Month: June 2019

Letter of Intent (LOI)

Retail space negotiations are complicated and time-consuming. Once you have located the retail space which is ideal for your business, the next step is to negotiate an agreement which protects you and is acceptable to the landlord. Industry practice for retail space is to negotiate a letter of intent before negotiating the lease.
Use an Attorney!

Engage an attorney to assist in the letter of intent negotiation. It probably seems that the letter of intent is informal and can easily be negotiated without an attorney. However, there are issues you should address in the letter of intent which may not be obvious if you have not previously negotiated letters of intent for retail.
Wow! This is Complicated

Common factors for a retail space letter of intent include: defining the parties (leasor and leasee aka landlord and tenant), defining the space, defining the rent including any percentage rent, defining the basis for calculating sales or net income if they are involved in calculating rent, the initial term, any renewal options, rent for renewal options period, the day at which lease payments commence, the date of occupancy, the condition of the space when the landlord provides it to the tenant, tenant improvement allowances provided by the landlord, who performs the tenant improvements, is the tenant required to use union labor for tenant improvements, is the tenant required to use a general contractor for tenant improvements (TI), who pays for the cost of the ADA compliance, who maintains what (i.e roof, HVAC, electrical, plumbing, etc), who pays which expenses, calculating the payment for CAM (common area maintenance), free rent, and identification of the broker and payment of the brokerage fee if relevant.
You Mean There is More!

Other issues which you may want to address in the letter of intent include expense escalations, co-tenancy issues, eminent domain, foreclosure, maintenance standards, definition of the amount of leaseable space, personal guarantees, purchase option, subleasing, required hours of operation, dedicated parking, who is responsible for obtaining variances related to signage and usage of the retail space, expansion options, first right of refusal, can the tenant keep the TI allowance not needed for construction, can the landlord relocate the tenant if the space is needed to accommodate another tenant, late payment fees, the mechanics of providing notice of default and any options for the tenant to cure the default, mechanics of dispute resolution between the landlord and tenant, and a right to terminate if your sales do not stabilize at a minimum level.
Complete LOI First

Complete and obtain an executed copy of the letter of intent before beginning on the lease agreement. The primary objective of the letter of intent is to negotiate and agree upon the business issues. The lease documents these agreements. Discuss fees to negotiate the lease with your attorney. Agree upon an hourly rate and estimate of the total fees. Agree the attorney will call if it appears the cost is going to exceed the estimate.
The following sections of the leasing retail space article focuses upon issues which merit commentary.

Percentage Rent

Percentage rent — make sure the agreement regarding percentage rent is clear. If percentage rent is based on sales, define sales. For example, is sales-tax remitted to the city and state included in sales? It is even more difficult to define net profits, which is why most percentage rent leases are based upon sales instead of profits. Attempt to look at the definition of net profits from a detached perspective. If you gave the definition to a six grader, could they understand it?
Renewal Options

Renewal options — tenants love them and landlords prefer to avoid them. In general, a larger number of shorter renewal options are better for the tenant. In addition, shorter notice periods to announce the tenants intend to renew are desirable for the tenant. Landlords prefer as much notice as possible regarding whether or not the tenet plans to renew.
Renewal Option Rental Rates

Renewal option rental rates — tenants typically want fixed rental rates for renewal periods. Landlords typically want the rental rate based upon market rent. Agreeing upon market rents can be difficult and expensive. Reasonable people can disagree regarding the level for market rent for a retail space. For example, should the premium for an end-cap space be 10% or 100%? Retail space is not fungible. It recently signed lease for retail space within the same center provides insight into market rent. However, in most cases it will not clearly defined market rent.
The Market Research and Consulting division of OConnor & Associates provides information necessary to make decision to commercial real estate professionals. Occupancy and Rental Data, ownership and management information are routinely gathered for four major land uses multifamily, office, retail and industrial. This information allows investors to compare competitive properties, facilitate business decisions and track market and submarket performance. In addition the data is useful to brokers who for example continually monitor Houston retail space leasing, Houston office space leasing, Houston industrial space leasing, Houston apartments, Dallas apartments, Ft. Worth apartments, Austin apartments, and San Antonio apartments.

