Letters of Intent for Colorado Commercial Real Estate and Triple Net Leases

In Colorado commercial real estate, the deal usually starts long before anyone signs a lease or a purchase contract. It starts with a letter of intent (LOI). For triple net (NNN) properties, where the tenant pays rent plus its share of property taxes, insurance and maintenance, the LOI is where the most important economic terms get set. Once they are in writing, even in a "non-binding" letter, they are hard to walk back.

This guide covers what a Colorado NNN LOI should address, which parts are binding, and the Colorado-specific issues that come up most often for landlords, tenants, buyers and sellers.

What an LOI does in a commercial real estate deal

An LOI is a short document that sets out the main business terms before the parties pay for a full lease or purchase agreement. It shows that both sides agree on the essentials and gives the attorneys a roadmap for drafting. The sections below walk through what a well-drafted LOI should cover when the property is in Colorado, for both NNN leases and purchases of NNN investment property.

Binding vs. non-binding terms

Most LOIs say they are non-binding, but almost all of them contain a few provisions that are meant to bind the parties right away. Typical binding provisions include:

• Confidentiality of the terms and any information shared during diligence.
• Exclusivity (a "no-shop" period) during which the owner will not negotiate with others.
• Access to the property for inspections, and who bears the cost and risk.
• Governing law, usually Colorado for Colorado property.
• Expenses, confirming each side pays its own costs if the deal falls through.

Colorado courts look at the language and the parties' conduct to decide whether a document is enforceable. A letter that says "non-binding" at the top but reads like a final agreement, or that the parties start performing under, can create disputes. The safest approach is to state clearly which paragraphs are binding and that everything else is subject to a signed definitive agreement.

Key terms in a Colorado NNN lease LOI

Rent and escalations

State base rent, the commencement date, and how rent increases (fixed annual bumps, CPI adjustments, or set increases at renewal). Spell out any free-rent or abatement period and whether it covers only base rent or the NNN charges too.

What "triple net" actually covers

Not every "NNN" lease means the same thing. The LOI should list exactly which costs pass through to the tenant: property taxes, insurance, common area maintenance, and repairs. Roof, structure and parking lot replacement are frequent points of disagreement. In a "double net" (NN) lease the landlord typically keeps responsibility for structural items or certain repairs; in a standard NNN lease the tenant pays taxes, insurance and maintenance; and in an "absolute net" or "bondable" lease the tenant bears nearly every cost, including roof and structure, and rent continues even if the building is damaged. If the parties intend an absolute net lease, the LOI should say so directly.

Colorado property taxes

Property taxes are usually the largest pass-through cost in a Colorado NNN lease, and commercial assessments can change significantly after a reappraisal or a sale. The LOI should address how taxes are estimated and reconciled, whether the tenant can protest the valuation, and whether increases caused by a sale of the property pass through to the tenant. Tenants often try to cap or exclude increases caused by a sale; landlords usually resist.

Insurance, repairs and capital expenses

Identify who carries property insurance, liability insurance and any hail or roof coverage, an issue that comes up often along Colorado's Front Range. Decide whether capital replacements are the landlord's cost, the tenant's cost, or amortized over their useful life.

Term, renewals and use

Include the initial term, renewal options and how renewal rent is set, the permitted use, and any exclusive-use protection the tenant needs. Make the deal contingent on zoning and any local permits or licenses the tenant's business requires, since these vary by city and county across Colorado.

CAM, reconciliation and audit rights

Most NNN tenants pay estimated monthly charges that are reconciled once a year. The LOI should say when the landlord must deliver the annual reconciliation, how overpayments and underpayments are settled, and whether the tenant can audit the landlord's books. Tenants commonly negotiate exclusions from operating expenses (for example, the landlord's income taxes, leasing commissions, costs of financing, and costs to fix original construction defects) and a cap on increases in "controllable" expenses. Management and administrative fees should be stated as a percentage so they cannot grow unchecked.

Tenant improvements and delivery condition

State the condition the space or building will be delivered in (as-is, "vanilla shell," or built out), any tenant improvement allowance and how it is paid, who manages construction, and what happens if the landlord delivers late. For newly built NNN properties, ask for warranties on the roof, HVAC and other major systems to be assigned or enforced for the tenant's benefit.

