LOI: Letter of Intent
What is a letter of intent and how do you write one?
A letter of intent (LOI) in commercial real estate is used as a means to initiate the purchase or lease of a property. If you plan on buying or leasing commercial property, it's important to know when to use a letter of intent and how to correctly write one.
What is a letter of intent?
A letter of intent is a short, one to two page letter that states the intent to enter into a commercial lease or purchase agreement. It's a non-binding offer that initiates the negotiation and due diligence process before a formal binding agreement is executed between both parties. It summarizes the basic terms of the offer without the extensive legal jargon that is in a formal real estate contract. The LOI gives a concise snapshot of the terms of the real estate purchase or lease agreement.
When is a letter of intent used?
A letter of intent is submitted by a prospective tenant, buyer, or representing broker in a commercial real estate transaction as an initial offer. It is prepared based on preliminary information provided by the seller, listing broker, and initial due diligence. Back-and-forth negotiations typically begin after the LOI has been signed and delivered.
How do you write a letter of intent?
The content of a letter of intent may vary based on the type of deal, but in general an LOI is one to three pages and almost always includes the following.
Introductory paragraph: a brief opening paragraph stating what the letter's purpose is.
Parties: Describing the parties involved in the transaction and their contact information.
Property description: the property address and legal description.
Price: what the purchase or lease price is as well as terms for potential financing or loan contingency.
Escrow: including the escrow agent and their contact information.
Inspection and Due diligence: including the length of time allotted for buyer to conduct inspections, due diligence, and specific documents that need to be provided by the seller during this period.
Closing: including closing date and costs.
Contingencies: whether the offer is subject to additional clauses or terms outside of the clauses above, such as 1031 exchange, broker commission, or covenants.
RE Agency: specifying if any brokers or agents are involved and which parties they represent.
Expiration: specific date and time in which the LOI expires.
Closing paragraph: a brief paragraph stating that the LOI is not a contract and is nonbinding, followed by signatures from both parties.
Help with a letter of intent
If you plan on actively investing in CRE, you'll want to get familiar with writing an LOI as it is the initial stage of purchasing a property. You can write a letter of intent yourself, but it's imperative you understand the terms of the LOI. Your letter of intent should be clear, concise, and complete. If you’re new to the business, having a broker and or attorney review your LOI is recommended.
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