The Founder's Guide to the LOI: Mitigating Risk Before You Build
A Letter of Intent (LOI) might feel like a simple formality—a handshake before the real lease negotiation begins. For healthcare founders, this is the most dangerous misconception. The LOI is your foundational term sheet that sets the price, defines the risk, and determines your ability to grow or sell your practice.
Skipping or rushing these critical terms means you've effectively waived your right to negotiate them later. You must move from strategy (what you want) to tactics (how you secure it) right here.
Disclaimer: The content of this post is for informational and educational purposes only and does not constitute legal advice. Retained CRE is not a law firm, and readers must consult with qualified legal counsel specializing in real estate and healthcare regulatory compliance for advice specific to their situation.
1. The Financials: Rent, TI, and the 3-Way Tradeoff
ELI5 The Financials: This section locks in your basic monthly cost and how much the Landlord will contribute to your clinic's build-out.
Founders often focus solely on the Base Rent Rate and overlook the other two critical variables: the Tenant Improvement (TI) Allowance and Free Rent (or abatement). The biggest financial pitfall is failing to quantify the cash flow impact of all three.
Founders often focus solely on the Base Rent Rate (your fixed monthly cost per square foot) and overlook the other two critical variables: the Tenant Improvement (TI) Allowance and Free Rent (or abatement).
The biggest financial pitfall is failing to quantify the cash flow impact of all three. You must secure the highest possible TI Allowance to reduce your out-of-pocket construction costs and maximize Free Rent months to cover start-up operational costs and mitigate construction delays.
The Critical Escalation Clause: Fixed vs. Variable
The Escalation Clause defines how your rent will increase annually. This has a significant, compounding impact on your long-term operating costs.
Avoid CPI: Demand a fixed annual escalation rate, ideally no more than 3.0%. Variable escalations tied to the Consumer Price Index (CPI) introduce unpredictable cash flow and significantly complicate lease accounting under FASB ASC 842.
The Compound Interest Trap: Over a 10-year term, an increase from 3% to 5% results in substantially higher rent in the out-years. Negotiate this cap fiercely.
Mandate a Rent Table (Defined Calculations)
To prevent future accounting disputes, the LOI must commit the Landlord to providing a Rent Table that will be incorporated into the final lease.
This table must explicitly define:
Base Rent per Square Foot for every year of the term.
The exact Monthly Rent Payment for every year of the term.
The Annual Rent Payment for every year of the term.
2. Key Dates: Protecting Your Timeline with Penalties
ELI5 Key Dates: These are the calendar milestones that define when the Landlord must deliver the space to you and when you are required to start paying rent.
The most common reason for a healthcare clinic's build-out delay is the Landlord’s late delivery of the space. You must tie the dates together.
Landlord Delivery Date: This is the day the Landlord commits to giving you possession of the space to begin your work. Your protection here is a Late Delivery Penalty. If the Landlord is late, you should be compensated with additional free rent (often day-for-day).
Rent Commencement Date: This is the day your obligation to pay full rent begins. This date must be defined as X days after the Landlord delivers the space (to ensure you have time to build out) OR the date you open for business, whichever is later.
Crucial Takeaway: Never allow your Rent Commencement Date to be defined by a fixed calendar date if you don't control the delivery.
3. Landlord Work Letter: Eliminating the Infrastructure Killers
ELI5 Landlord Work Letter: A document that defines exactly what the Landlord will build, pay for, and deliver to the space before your contractor steps onto the site.
The Landlord Work Letter must clearly define who pays for the big, expensive infrastructure items.
The three most critical infrastructure items to define as the Landlord's responsibility (or included in the TI calculation) are:
Electrical Supply: Ensuring the Landlord delivers the required amperage to the perimeter of your space.
HVAC Capacity: Ensuring sufficient tonnage (cooling capacity) is delivered to handle the heat load of high-density medical equipment and patients, and that the unit is under five years old (or the Landlord commits to replacing any unit older than five years).
Plumbing/Sewer Sizing: Ensuring the base building stub-outs for water and sewer lines are adequately sized to handle all your your required sinks, restrooms, and lab equipment.
4. Guarantees: Alternatives to the Personal Pinky Promise
ELI5 Guarantee: The legal assurance that someone, or some entity, will pay the rent if your practice defaults on the lease. A Personal Guarantee (PG) makes you personally liable using your house and savings.
As a sophisticated founder, your goal is simple: Do Not Sign a Personal Guarantee.
