Modern Workplace Planning: Solving for Experience Part V: Negotiating the Letter of Intent

The letter of intent (“LOI”) is a non-binding document (although in unique circumstances they can be binding) which captures the terms and conditions upon which the parties have agreed and becomes the basis for a legally binding document (the lease).  The best LOIs are highly detailed and cover a wide range of topics from rental economics to flexibility mechanisms (like expansion, contraction, termination, and extension options) to operating expense inclusions and exclusions, and much more.  The occupier’s ability to include more items in the letter of intent varies somewhat by the circumstances of the market.  In tight markets like San Francisco circa 2019, landlords could get away with limiting the level of detail covered in the LOI.  Why would a landlord want to limit the LOI in this manner?  Because they gain leverage.  Most tenants don’t enter into the lease negotiation until late in their market process, meaning they’ve burned through a lot of the project schedule and will soon need to transition to design and construction in order to get the space ready on time.  In short, limiting the terms of the LOI is a way for the landlord to jam the tenant on timing, forcing them to be more conciliatory to preserve schedule.  In this current environment, nearly all tenants can enjoy the benefits of expanding the content of the LOI. 
 
It matters how you begin.  In soft markets (most urban center markets are now soft), the best way to begin is with a detailed Request for Proposal (“RFP”).  The RFP is vital as it does not commit the occupier to any specific positions, instead asking the landlord to respond with its specific position on a wide variety of topics.  Different landlords have different motivation to capture the tenancy.  Strategically, we always want our clients to negotiate with multiple landlords at the same time, creating a bidding dynamic in which the value achieved with each prospective lease outcome gets progressively better for the tenant as the negotiations unfold, round by round.  In some cases, the initial landlord proposal may be proforma, not reflecting a lot of movement off the quoted “asking economics”.  However, right out of the gate, some landlords may choose to get aggressive, offering terms we could not have predicted.  In distressed markets its difficult to predict how low someone will go, so why do so?  That’s the argument against beginning with an offer.  To be clear, the RFP must be thoughtful and detailed.  These discussions become sequential, with the expectation neither party will go backwards.  It’s thus harder to introduce new concepts into the negotiation downstream.  You want to get it all in there from moment one.
 
If the competitive set has been properly established, you will be evaluating comparable assets at incomparable pricing.  It’s our job to guide the negotiations such that we bring everyone down to the lowest common denominator.  After several rounds of negotiation, we often see relatively comparable value being offered.  But the key is to carefully measure and compare each unique offering such that you are capturing all the differences.  The best outcome is when the top choice site (which is typically the highest cost) concedes to meet terms which are otherwise associated with the lowest cost site.  How we communicate with counter party brokers is extremely important. For starters, we’re always truthful – strategies based on lies fail.  What we share and don’t share, the overall quality and consistency of our external communications helps shape the ways in which landlords respond.  Remember, landlords are very good at interpreting the market, in reading between the lines to get an advantage in the negotiation.  Seemingly small details can materially impact the quality of a landlord’s offer.  Too often, we see tenants and their advisors carelessly signal a desire to stay in the existing space, for example, causing the existing landlord to immediately scale back the level of concessions it would otherwise offer.  These mistakes can be costly.
 
Negotiating a great letter of intent is part art, part science.  Like the market process which comes before it, the LOI negotiation is a direct manifestation of the strategy – it’s where strategy goes from theory to action.