The document is two pages. Most operators have never read one before they're asked to sign it.
When an operator agrees to pursue a sale-leaseback, the first formal document they receive is a letter of intent — a term sheet that outlines the proposed structure before anyone spends money on due diligence. It's usually two to four pages. It contains terms that determine the economics of the deal for the next 20 years.
Most operators sign off on LOIs without fully understanding every line. That's not a criticism — the document assumes familiarity with net lease conventions that most operators don't have unless they've done this before. The problem is that the terms that matter most are the ones that are hardest to renegotiate once due diligence begins.
Here is what a standard net lease LOI looks like, line by line, in plain language.
1. Purchase price and implied cap rate
What the term sheet says: "Purchase Price: $4,800,000, representing a capitalization rate of 6.75% applied to the proposed annual base rent of $324,000."
What it means: The buyer is valuing the property by dividing the annual rent by the purchase price to get the cap rate. $324,000 ÷ $4,800,000 = 6.75%. A lower cap rate means the buyer is paying more for the same rent dollar — which is better for the seller. A higher cap rate means the buyer is paying less.
Cap rates vary by asset type, operator credit quality, and market conditions. Single-tenant retail with strong operator credit is currently trading in the 5.5-7.5% range in most markets. Industrial assets trend lower (4.5-6.5%). QSR and casual dining trend higher (6.5-8.5%).
The purchase price and cap rate are related — you can negotiate either one, but changing one changes the other. If an operator wants a higher purchase price, the cap rate goes down, which can create pricing tension with the buyer. If the buyer wants a higher cap rate, the purchase price goes down.
What to watch: The cap rate is the buyer's return on investment. In practice, the more important number for the operator is the rent coverage ratio — can the business sustain the rent at this level? A cap rate that looks attractive but produces rent that crushes the coverage ratio is the wrong deal.
2. Annual base rent and structure
What the term sheet says: "Annual Base Rent: $324,000, payable in equal monthly installments of $27,000. Lease structure: triple-net (NNN)."
What it means: $27,000 per month, flat, every month, for the primary lease term. This is your occupancy cost for as long as you're in the building. Under triple-net, you also pay property taxes, insurance, and maintenance — the "three nets." In a full NNN lease, the landlord's only obligation is to hold title.
The NNN structure is important to understand because it means the rent line is not the total occupancy cost. A building with $27,000/month NNN rent might carry $3,000-5,000/month in taxes and insurance on top of that. Your total occupancy cost is the rent plus the nets.
What to watch: Not all "triple-net" leases are the same. Some leases labeled NNN have landlord-responsible carve-outs for roof and structure. Absolute NNN means you're responsible for everything, including roof, HVAC replacement, and structural repairs. Know which version you're signing before you run your coverage calculations.
3. Lease term and renewal options
What the term sheet says: "Initial Term: Twenty (20) years from the Commencement Date. Renewal Options: Four (4) consecutive options of five (5) years each, at Tenant's election."
What it means: You're committing to 20 years. The four 5-year options give you the right to stay, not the obligation. If the business is doing well in year 20, you exercise the option and stay. If circumstances change, you have the option not to renew — but you cannot exit before year 20 without consequences.
Twenty years is the standard primary term for institutional NNN deals. Some deals are 15-year primaries, particularly for asset types with shorter remaining economic lives. Buyers who are underwriting operator credit (rather than pure real estate) prefer longer primary terms because the credit exposure is supported by a longer lease.
What to watch: The options run at your election, not the landlord's. But read what happens to rent during the option periods (see escalator section below). Some LOIs structure the option rent at a reset to fair market value — which eliminates your cost predictability. The better structure for operators is continued escalation from the base rent, not a fair market reset.
4. Rent escalators
What the term sheet says: "Annual Rent Increases: 2.00% per annum, compounded annually, throughout the Initial Term and any Renewal Options."
What it means: Your rent goes up 2% every year. Year 1: $324,000. Year 5: ~$350,000. Year 10: ~$394,000. Year 20: ~$481,000. These are knowable numbers. You can model your rent obligation through the full term of the lease on day one.
This is the feature that makes the sale-leaseback's occupancy cost predictable in a way that floating-rate debt is not. The 2% escalator is below historical CPI in most periods — which means in real terms, your rent is going down over time relative to inflation.