ICE first presented to MITIE (Retail) Ltd in November 2009 and over the next year became our sole supplier of cleaning machinery. They brought to the table an enthusiastic approach which was innovative, flexible and accommodating in those times of need. This was a supplier partnership and it was both encouraging and rewarding for both parties. Two specific mobilisations come to mind which I believe gives a good indication of ICE as a company, one which was the largest ever single machinery order placed by MITIE for the Co-operative Group stores and one is this case study for Tesco Stores in September 2010.

Background:
MITIE was awarded significant growth in the Tesco store cleaning Tender in July 2010. Up to this point we were using ICE to supply machinery into the existing smaller convenience Express stores. We had chosen the RA431 compact scrubbing machine for these stores, following their presentation. This proved to be a low maintenance, cost effective machine that the operators liked because of the simplicity. ICE had supplied with the machine both pad drives and brushes so we could utilise the machinery in almost every area of the store, achieving that machinery driven approach we were aiming for. This machine later became our utility machine of choice in the large format stores for use throughout the trading day on the shop floor.

Tesco has an agreement term within its Tenders that on site machinery will transfer between suppliers providing they can reach agreement on the net book values etc. Although this seems a fair approach it does have its complications and, in this case, negotiations had not been going well with the incumbent contractor. We were now entering minus four weeks to start date and we were starting to get concerned. I arranged a meeting with ICE and fully explained the situation. Without any firm commitments from MITIE, ICE immediately `got on board` with a contingency plan on our behalf. This involved considerable expense to ICE, surveying the stores, speaking to Switzerland on delivery timescales and eventually taking the ultimate risk in placing an order with Cleanfix without a guaranteed order from MITIE. This showed a huge amount of commitment from ICE and enabled MITIE to have a contingency plan for Tesco who were aware of the situation.

With two weeks to go to start date MITIE decided to end negotiations with the incumbent and officially place the order with ICE to supply a 1.5 million order for floor cleaning machines into all Express stores across our regions and all large store format stores in the South East and South West Regions of England. This amounted to approximately 230 sites.

Logistics:
The machinery roll-out started 2 weeks prior to start date. Fortunately, following the commitment ICE had made by arranging for machinery to be delivered into the UK, this was possible. If ICE had not taken this approach then we would have needed to either go back to the negotiating table with the incumbent contractor and pay well over the net book values for the machinery or request that the customer postpone the start date. Both scenarios would have been unacceptable to MITIE as options.

The machinery for each store had been specified on the surveys initially carried out and, upon delivery, training took place with not only the machine operator but all staff on the shift. This gave us the multi skilling of operatives we were looking for. Every member of staff received a training certificate prior to contract start date.

ICE had taken a simplicity approach and banded the stores into machine bundles so we were aware that a specific store would receive certain machinery. This gave us a very easy communication line with our field teams as we issued them all a matrix which they could refer to if questioned. As with every multi-site contract, however, there will be unique stores that the bundle matrix does not fit. These idiosyncrasies, which were unknown to ICE, on survey lead to the need to change some machinery for larger or smaller models and this was done without any objection and at a further cost to ICE which was never passed onto MITIE. All unique changes were carried out prior to the contract start date.

Machinery Types:
The machinery we procured was the RA431 compact scrubbing machine for the Express stores. The RA561 tough and powerful machine for hard and soft floors and the RA 900 Sauber ride on scrubber drier were chosen for the larger stores. We also purchased additional machinery including vacs, single rotary machines and car park sweepers from ICE.

Summary:
Whenever I am asked to provide a reference for a supplier, the first question I ask is firstly `Did they go the extra mile for MITIE?` and pull out all the stops as a supplier to `Make it happen`. We need our supply chain to, at times, gamble to aid the cause. The world of contract cleaning can throw all types of issues at you and you need to have a supplier who is in there with you when the going gets tough. I found ICE ready and up for the challenge and when we asked them to `step up to the mount` they certainly did so. The commitment they made considering the MITIE policy for purchase ordering went well over and above what was expected and probably saved what could have been a mobilisation disaster. I have no hesitation in recommending ICE as a supplier because there will be some tough times ahead for all of us and we all need suppliers like ICE to support us through difficult times.