From Letter of Intent to Closing: The Sale-Leaseback Deal Process

In a conventional building sale, the seller's interest ends at closing. In a sale-leaseback, closing is the day your relationship with the buyer begins. You will be its tenant for years. That changes how each stage should be handled: the lease is not an attachment to the sale contract, it is half the deal, and concessions made to keep the sale on schedule can cost far more over the lease term than they saved.

The stages below follow the usual order. Durations vary with the property, the buyer and what diligence turns up, so we describe sequence and leverage here and leave timing to a separate guide.

A letter of intent, or LOI, is a short document summarizing the business terms. It is generally written to be non-binding as to the transaction itself, with a few binding provisions such as confidentiality and exclusivity. Your attorney should confirm which parts bind you.

Non-binding does not mean unimportant. The LOI is the last point at which several buyers are competing for your building. Once you sign with one and grant exclusivity, the others move on, and your negotiating position narrows. Anything you want in the lease should be in the LOI, at least as a headline term.

• ✓Does the LOI state price, deposit amount and when the deposit becomes non-refundable?
• ✓How long is the diligence period, and can the buyer extend it?
• ✓How long after diligence is closing?
• ✓Is the purchase subject to financing or to approval by an investment committee?
• ✓Does it state lease term, starting rent, escalations and renewal options?
• ✓Does it state who is responsible for roof, structure and capital replacements?
• ✓Does it address assignment and subletting, alterations and any expansion right?
• ✓Does it state what credit support is required: tenant entity, guaranty, deposit?
• ✓Does it allocate closing costs and say who pays for which reports?
• ✓How long does exclusivity last, and does it end if the buyer proposes a price change?

After the LOI, attorneys draft two documents: the purchase and sale agreement, and the lease, which is usually attached to the purchase agreement as an exhibit in final agreed form. Signing a purchase agreement with the lease still open is a risk for the seller. It commits you to sell while leaving the buyer free to negotiate lease terms against a party that is already under contract.

Who drafts matters. Buyers generally prefer to start from their own lease form, which is written for a landlord. Sellers are in a stronger position if the offering included a tenant-side term sheet or a draft lease. Either way, expect several rounds of comments.

• Purchase agreement points for a seller: scope of representations and warranties and how long they survive closing, limits on post-closing liability, the buyer's termination rights, conditions to closing, how the property is described, and what happens to the deposit if the buyer defaults.
• As-is language: sellers typically seek to sell the property in its existing condition with limited representations. Buyers push for more. Where this lands affects your exposure after closing.
• Consistency between the two documents: repair obligations, environmental responsibility and condition of the property should be treated the same way in both. A seller who sells as-is but signs a lease promising the building is in perfect condition has given back the protection.
• Personal property: a schedule of equipment and fixtures that are excluded from the sale.

The diligence period starts when the purchase agreement is signed, or sometimes at LOI. The buyer orders its environmental assessment, title commitment, survey and property condition report, reviews your financial statements in detail, and in many cases arranges its own financing or seeks final internal approval. Reports have a shelf life. The US Environmental Protection Agency states that the environmental inquiry must be conducted or updated within one year before acquisition, with certain components within 180 days, so a deal that drags can require updates.

During this period the buyer usually may terminate and recover its deposit. That right is the source of the buyer's leverage, and requests to reduce the price, if they come, tend to come near the end of it. The strongest defenses are prepared in advance: full disclosure in the offering, your own review of title and condition, and a backup buyer who has been kept informed.

1. Deliver the document package promptly and track every request.
2. Schedule site visits for the buyer's consultants with minimal disruption to operations, and decide what employees are told.
3. Respond to title and survey objections through your attorney within the contract deadlines.
4. Review each third-party report when the buyer shares it, and correct factual errors quickly.
5. If the buyer raises an issue, ask for the report and the cost estimate behind it before discussing price.
6. Weigh alternatives to a price cut: a repair before closing, a credit, an escrow, or a lease adjustment.
7. Keep lease negotiations moving so the lease is final before the diligence period ends.

Treat a late request for a price reduction as a new negotiation. Ask what changed since the LOI, and compare the revised offer against your backup bidder and against not selling at all.

When the diligence period expires without termination, the deposit typically becomes non-refundable except for seller default or failure of a closing condition. This is the point at which the deal is firm. The remaining work is mechanical but detailed.

• The title company issues a final commitment, and your attorney clears remaining exceptions and obtains the mortgage payoff letter.
• If the buyer is financing, its lender reviews the lease and may ask for changes and for a subordination, non-disturbance and attornment agreement. Review any requested lease changes carefully. They are being asked of you as tenant.
• Any existing lease between your real estate entity and operating company is terminated effective at closing.
• You arrange tenant insurance as the lease requires, naming the new owner and its lender as the lease specifies.
• Prorations are calculated for property taxes and other items. Under a net leaseback where you keep paying those costs as tenant, the parties often simplify prorations, and the documents should say how.
• Transfer tax declarations and closing statements are prepared. Your attorney will confirm which transfer taxes apply and who pays them under the contract.
• Your CPA finalizes the accounting and tax treatment based on the signed documents.

At closing, usually handled through the title company without a meeting, the deed is delivered, the lease and any guaranty are signed and dated, the purchase price is paid, the mortgage is paid off from the proceeds, costs are deducted, and the net proceeds are wired to you. The lease term generally begins the same day, and rent starts on the schedule the lease sets.

Operations in the building should not change at all. What changes is administrative: set up rent payments, send required insurance certificates, calendar every notice date in the lease including renewal deadlines, confirm who at the landlord receives notices and repair requests, and file the complete set of closing documents where your successors can find them.

TAG's role runs through all four stages. We negotiate the agreement, meaning the price and the lease together, and stay with the transaction through closing, working with your attorney on the documents and managing the buyer's diligence requests so the terms agreed in the LOI are the terms that close.