The Landlord is concerned with the "Zero-Asset Problem." You can buy down this risk using corporate and financial levers:
Offer a Corporate Guarantee (CG): Use your larger holding company or parent entity as the guarantor instead of yourself.
Offer Financial Alternatives: Offer to increase the Security Deposit or provide a Letter of Credit (LOC) from a bank.
5. Contingencies: The Permitting Escape Hatch
ELI5 Contingency: A condition that must be met (or waived) before you are legally bound by the final lease. If the condition isn't met by the deadline, you can walk away penalty-free.
The single most essential clause for a new clinic is the Permitting Contingency.
It grants you the right to terminate the deal if you cannot secure the necessary Building Permits from the local jurisdiction to complete your specialized build-out.
The Timeline Trap: You cannot accept a short 30-day contingency. The period must be long enough to cover your construction drawing time plus the Jurisdictional Review Timeline. This period can easily be 120 to 180 days. If you can't legally build your space, you should not be locked into a contract to pay for it.
6. Assignment: Securing the Exit Strategy
ELI5 Assignment Clause: Governs your right to transfer the lease to another company during the term.
If your company raises capital, restructures, or is acquired, the lease must be easily transferable. If you need Landlord approval every time, they can block a merger or demand a fee, drastically reducing your enterprise value.
The core negotiation is for Permitted Transfers—transfers that do not require the Landlord’s consent:
Internal Restructuring: Moving the lease to a related holding company or subsidiary.
Sale of the Business: Transferring the lease to an acquiring entity when you sell all or substantially all of your assets.
Change of Control: Clarifying that taking on a new investor or changing board members is not an assignment that requires consent.
7. Use and Exclusivity: Flexibility vs. Protection
ELI5 Use Clause: Defines what services you are allowed to provide in the space (e.g., "primary care"). Exclusivity is the promise that the Landlord won't rent to specific competitors.
You need a broad Use clause to future-proof your clinic. Demand language like: "Medical clinic and all uses incidental thereto, including, but not limited to, [Specific Services X, Y, Z]."
The Tradeoff: Landlords will rarely grant you broad exclusivity. Be prepared to narrow your Exclusivity clause to direct, named competitors in exchange for a broad, flexible Use clause.
8. Parking: Location, Control, and Compliance
ELI5 Parking: Your right to use the Landlord's common parking area for your patients and staff.
For a clinic, the parking must satisfy Patient Access, Staff Experience, and Regulatory Compliance (ADA).
Location: Negotiate for reserved or designated patient parking closest to your entrance.
The Staff Trap: Explicitly reject any clause that allows the Landlord to mandate staff parking in a future, remote, or off-site lot.
Compliance: The LOI must confirm the current parking ratio meets the higher zoning minimums required for medical use.
9. Signage: Visibility is Revenue
ELI5 Signage: Your legal right to install physical signs on the building, monument, or directory.
Signage is not decoration; it is your most effective wayfinding and marketing tool. Leaving it vague in the LOI risks losing key visibility.
Demand the right to install the "Maximum amount of signage permitted by local jurisdiction, including but not limited to..." This forces the Landlord to confirm placement (Pylon, Building Face, Directory) and size early.
High Visibility: Ensure access to electrical conduit for illuminated signage.
Window Graphics: If you rely on window branding for marketing, it must be explicitly permitted in the LOI.
Your Guardrail Against Real Estate Risk
You've just walked through nine of the most critical, high-stakes clauses in a healthcare Letter of Intent. If you feel overwhelmed, you should. The complexity of these clauses—from securing your Assignment rights to funding the hidden costs of HVAC capacity—is why healthcare real estate is notoriously difficult.
The Landlord’s team does this every day, and their LOI is designed to maximize their flexibility and minimize their risk. Your success depends on leveling that playing field.
Your Real Estate Decision is not just a cost; it's a permanent operational decision.
🛑 Stop Negotiating Alone. Start Building Smarter.
The LOI is a foundational term sheet that determines your budget, timeline, and ability to exit. Getting a single clause wrong can lead to significant construction delays, necessitate unexpected capital injections, and create structural limitations that complicate a future sale.
Our core work is translating the complexity of these documents into simple, actionable decisions for founders. We don't just find you a space; we ensure the terms of that space are structurally sound for scalable growth and maximizing enterprise value.
Ready to de-risk your next de novo project?
Don't sign that LOI before speaking with a healthcare real estate expert.
Contact us today to ensure your term sheet sets you up for long-term operational and financial success.
