by Prince Licaylicay | Nov 24, 2021 | All Articles, Buying, Investing, Leasing, Selling
In a leasing project, you will likely encounter a Letter of Intent (LOI). This article explains the essential details you need to know about an LOI, including its purpose, usage, and significance in commercial real estate transactions.
What is a Letter of Intent (LOI)?
A Letter of Intent (LOI) outlines the foundation for a future agreement between two parties. It serves as a preliminary agreement that a tenant and landlord or buyer and seller negotiate. The LOI details the main economic terms and key points proposed for a lease agreement. Essentially, it drafts the crucial items both parties evaluate to decide whether to proceed with an official contract. While the LOI is typically non-binding, both parties can agree to make it binding.
When Do You Use an LOI in Real Estate?
Typically, a potential tenant, buyer, or representing broker submits a Letter of Intent as an initial offer in a commercial real estate transaction. This submission relies on basic information that the landlord provides and preliminary due diligence on the property. After the LOI reaches the other party, they begin negotiations and formal due diligence before finalizing a purchase or lease agreement. While parties often agree on LOIs, they may change or withdraw the terms and conditions since the LOI is non-binding and subject to further verification.
In commercial real estate, an LOI puts the major points of a proposed lease into writing. The party submitting the LOI should research, inspect, or tour available properties before submission. Generally, a commercial real estate broker representing the buyer or tenant drafts the LOI after inspecting the property and discussing terms with the owner or landlord. The LOI outlines key deal points such as rent, the due diligence period, financing, and the close of escrow or date of possession.
Why is the Letter of Intent Important?
A Letter of Intent plays a crucial role in commercial real estate leasing or buying. Since buying, selling, or leasing commercial real estate is often tedious, complex, and costly, even experienced investors and tenants rely on the LOI to ensure that both parties reach a mutual understanding before diving into the complexities of contract-making.
Moreover, the LOI acts as a stepping stone between initial discussions with the property owner and the drafting of a legally binding lease contract. It allows the parties to outline key points and familiarize themselves with the basic terms of the proposed transaction. This step is vital before negotiating contract terms and paying a real estate attorney to draft or review a lease agreement.
For landlords, the LOI provides an excellent way to assess the seriousness of a prospective tenant. Additionally, creating an LOI involves no cost, allowing prospective lessees or buyers to submit multiple LOIs, hoping that one will be accepted. However, if a prospective lessee’s terms significantly deviate from the property owner’s expectations, this deviation may indicate that the lessee is not a good fit or is not serious about completing the transaction.
What Does an LOI Include?
A typical Letter of Intent includes the following:
- Parties Involved: Names of the tenant and landlord, contact information, and the party authorized to execute a final sales or lease agreement.
- Property Details: Address, suite number, building description (including lot size and square footage), and type of rent (Full Gross Service or Triple Net Lease).
- The Offer: Lease price, down payment, due diligence period, lease terms (including rent and any annual increases), rent abatements or tenant improvements, lease length, and target dates for signing the lease agreement.
- Disclaimers: Statements clarifying that the LOI is non-binding, along with any preconditions for signing the lease.
How to Write an LOI
The structure of a Letter of Intent typically includes:
- Introductory Paragraph: Describes the purpose of the LOI, such as expressing interest in leasing the property.
- Parties Involved: Identifies the entities involved, including their legal and home state, to reduce the risk of incorrect information being used in the lease agreement.
- Key Deal Points: Describes the property, terms of the offer, and any commercial real estate brokers involved, along with other key terms specific to the transaction.
- Closing Paragraph: Clarifies whether any parts of the LOI are binding, includes a confidentiality clause, outlines remedies for breaching any binding provisions and requests that the receiving party sign and return a copy before the LOI’s expiration date.
Conclusion
In conclusion, a Letter of Intent serves as a guiding document for parties before they enter into any formal lease or purchase agreement. It outlines the key points both parties want to convey, ensuring a mutual understanding. Although non-binding, the LOI plays a crucial role in the early stages of real estate transactions, allowing both parties to clarify their intentions and proceed with confidence.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Phill Tomlinson | Nov 23, 2021 | All Articles
As a tenant or business owner looking to lease commercial real estate (CRE) property, you hold a position of advantage. CRE property owners or landlords often seek you out, employing strategies to entice you to sign a lease or renew an existing contract. These strategies typically include incentives, which can serve as attractive perks.
In a competitive market, landlords use incentives to present their properties in the best light. However, while these incentives may seem appealing, they require careful consideration to avoid potential drawbacks. It’s wise to hire a real estate broker or lawyer to examine the agreement before you sign.
Types of Rent: Face Rent vs. Effective Rent
Before exploring the various lease incentives available, it’s essential to understand the two types of rent: face rent and effective rent.
