Making the Offer

The Anatomy of a Letter of Intent

Part 3 - Base Rent & Additional Rent

Rent: Under this heading, you’ll want to spell out the rent schedule for the entire term (base term plus any options periods) along with the agreed upon increases. It’s important to spell out EXACTLY what your rent will be in yearly and monthly amounts and, as with the term, include when your responsibility to pay rent starts.

What price you decide to offer the Landlord is a very personal decision on your part, just make sure that it is a number you can live with and not going to be a stretch for you and your business to meet. Just try and keep a straight face while you discuss it and remember that every dollar that you save in rent will go right to your bottom line.

Example: A five (5) year base term with one (1) - five (5) year option. The term shall commence on the first day of the first calendar month following the earlier of (i) one hundred fifty (150) days after all of the conditions and covenants have been fulfilled or (ii) the date Tenant opens for business, whichever shall first occur.

Rent:

Years                      Rent                            Per Month            

1-5                         $96,720.00                  $8,060.00

6-10                $106,392.00         $8,866.00

Oh, that brings up one of the dirty little secrets about rent increases; most major companies do not agree to yearly escalations in rent. Usually, they will agree to "bumps" every three (3) to five (5) years and try to limit the increase amount to no more than 2 or 3% maximum. Since your business may not grow by more than 2 or 3% every year, why should your rent? This is about YOU making money not the Landlord (That’s a whole different web site).

Utilities and CAM Charges: If your responsibility is to pay all of the utilities in the building or just your proportionate share (which would make this a “net” lease), you’ll want to identify it in your offer letter.

Although it may sound fair on the surface to pay 25% of the common charges and utilities if you are leasing 25% of the building; you should be aware of any Tenants that may use significantly more water, electric, etc than you do. 

Nothing is worse than having to pay more than you should, so protect yourself and your business from subsidizing another tenant (i.e.; a business that is open 24 hours a day will most certainly use more electric to light the parking lot than a retail store open from 9:00 AM to 6:00 PM). You should outline how the charges are calculated, exactly what’s included and when the Landlord plans on billing you for them.

One word of caution; make sure you fight for your right to audit any of the Landlord’s charges. You will most-likely hear them scream, but it beats getting hosed with charges that you shouldn't be paying in the first place. Common Charges are, without question, one of the biggest opportunities for Landlords to really stick it to their Tenants. We’re not saying every Landlord does it…but the potential is there. You need the right to audit, period.

There are situations, especially found in some regional mall deals, where Tenants pay more in CAM charges than they do in base rent (someone has to pay for the merry-go-round and you can bet…it ain’t going to be the Landlord) get an estimate from them so you can include it in your Business Plan and your Operating Pro forma.

Taxes and Insurance: Similar to Utilities and CAM charges, Tenants in multi-use buildings usually pay their proportionate share of these expenses (If you occupy 10% of the building, you usually pay 10% of the taxes and insurance). Although as with the other charges, you should identify the square footage of your space and the total square footage of the building and reduce it to a percentage (this is your Proportionate Share).

Most Landlords are going to require you to carry liability insurance and/or business interruption insurance. You will probably want to identify the limits and amounts of their minimum requirements (most companies offer the Landlords $1,000,000 of coverage but will “settle” at $3,000,000; rarely do they ever give more). You should always speak in detail with a qualified Insurance professional about what coverage will best suit your individual needs (yeah, we know this doesn’t sound like a lot of fun, but it sure beats a “Am I covered for that?” moment after someone accidentally drives through your storefront window).

Next: Term and Contingencies

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