Letter Of Intent (LOI)
When a site opportunity is determined, you and your broker will want to demonstrate your interest by submitting to the developer/landlord a LOI. A LOI notifies the owner of the shopping center/building that you would like to engage in negotiations for a final lease and tenancy for a particular site. Your broker can advise you on the best strategy in this regard for each specific site.
Other language added: A LOI is non-binding on both parties; therefore, you are not obligated to proceed to a lease merely by the submission of a LOI. Conversely, the developer/landlord is not obligated to lease you the space merely by your submission of a LOI. This is an important distinction. You may have multiple site opportunities that you are interested in pursuing, with the intent of only securing one location. So, you and your broker may submit more than one LOI in a more highly competitive market for real estate space, in the hopes of gaining acceptance of one of the LOI’s. Conversely, landlords and developers consider many candidates/prospects for tenancy of their space. They are attempting to lease the space you are considering to the strongest tenant they can acquire. Many factors go into their thought process: national/growing brand, financial strength of guarantors on the lease, does the use of the space ‘mix’ well with other tenants in their center, and what is the impact on parking.
The LOI details the specifics that you are offering for the developer/ landlord to consider for your tenancy of their space. Often, the developer/landlord will have an “offer sheet” that spells out some of the basic details of the space, such as rent per square foot, tenant allowance(s) (TI), triple net (common area maintenance or CAM, taxes, and insurance) per square foot, etc. Once you express interest in a specific location, the developer/landlord may want to provide you with a form LOI for you to begin your negotiations. This LOI template encompasses all of the operations required needs for your center: electrical, plumbing, HVAC, water line size, etc. Other items included on the LOI, which are typically negotiated in addition to the rent per square foot and the triple net charges, are TI and “build out rent abatement / free rent”.
Work Letter
During the LOI process you will also be negotiating the condition of the space upon delivery from the landlord. If the site you are considering meets many of the criteria but not all, consider what the cost would be to make adjustments to the space and whether, given those costs, the space is still affordable. We will provide the standard amount of work we would expect from a reasonably capitalized landlord in a traditional deal structure. This work letter is not set in stone – it is a recommended starting place for negotiations. Every space is different and we recommend you consult with your architect and general contractor to get a sense of the most important items to negotiate for each given space.
For example, the sprinkler pipes or the HVAC units may exist for a space. Pending confirmation with your architect, these items could potentially be reused (pending age & condition) for considerable savings. On the contrary, taking on a space with existing older HVAC units could cost you more in the long run than simply starting with new ones at the beginning of your term. It is important to have qualified consultants review these items before entering into a binding agreement.
Generally, your landlord provides the space with the following:
- Demolition complete (“vanilla box”)
- Interior walls drywalled
- Working HVAC
- Plumbing and electrical service to the space
Rent
Base Rent
Base rent is typically expressed as a dollar amount per square foot (ex. $150/sq. ft. depending on geographic areas) on an annual basis and is multiplied by the gross leasable area of your space. You will want to gain an understanding from your broker of what comparable rents are in the trade area/market that you are considering, to ensure you are paying a fair and reasonable rate for your space.
There are other factors that will affect how much you offer per square foot to the landlord, such as whether there are any TI. This may determine how much Base rent you may want to offer the developer/landlord.
Example: If you have to spend $50,000 to upgrade the space for HVAC, or electrical, you will want to recoup that cost that is permanently improving the landlord’s space. Therefore, you may want to offer a lower price per square foot to offset this investment in the landlord’s property.
Negotiating Rent & Triple Net
Your broker will play a crucial role in helping you navigate these negotiations. Below are some basic things for you to consider as you discuss the broader negotiations of your potential tenancy with your broker.
Triple Net Rent (often expressed as NNN) represents the Common Area Maintenance (CAM) charges, taxes & insurance. This is your pro-rata share of these expenses the landlord is paying to maintain the shopping center, office building, aesthetics including landscaping, lighting, snow removal, etc., your pro-rata portion of property taxes on the building, and your pro-rata portion of the insurance on the building. These are smaller amounts that are multiplied by your square footage to determine the monthly amount you will pay. You are typically provided an annual statement to see how these monies are spent/allocated. Most leases may have a provision for an “assessment” if these charges exceed what you are paying under your lease, and also provide a refund to you (or carry forward) should the shopping center have a surplus. If it can be negotiated, you want to put a “Cap” on the NNN.
Increases In Rent
Most leases provide for increases over the term of the lease. Typically, these are 2% - 3% per year, and are either annual, or at certain milestones in the lease (example 10% increase in year 5 & 10). They may be based on an index (i.e. consumer price index / cost of living index) or other variable indexes. You want to limit these increases.