Assignment, subletting and casualty

Tenants want the right to assign the lease in a sale of their business or to an affiliate without landlord consent. Landlords want to approve any new tenant and may ask to keep the original tenant or guarantor liable. The LOI should also outline what happens after a fire, hail storm or condemnation: who rebuilds, whether rent abates, and when either side can terminate.

Guaranties and security

Landlords commonly ask for a personal or corporate guaranty and a security deposit. If a guaranty is expected, the LOI should say so now rather than surprising the tenant at the lease stage.

Key terms in a Colorado NNN purchase LOI

When the LOI is for buying a leased NNN property as an investment, the focus shifts to the purchase price and the strength of the existing lease. A purchase LOI should cover:

• Price, earnest money and financing contingencies.
• Due diligence period to review title, survey, environmental reports, the lease, tenant financials and rent history.
• Estoppel certificates from tenants confirming rent, term and that no defaults exist.
• Closing timeline, which matters a great deal if the buyer is completing a 1031 exchange with fixed identification and closing deadlines.

Evaluating the lease you are buying

In an NNN purchase, the buyer is really buying a stream of rent, so the lease is the most important diligence document. Review the remaining term and renewal options, rent increases, which expenses the landlord still bears, the tenant's credit and any guaranty, early termination or "go dark" rights, co-tenancy clauses, and any right of first refusal or purchase option the tenant holds that could interfere with the sale. A purchase LOI should make the deal contingent on the buyer's satisfaction with the lease and receipt of a clean estoppel.

1031 exchange timing

Many NNN buyers are completing a 1031 exchange. Under federal rules, the buyer generally has 45 days after selling the relinquished property to identify replacement property and 180 days to close. The LOI should keep diligence and closing dates inside those windows, include a cooperation clause for the exchange, and allow assignment to a qualified intermediary. A seller can also be in an exchange, so the cooperation clause should usually run both ways.

Colorado residential and many commercial transactions use forms approved by the Colorado Real Estate Commission, but those forms do not replace a carefully drafted LOI, and they may not address every term a commercial buyer needs. It is worth making sure the LOI and the eventual contract say the same thing.

Colorado-specific points to watch

• Local transfer taxes. Colorado charges a small state documentary fee on recorded deeds, and some mountain communities impose their own real estate transfer taxes. The LOI should say who pays.
• Water and mineral rights. In Colorado, water rights and mineral rights can be owned separately from the land. A purchase LOI should state whether any water rights are included and call for review of severed mineral interests in the title commitment.
• Entity and authority. Confirm that the landlord or seller entity is in good standing with the Colorado Secretary of State and that the person signing has authority.

Common LOI mistakes

• Leaving NNN pass-throughs vague ("tenant pays its share of expenses").
• Agreeing to exclusivity with no end date.
• Forgetting to make the deal contingent on financing, zoning or diligence.
• Signing an LOI that unintentionally reads as binding.
• Bringing in an attorney only after the LOI is signed, when the key terms are already locked in. See why your attorney needs to be involved from the LOI phase.

Frequently asked questions

Is a letter of intent legally binding in Colorado?

Usually only in part. Business terms such as rent and price are typically non-binding, while confidentiality, exclusivity, access and governing-law provisions are often intended to be binding. Whether a particular LOI is enforceable depends on its wording and how the parties act, so it should state plainly which provisions bind.

Who pays property taxes in a Colorado triple net lease?

In a typical NNN lease the tenant reimburses the landlord for property taxes, along with insurance and maintenance. The LOI should spell out how taxes are estimated, reconciled and protested, and whether increases from a sale pass through.

Should I have an attorney review an LOI before signing?

Yes. The LOI sets the economics and risk allocation that the lease or purchase contract will follow, and terms agreed at this stage are difficult to renegotiate later.

Related reading

• Letters of intent when buying or selling a business
• M&A due diligence for buyers and sellers
• Colorado contract drafting and review
• Colorado business attorney and Denver Metro

Get help with your Colorado LOI

Auxo Law PLLC reviews and drafts letters of intent, leases and purchase agreements for Colorado businesses and investors, working remotely by phone and video. If you are about to sign an LOI for a commercial or NNN property, schedule a consultation before you sign.