Face rent refers to the baseline payable amount, excluding incentives. In contrast, effective rent represents the total rent after accounting for all incentives. Effective rent is the actual amount you’ll spend on the property and is the figure to compare with other properties on your list. These rent types also help calculate the total savings a tenant can generate over the lease period.
Common Lease Incentives
There are numerous incentives in the market, but the three most common ones are the rent-free period, rental rate reduction, and fit-out contribution.
Rent-Free Period
A rent-free period, also known as abated rent, allows tenants to occupy the property without paying rent for a specified time. This incentive is often offered during the first few months of the lease, providing significant cost savings. It’s particularly beneficial for newly established businesses, as it helps generate sustained cash flow during the initial operations.
However, it’s crucial to remain cautious when considering this incentive. Thoroughly review the lease agreement and consult professionals to ensure the arrangement doesn’t result in long-term disadvantages.
Rental Rate Reduction
A rental rate reduction involves negotiating a lower lease rate, either for a specific period or throughout the lease term. Deciding whether to opt for a rent-free period or a rental rate reduction depends on which option offers greater savings. When making this decision, consider factors such as annual rent increases, market stability, and negotiations with the property owner.
Fit-Out Contribution
A fit-out contribution, also known as a tenant improvement allowance, involves the tenant and property owner sharing the costs of space improvements. This incentive may cover maintenance costs, fixture installations, and other enhancements. Typically, it operates on a reimbursement basis, with the property owner covering a percentage of the total costs.
Before proceeding with this incentive, tenants usually need to provide the following:
- A duly signed commercial lease contract or agreement
- Required insurance documentation
- Receipts for all identified expenditures for reimbursement
- A bank guarantee or security deposit
- Detailed plans for the work, subject to landlord approval
When negotiating a fit-out contribution, both parties should clarify terms such as:
- Ownership of the completed fit-out, either fully or partially by the tenant or landlord
- Whether the landlord must provide an ‘incentive guarantee’ to cover the incentive
- The mode of payment, whether on a reimbursement basis or another method
Additional Lease Incentives
Aside from the three common incentives, landlords may offer other perks, including:
- Cash payments
- Cash-convertible benefits like cars or equipment
- Fixed rent rates that don’t increase during the lease period
- Reimbursement of relocation costs, penalties, or legal fees
- Free furnishings and equipment
- Incentives for exceeding lease liabilities or low-value equipment
- Compensation for inconvenience caused by refurbishment
- Interest-free loans
- Holiday packages
- Pay-out of a tenant’s pending lease commitment to another property
Incentive Taxation
Incentives given to tenants, such as cash, are often considered taxable income. However, if provided during the initial stages of a business, the incentive may be classified as capital and thus exempt from tax. Incentives like reduced rent or entertainment packages, such as holidays, are also typically non-taxable.
Repayment Clauses
One of the most critical reasons to thoroughly review a lease agreement before signing is the presence of repayment clauses. Some agreements include sub-clauses requiring tenants to repay a portion of the incentives if the lease is assigned, surrendered, or terminated before expiration.
Fit-Out Ownership
Tenants should clarify the ownership terms regarding fit-out improvements. It’s essential to specify the roles and duties of both parties concerning fit-out taxation and ownership, particularly upon lease expiration.
Incentive Disclosure
Finally, never hesitate to seek professional assistance when reviewing lease agreements and negotiating terms. It’s better to be safe than sorry. Remember, a lease agreement is a legal document, and your signature legally binds you and the landlord. Although lease incentives can be enticing, don’t let excitement lead to hasty decisions that could result in undesirable consequences or financial loss.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Nov 19, 2021 | All Articles, Leasing
A lease agreement plays a crucial role in leasing commercial real estate (CRE). It outlines the terms and conditions that govern the lease during the occupancy period. Business owners and tenants have the opportunity to negotiate various provisions, allowing them to customize the agreement to meet their specific needs. Because a lease agreement is a legal document that affects the finances and responsibilities of both parties, tenants should enlist the help of a commercial real estate broker or lawyer. This ensures that the provisions are fair and justified.
As a tenant, make sure the following essential provisions are included in your lease agreement:
Rent
Rent represents the tenant’s obligation to pay the agreed-upon amount at specified intervals, such as monthly or annually. The rental rate, whether it’s full-service (FS), modified gross (MG), or Triple Net (NNN), can be negotiated based on factors like the lease term, tenant strength, required tenant improvements, and demand for the space. Most lease agreements include annual increases, causing the rental rate to rise each year according to the lease terms.
As a tenant, pay attention to how rental obligations might affect your overall costs over time. Increases often result from the base-year concept in full-service and modified gross leases. Rent can rise when operating expenses increase each year after the initial lease signing. While this increase typically ranges between 1% and 2%, being aware of it can help you avoid surprises.
