Letter of Intent
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LANDLORD: _________________. (“Landlord”) TENANT: _________________ (“Tenant”) BUILDING: _____________, San Francisco, CA (“Building”) PREMISES: State the floor/suite number and estimated rentable square as your Premises. Rentable square feet should be determined by what’s called “BOMA standard” which ensures your paying for an accurate square footage measurement. USE: Stipulate the type of Use (office, production, etc.) that you plan for the space and highlight the type of access you want to the premises, hint: 24/7 access. TERM: Input how many years you’d like to commit to in your lease Term. COMMENCEMENT DATE: Commencement Date is also known as your move-in date. This can be a moving target depending on how much improvement work is needed for the space to be move-in ready. If you think you can’t commit to a specific date, include a buffer move-in date of 120 days following the delivery of the space. BASE RENT: The Base Rent can be tricky. There are three different versions of base rent structures. Full Service, Industrial Gross and Triple Net. Full Service is the complete rental amount including property taxes, insurance, maintenance, janitorial and utility costs. A Full Service lease means no surprise additional costs. Industrial Gross typically means the tenant pays for their own utilities and janitorial, i.e. similar to an apartment lease where you pay for what you use. Triple Net means none of the full service costs are included. In a Triple Net (“N.N.N”) lease you will want to define the net costs associated with property taxes, insurance, maintenance, utilities and janitorial services. In San Francisco no matter a Full Service, Industrial Gross or Triple Net structure, your base rent will increase 3% annually. The 3% annual increase is accounting for the rate of inflation. OPERATING EXPENSES/TAXES: Don’t get stuck paying taxes for more than your fair share of the building. If the Landlord’s taxes are $10 when you move-in and then $15 in year two, he should only be able to charge you your specific percentage of the $5 increase between year 1 and year 2. Meaning if you occupy 20% of the building you would pay $1 (20% of $5). LANDLORD’S WORK: Each Landlord pays for improvements differently, for ease I recommend asking for a turn-key delivery. A turn-key delivery is exactly what it sounds like, you turn the key and can move- in because you’ve specified the exact improvements necessary to be made before you move-in. If this isn’t possible due to the Landlord not having the financial capital to fund the turn-key delivery, then propose a fair amount in Free Rent allotment that will equal to the costs that you will end up spending on the office in order to move into it. To get the correct amount of free rent to ask for, first price out the work you’ll need done with a skilled contractor. Contractors will provide bids for free typically in order to be considered for the work. If you need a contractor see chapter 7 Hacks. Landlord Work Request Examples: • New paint and carpeting of Tenant’s choosing • Install secure FOB ground floor access • Construct four (4) mid-size conference rooms Remember, always ensure that any improvement work the Landlord does is up to code. ADA and Title 24 upgrades are extremely costly to you, be careful to get this in writing as a Landlord expense if the space isn’t already in code compliant condition. ASSIGNMENT/SUBLETTING: Always have subleasing rights. For the majority of startups that commit to a three-year term or longer, more than likely two situations will occur. You’ll either grow out of the office too quickly or you’ll need to downsize. In some sad cases subleasing can mean closing the doors completely. In both cases of growth or failure you will be glad to have sublease rights that allow you to be let out of your remaining monthly rental payments. In your subletting clause make sure to note that any net profit resulting from a sublease shall be split 50/50 between you and the Landlord, that way when you walk away from the property you may be able to walk away with a passive income stream. OPTION TO RENEW:Leases typically don’t provide flexibility; unless you add two specific clauses an Option to Renew and the next clause is a Right of First Offer. An Option to Renew is a clause that ensures you as the Tenant have the right to renew your lease for an additional term that matches your initial term i.e. if you sign up for a 5 year lease you should have a 5 year renewal term. Keep in mind you don’t want a lease in five years that is more than what you’re paying now and you also don’t know where the market will be five years from now. To account for the unknown, include that the Base Rent during the Option Term shall be 95% of the then-prevailing “Fair Market Rent”. Fair is fair. RIGHT OF FIRST OFFER: Boxes don’t magically grow in size but startups do. One year you may need an office for 10 people and the next year you’ll need an office for 70. To account for this we take into consideration a range of office space size calculations as mentioned in chapter two but the more option for growth space the better. Thus, a Right of First Offer is crucial to a startup’s unpredictable growth. It gives you the right to expand into your neighboring office tenant’s space when they move out. A Right of First Offer demands that the Landlord give you the right to make the first offer on the adjacent available space before he/she lists it available on the market. SECURITY DEPOSIT: Tying up cash is never a good idea for a startup. A security deposit is meant to alleviate risk concerns for the Landlord but a year’s worth of rent paid upfront can be detrimental to the longevity of a startup business. Ironic isn’t it? A letter of credit however, proves that you’re good for the rent with a balance currently in the bank and requires no cash exchange. Whether you decide on a cash security or a letter of credit, make sure to include a “burndown” clause that states a percentage of your security deposit is paid back to you each year you are still in business and paying rent on time. MAINTENANCE/REPAIR: A property is an asset and at the end of the day you as a Tenant should not be responsible for the Landlord’s asset above and beyond treating the place respectfully. Thus, always stipulate that the Landlord shall keep the building systems (HVAC, fire/life safety, plumbing, electrical), structure, roof, common areas, and landscaping in good maintenance and repair. Most importantly should anything go wrong with the building the Landlord should be held responsible for any repair or replacement of expensive building infrastructure i.e. HVAC systems and a generator engine set.