What to watch: Escalator structures vary. Some leases use fixed percentage increases (2% is most common for QSR and retail). Some use CPI-based escalators with floors and caps (e.g., CPI with a 1.5% floor and 3% cap). Some use step-up structures (flat for years 1-5, then reset). Fixed percentage is the most operator-friendly because it's fully predictable. CPI-linked is acceptable with a cap. Uncapped CPI is a risk you should price.
5. Tenant obligations under NNN
What the term sheet says: "Tenant shall be responsible for all real property taxes, assessments, insurance premiums, and all maintenance, repair, and replacement costs relating to the Premises, including roof and structure."
What it means: You pay everything. Property taxes (which can change year to year depending on reassessment). Property insurance (get quotes — this varies significantly by location, age of building, and coverage requirements). And all maintenance from doorknobs to roof replacement.
The roof and structure language is the most important clause in this section. In an absolute NNN lease, if the HVAC fails, you replace it. If the roof leaks, you repair it. These are costs that the owner would have borne if you hadn't sold the building — now they're your responsibility as the tenant.
What to watch: Before signing, get a physical condition assessment on the building if you don't already have one. Knowing that the HVAC units are 12 years old with a 15-20 year expected life tells you whether you're inheriting a near-term capital expense. These costs don't disappear after the sale — they transfer back to you as the tenant.
6. Assignment and subletting
What the term sheet says: "Tenant may not assign this Lease or sublet the Premises without Landlord's prior written consent, which shall not be unreasonably withheld in connection with a sale of the business."
What it means: If you sell your business, the buyer takes the lease. The landlord's consent is required, but the "not unreasonably withheld" language means they can't arbitrarily block a creditworthy buyer from assuming the tenancy.
This is the exit mechanism for multi-unit operators who plan to sell the business at some point. The lease transfers with the business, and the lease term and rent structure carry forward to the new owner.
What to watch: Some LOIs have more restrictive assignment language — requiring the landlord's approval at their sole discretion, or requiring the original tenant to remain as a guarantor even after assignment. The language matters for how clean a business sale can be in year 7 or 12.
7. Guaranty structure
What the term sheet says: "Guaranty: Corporate Guaranty of [Operating Entity], an [Iowa] limited liability company."
What it means: The LLC that runs the business is guaranteeing the lease. Not you personally. If the business fails and the lease defaults, the landlord's recourse is against the operating entity, not your personal assets.
This is the typical structure for operators with established operating companies and demonstrated track records. Personal guaranty requirements vary — some buyers require them from operators below a certain unit count or coverage ratio threshold.
What to watch: Confirm the guaranty structure before the LOI is signed, not after. The guaranty type (corporate vs personal, term length of the guaranty, burndown provisions) can be negotiated at the LOI stage. It's much harder to renegotiate once due diligence has started.
8. Exclusivity period and due diligence
What the term sheet says: "Exclusivity: Upon execution of this LOI, Seller agrees to a 45-day exclusive due diligence period during which Seller will not negotiate or accept offers from any other party."
What it means: You're off the market for 45 days. In exchange, the buyer commits to spending the money on due diligence (environmental, title, appraisal, lease review) and pursuing closing in good faith.
The exclusivity period protects both sides — it gives the buyer time to complete diligence without competing offers, and it gives the seller a committed counterparty who's spending real money to get to closing.
What to watch: What happens if the buyer walks at day 44? In most LOIs, both parties retain the right to walk without penalty during the due diligence period. The LOI is non-binding. The protection for the seller is reputational — buyers who develop a pattern of walking late in diligence find it difficult to source deals from operators who've heard about prior behavior.
The lines that matter most
If you could only read four lines of a net lease LOI carefully, they would be: the purchase price and cap rate (the economics), the rent and escalator structure (the 20-year cost model), the absolute NNN clause (what you're agreeing to maintain), and the guaranty structure (your personal exposure).
Everything else in the document is standard legal language that your attorney should review. But the commercial terms live in those four places, and they're set at the LOI stage.
Have a term sheet in front of you and want a second read? We look at these documents every week. If something doesn't read right or you want to understand what a specific clause means before you sign, reach out.