Commercial Lease incentives may also impact the lease rate. If your landlord offers such incentives, make sure they are clearly stated in the lease agreement.
Repairs, Maintenance, and Improvement Clause
Understanding Improvement Responsibilities
This clause specifies the improvements made to the property before you take possession and identifies who is responsible for payment. This aspect of the agreement is critical because it involves financial obligations. Always review this clause to ensure you’re in a fair position within the agreement.
Planning Future Renovations
Additionally, this clause outlines the improvements you are allowed to make to the CRE property. If you plan to renovate the space to suit your business needs, this clause becomes especially important. If an improvement clause is absent and you wish to make changes, negotiate to include one or request permission from your landlord or property manager.
Sublease Clause
Taking risks is a part of running a business. As a business owner, you must prepare for potential failures and losses, just as you prepare for success. Having a backup plan is crucial, and a sublease clause can protect you from financial difficulties.
This clause determines whether you, as the existing tenant, can sublease the space to another tenant. It can shield you from paying rent for unused areas or from terminating your lease if you need to relocate or cease operations.
However, not all lease agreements include a sublease clause. Consider your long-term needs and future plans. Landlords often hesitate to include this clause, but you can negotiate its inclusion to protect your business and finances.
Permitted Use
Understanding Allowed Activities
As a tenant, you must know the allowable or permitted uses of the CRE property. Permitted use refers to the activities that are allowed on the property, as described in the lease agreement, CC&Rs, or zoning requirements. Verify with your city whether your business use is permitted at the location you wish to lease.
Dealing with Restrictions
For example, a dog grooming business might not be allowed under the CC&Rs, while a welding company might require specific zoning. Confirm these details before signing a lease agreement, as property restrictions could be a deal-breaker if they limit your business activities. However, you can negotiate to broaden the permitted use provision in your lease agreement.
Renewal Clause
Forgetting to renew a lease contract can lead to serious consequences, such as eviction. A renewal clause can prevent this from happening. This clause gives tenants the right to renew or extend the lease agreement. However, the specifics of this clause can vary from one contract to another.
A renewal clause should outline the steps required for a tenant to renew the lease when the term ends. In some cases, tenants might need to notify the landlord of their intent to renew. When negotiating the renewal clause, aim for methods that are convenient for both parties, ensuring that neither the tenant nor the landlord faces unnecessary inconveniences.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Nov 16, 2021 | All Articles, Buying, Investing
In today’s market, there are numerous investment opportunities available, from stocks and bonds to commodities, cryptocurrency, and commercial real estate. Your choice depends on your risk tolerance, preferences, and long-term goals. here we explain why you should Invest in commercial real estate.
If you’re an investor, whether first-time or experienced, who prefers real estate among other investment options, this article is for you. Real estate is generally classified into two categories: Commercial Real Estate (CRE) and Residential Real Estate. Here are four reasons why you should consider to invest in commercial real estate over residential properties.
Higher Income Potential
Commercial properties offer much higher income potential compared to residential ones. Generally, commercial tenants cover many of the property upkeep costs through Common Area Maintenance (CAM) charges. These charges include building maintenance, insurance, administrative fees, and more. Since tenants handle these expenses, landlords don’t have to worry about them. In residential real estate, tenants usually don’t cover these costs, and if they do, it’s often negotiated in the lease contract.
This means investing in commercial properties can provide greater income returns compared to residential properties. Commercial real estate is not only a reliable source of income because tenants cover various fees, but also because commercial tenants tend to sign longer leases. They prefer stability and avoid the hassle of relocating their businesses frequently. As an investor, consider this: instead of earning a few hundred dollars a month from a rental home, you could earn thousands or more by choosing the right commercial properties.
Quality Tenants
Commercial properties typically attract stronger tenants than residential properties. If you’re a residential property investor or landlord, you may receive frequent calls from tenants about issues with their rental homes. While it’s your responsibility to address these concerns, many of these calls come at inconvenient times, like late at night or on weekends.
These scenarios are rare in commercial properties. Tenants in commercial spaces tend to be more professional and often have their own maintenance teams to handle issues. Additionally, commercial tenants usually operate during regular business hours, so any calls you receive will be at more convenient times. Investing in commercial real estate not only gives you better quality tenants but also spares you from late-night emergency calls.
Less Competition
The competition in the commercial real estate market is lower compared to residential real estate. Residential properties are common and widespread, making commercial properties appreciate differently. Many investors often overlook the value and potential of CRE, leading to less competition. Financing is typically more challenging for CRE, reducing the number of potential buyers compared to the residential market. As a result, those who qualify can explore more options with fewer competitors.
Investing in CRE not only offers higher returns but also provides more income opportunities and profit potential.
