial letters of intent are standardized documents, with you and the landlord simply filling in the specifics unique to the property and the basic terms of your agreement.
And most importantly, a letter of intent is non-binding. It has no legal authority to hold you to anything. It’s simply there to get the ball rolling on negotiating a lease. If you find another property you prefer to lease (and we certainly encourage continuing your search until you’re prepared to go through with a lease on a space), there’s no risk or penalty in backing out.
However as a tenant it is important to understand what goes into a landlords request for proposal or negotiating on a letter of intent and what you are agreeing to.
Even though these are non-binding documents, they set some precedent that the lawyers look to when drafting the final lease document.
Here are a few areas to be sure to consider during the commercial letter of intent process:
- Tenant Options: It’s important for a tenant to specify exactly what options they have going forward (i.e., renewal options, preferential rights to lease, contraction options, rights of first refusal, rights of first offer, etc.).
Be as specific as possible on deal points so there is no confusion later—what floors are subject to those options, what other tenants have superior rights to you, what is the rent of any new space you take, and beyond.
- Operating Expenses and Exclusions: Always ask for the Landlord’s standard list of operating expenses and exclusions, so you can begin to negotiate what is included and excluded up front, and so you know what you’re paying for. Also ask for the last few year’s actual amounts so you know what you’re getting yourself into, even though those numbers won’t actually be in the lease.
- Tenant Improvement Allowance: In addition to the amount, specify exactly when and how the tenant improvement allowance will be paid, and what the allowance can be applied towards.
- Signage Rights: Depending on your size, you may be able to negotiate for various rights for interior and exterior signage, in addition to space on the building’s directory board. Be specific as to what rights you have as a tenant, what other tenants have such rights and where the signs can be located.
Obviously these are just four of many lease points which often get negotiated through the commercial letter of intent process, and that’s why it is important for tenants to have qualified brokers and lawyers represent them from the beginning.
So the next space you tour that seems like a good fit for your future office, don’t be shy, tell your broker you want to make an offer.