Percentage Rent
In some instances, developers/landlords may have a provision for “percentage rent.” This is more common in higher demand shopping centers. Percentage rent is an additional rent charged should you exceed defined sales amounts for your space. It is typically a percent above your base rent, calculated on your space once you exceed a certain sales threshold. We advise our franchisees to avoid leases with percentage rent clauses. If you need assistance, should this be a requirement for your tenancy, please contact us to discuss in more detail.
Free Rent
As part of your lease negotiation, you will want to ensure that you have a period where you are not paying rent, while you are building your center and in many cases after you open. This is typically referred to as a “stocking and fixturing” abatement. It takes several months from the signing of your lease to get your Center developed and opened depending on the specific site and location parameters. Therefore, you will want a sufficient timeframe for that period of rent abatement after you have signed your lease. Every situation is different. Some developers/ landlords may offer greater rent abatement and less TI or vice versa. You want to avoid having to pay rent when you are not open for business.
You may also be able to negotiate a period of “free rent” after you are open for business. This will help your overall initial cash flow, as you ramp up your business. There may be circumstances where you can negotiate rent abatement while you are building your center, and also, a period of free rent after you have opened. Tenant Improvement allowances, rent abatement, and free rent are all important aspects of your lease negotiation. You typically will not receive all three, and the amounts and time that you do receive is often dependent on the strength of your broker and their negotiating ability.
Tenant Improvement Allowance (TI)
Tenant Improvement Allowance is money that the developer/landlord provides to you to assist in the cost for developing your space. This will lower the cash/capital outlay typically required for your build-out. It is more common in a new shopping center space and shopping centers that are owned/represented by larger real estate developers or owners. These developers/landlords understand that there are costs you will incur in the build-out of your space, which will materially improve their property and will not be able to be recouped, should you vacate.
This allowance varies greatly from region to region and project to project. It is typically expressed as a dollar per square foot amount. Tenant improvement allowance is a strong negotiating tool and as you gain greater TI allowances, you typically pay a higher base rent (the developer/landlord is funding your development and you are paying them back through rent - they are essentially acting as a lender). As mentioned earlier, if there is limited or no TI funds available, and you have to spend a substantial amount of money to convert the space to a BHRC, you should have a lower base rent, or lower your offer on the base amount to help you recapture your initial expenditures.
Tenant Financials
It is common for landlords to ask tenants for their financials. This may include tax returns and balance sheets. The landlord uses these to determine your creditworthiness, and therefore determine the amount of security deposit required and the scope of any guaranties you may be required to execute.
Lease
It is essential to hire an attorney to review your lease. Never simply sign the first lease document that a landlord sends to you. There is considerable legalese in any lease document, and only a qualified attorney can explain the risks associated with a lease document.
You will want to negotiate a lease that provides you with enough term to match your franchise agreement and ideally an option period that will allow you to maintain your tenancy longer term. Most leases are initially structured as a 5 or 10-year terms with some number of options. Your broker will assist you in capturing the appropriate term for your lease.
Lease Rider
Your franchise agreement requires a lease rider or addendum, in a form specified by BHRC, to be executed for each lease. The current form of Addendum to Lease follows.
Lease Acceptance
At least 15 days before signing it, you must submit your proposed lease to BHRC FRANCHISING LLC. The lease must include the “Addendum to Lease” located in the Appendix of this manual.
You must also provide the executed copy of the lease to us for our records.
Purchase Approval
If you purchase the location, you must submit the purchase contract to BHRC Franchising LLC at least 15 days before you sign it and provide a fully signed copy within 15 days following its execution.
Lease Addendum
THIS ADDENDUM TO LEASE (“Addendum”) is made this _____ day of __________, 20 by and among _______________________(“Landlord”), _______________________ (“Tenant”) and BHRC Franchising LLC (“Company”), with reference to the following facts:
A. Company and Tenant are parties to that certain Franchise Agreement dated _______________________, 20_____ (the “Franchise Agreement”), pursuant to which Company has granted Tenant a franchise and license to operate a Beverly Hills Rejuvenation Center (the “Center”) on the terms and conditions stated in the Franchise Agreement.
B. Landlord and Tenant desire to enter into a lease (the “Lease”), a true and correct copy of which is attached hereto as Exhibit “A,” pursuant to which Tenant will occupy the premises located at the “Premises”) for the Center licensed under the Franchise Agreement.