Property Value Appreciation
A wise investor carefully selects what, where, and when to invest. Investing in a commercial building is often a better and more secure option compared to a residential property. Why? Because commercial real estate appreciates faster than residential real estate.
One key difference between residential and commercial real estate is how property values are calculated. While comparable properties heavily influence residential real estate values, revenue plays a significant role in determining commercial real estate values. Additionally, commercial properties are less susceptible to market fluctuations, making them a safer and more stable investment.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market! Invest in commercial real estate now.
by Prince Licaylicay | Nov 12, 2021 | All Articles, Buying, Investing
Closing a real estate transaction involves completing necessary investigations and actions performed by a single agent or title attorney before issuing the title insurance policy. While title attorneys or agents don’t have the primary responsibility to resolve every title defect, they often provide valuable assistance in this area. Here’s a step-by-step guide to understanding the Commercial Real Estate (CRE) closing process:
Establishing a Plan
The first step is to develop a transaction plan. This plan should guide contract negotiations and outline the necessary actions for closing and post-closing. For example, if zoning requirements, utility availability issues, or the need to confirm structural elements of a building exist, the plan must address these and include them as part of the closing requirements.
Assessing Potential Issues
Prepare for problems that may arise during a commercial closing. Failure to identify and resolve these issues can lead to transaction missteps. You can effectively mitigate risks through risk-shifting techniques like obtaining insurance with appropriate commercial endorsements. An experienced commercial real estate attorney, familiar with these endorsements, can often overcome title obstacles through effective contract drafting and collaboration with a professional title underwriter.
Opening an Escrow Account
An escrow account, managed by a neutral third party, plays an essential role in a commercial property sale. Given that such transactions typically involve multiple steps and take between 15 to 90 days to complete, an escrow account ensures a secure process. The third party holds all funds and documents related to the transaction until everything is resolved. Once all procedural and substantive formalities are complete, the capital and records transfer to the seller and buyer through the escrow account, ensuring a secure transaction.
Conducting a Title Search and Securing Title Insurance
A title search and title insurance offer both peace of mind and legal protection. During a title search, public records are examined to verify a property’s legal ownership and identify any claims against it. If claims exist, they must be resolved before the buyer acquires the property. Title insurance protects the holder against financial loss due to defects in the property’s title, safeguarding real estate owners and creditors from potential claims.
Coordinating All Closing Requirements
New issues often arise towards the end of closing, frequently due to the need to rely on independent third parties for certifications and property tours that must be completed near the conclusion. As closing approaches, CRE brokers, counsel, and all necessary buyer and seller representatives must stay available and ready to address changing demands and circumstances.
Negotiating Closing Costs
Closing costs can quickly accumulate, ranging from opening an escrow account to hiring a real estate attorney. Unfortunately, many services exploit consumers’ lack of knowledge by charging exorbitant fees. Even legitimate fees for closing services are often subject to inflation. Lenders may impose “junk fees,” unexpected costs not clearly explained to the borrower, leading to significant expenses. These fees include administrative, application review, appraisal review, ancillary, processing, and settlement fees.
Securing Proper Interest Rates
Interest rates, including those on mortgages, can fluctuate and are influenced by several factors, such as geographic location, property type, loan type, and the applicant’s credit score. To avoid market fluctuations that could raise rates before finalizing your property purchase, it’s advisable to lock in your interest rate in advance. Even a small rate increase can significantly impact your monthly payments and the overall cost of your mortgage.
Meeting Funding Requirements
When signing the purchase agreement, you likely deposited earnest money, demonstrating your good faith and commitment to the transaction. To complete the purchase, deposit additional funds into escrow. Failing to do so can result in the sale getting canceled, with the earnest money forfeited to the seller.
Reviewing Title and Closing Paperwork
Before finalizing the transaction, both buyer and seller must accept the title report and complete the closing documents. These may include leases, deeds, environmental reports, zoning disclosures, and any other agreed-upon terms necessary to close the deal.
During the sale process, the title company provides a report on the property’s title. The buyer carefully reviews this report and files any objections. The seller must respond to these objections within a limited timeframe to proceed with the sale. Once all title issues are resolved, a final title report is prepared, which both parties must approve before moving forward with other closing documents.
Understanding the Paperwork
Properly reviewing paperwork is essential to closing a property deal. Although the documents contain legal terms, it’s important to read them thoroughly. If any terms are unclear, hire an attorney to review the documents and help smooth out any issues with the transaction.
Final Thoughts on the Closing Process
The closing process may seem overwhelming, but investing time and effort to get everything in order before signing is crucial. While real estate brokers and other entities can assist during the transaction, they cannot guarantee a problem-free process. Ultimately, you must ensure the transaction is fair and free from potential pitfalls before closing the Commercial Real Estate Transaction.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
