One of the most lively discussions I have seen on any social media or listserve has been a recent one on Linkedin by Ira Meislik who asked the question, “Can a Detailed Letter of Intent Speed Up a Transaction?”.
What I was most intrigued by was the clear split between those who thought more was better verse those who thought less was better…simply…it was the brokers representing tenants or the corporate real estate executives on one side and the listing agents or landlords on the other. The former wanting as much detail in the LOI, typically 28-35 issues or deal points while the latter wanted short forms which usually meant limiting the LOI to 8-12 terms.
The discussion was most revealing and ranged from how the length or detail of the LOI could or couldn’t save either time or money. Both had their own talking points and were convince their position was right. Personally, I looked at the discussion as if it were a political referendum like we so often have in California. I look for who is supporting which side of the ballot. Too often the referendums are so complex and confusing it’s best to see what the experts think. A tax on cigarettes failed because of a great marketing campaign supported by the big tobacco companies while the American Cancer Society and others just couldn’t raise the capital to run counter adds. I voted with the ACS.
So many times we negotiate a deal with the broker then provide the final LOI to the attorneys when we (along with the tenant’s attorney) negotiate the lease only to have the implementation of the transaction including installation of the TI’s, managing the lease during the term or other issues are then turned over to a third party property manager who was not involved in the initial negotiations.
While one might say the Lease should have covered all the negotiated items it never fails that someone along the line looks at the Lease and tries to interpret it in a different way. The more detailed the better.
While that is always our goal, it never seems to amaze me how interpretation of items normally accepted as standard in a market is misconstrued after the deal is signed.
Recently we completed a transaction for a client where our 32 item LOI contained general information concerning the tenant improvements. While the LOI had some workable parameters and a drawing of the proposed improvements it clearly stated the Tenant would meet with the Landlord or his agent prior to executing the Lease in order to clarify the scope of work. One item that was specifically called out in our walk through was that the blinds in the front of the suite (the entire length of the front entry was windowed sections) would be “Repaired or Replaced.” As we did our pre-lease walk through it was determined the blinds could not be repaired and needed to be replaced. What the Landlord attempted to do was take blinds from other suites some of which didn’t even match and install them in the suite noting that by doing so they were living up to the “or replace” mandate of the Lease. Next time we write (for the first time in over 25 years), “Repair as new or replace with new.”
We don’t have all the answers and things we never expected seem to come up on every deal. However, the more detailed your LOI is, the clearer it will be for the folks that are helping to manage the lease but, as mentioned earlier, were not directly involved in the negotiations.
We’ll talk more about what goes into an LOI in future blogs. Feel free to contact me if you have immediate questions at firstname.lastname@example.org.