C. Tenant is required to execute and to cause Landlord to execute this Addendum.
NOW, THEREFORE, the parties agree as follows:
1. Notwithstanding anything to the contrary contained in the Lease:
(a) The Premises shall only be used for the operation of the Center, and shall be constructed and improved pursuant to the Franchise Agreement including exterior signs displaying Company’s service marks, in accordance with Company’s standards and specifications;
(b) Company or its designee, which may include, without limitation, an affiliate, franchisee or licensee of Company (a “Designee”) shall have the option, without cost or expense to Company or such Designee and without Landlord’s consent, to assume the Lease, or execute a substitute lease on the same terms, at any time, including, without limitation, upon Company’s (or its Designee’s) acquisition of Tenant (whether by asset purchase, equity purchase, merger, or otherwise), or upon the termination or expiration (including nonrenewal) of the Franchise Agreement for any reason;
(c) Company or its Designee shall have the right, but not the obligation, to succeed to Tenant’s rights under the Lease if Tenant fails to exercise any option to renew, and/or extend the term of the Lease;
(d) Upon Tenant’s actual or alleged default under the Lease, the Landlord shall notify Company in writing concurrently with notice to Tenant (but in no event less than 15 days prior to the date of termination or non-renewal of the Lease) and, in the case of a default, Company or its Designee shall have the right, but not the obligation, without liability to Tenant, to cure the default and to succeed to Tenant’s rights under said Lease or request that the Landlord terminate the Lease and enter into a substitute Lease with Company or its Designee on the same terms by giving written notice of such election to Tenant and such Landlord;
(e) Tenant shall have the unrestricted right, without Landlord consent, payment to Landlord or modification of any term of the Lease, during the entire term of the Lease (including any renewal terms) to assign or sublet the Premises to Company or its Designee;
(f) Except as permitted above, the Lease may not be assigned, subleased, modified or amended without Company’s prior written consent and that Company shall be provided with copies of all such assignments, subleases, modifications and amendments;
(g) Landlord must disclose to Company, upon Company’s request, all sales and other information furnished to the Landlord by Tenant;
(h) Company or its authorized Designee shall have the right to enter the Premises at any time to inspect Tenant’s operations;
(i) Landlord shall notify Company in writing of non-renewal or expiration of the Lease at least 90 days prior to the date of non-renewal or expiration of the Lease; and
(j) Upon expiration or termination of the Lease for any reason, Tenant shall, upon Company’s demand, remove all of Company’s proprietary trademarks from the Premises and modify the decor of the Premises so that it no longer resembles, in whole or in part, a Center, and otherwise comply with the Franchise Agreement. If Tenant shall fail do so, Company or its Designee will be given written notice and the right to enter the Premises to make such alterations, in which event Tenant shall reimburse Company or its Designee for all direct and indirect costs and expense it may incur in connection therewith, including attorneys’ fees.
2. If Company or its Designee elects to succeed to Tenant’s rights under the Lease, Tenant shall assign to Company or such Designee all of its right, title and interest in and to the Lease. Upon such assignment, Landlord shall attorn to Company or such Designee as the tenant under the Lease. Tenant shall execute and deliver to Company or such Designee such assignment and take such further action as Company or such Designee, may deem necessary or advisable to affect such assignment. Upon demand, Company or such Designee shall be, and hereby is, appointed Tenant’s attorney in fact to execute such assignment and/or take further action in Tenant’s name and on its behalf. This power of attorney granted by Tenant to Company and such Designee is a special power of attorney coupled with an interest and is irrevocable and shall survive the death or disability of Tenant. Any sum expended by Company or such Designee to cure Tenant’s default of the Lease shall be deemed additional sums due Company and Tenant shall pay such amount to Company upon demand.
3. Nothing in the Lease or this Addendum shall either create or purport to create any obligations on behalf of Company to Landlord or Tenant. Nothing in the Lease or this Addendum shall grant or purport to grant to Landlord any right to pursue any claim against Company arising out of Tenant’s breach or default under the Lease.
4. Without limiting any other rights or obligations of Company set forth in this Addendum, Landlord agrees that it shall not accept Tenant’s voluntary surrender or abandonment of the Lease without providing Company with at least 15 days’ prior written notice.
5. Any notices required in this Addendum must be in writing and will be deemed given when actually delivered by personal delivery or 4 days after being sent by certified or registered mail, return receipt requested, if addressed as follows:
Company: BHRC FRANCHISING LLC
Phone: (___)__________
Fax: (___)__________
Attn: Manager
Landlord: __________
Tenant: __________
Any party may change its address for receiving notices by appropriate written notice to the others.
6. Tenant hereby authorizes Company and Landlord to communicate with one another for any purpose, including de- identification of the Premises following the termination or expiration (including nonrenewal) of the Lease, Tenant’s operations, Tenant’s defaults under the Lease, and negotiating a lease for the Premises following the termination or expiration of the Lease.
7. Each party agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform the terms, provisions and conditions of this Addendum.
8. This Addendum shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs, and personal representatives of the parties hereto.
9. In the event of any conflict or inconsistency between the Lease and this Addendum, this Addendum shall control.
[Signature page follows]
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date first set forth above.
“Landlord” ______________________
By: ______________________________
Name: __________________________
Its: ______________________________
“Tenant”
By: ______________________________
Name: __________________________
Its: ______________________________
“Company”
BHRC FRANCHISING LLC
By: ______________________________
Name: __________________________
Its: ______________________________
