In commercial real estate transactions, a prospective buyer wants to be as efficient as possible when it comes to managing the acquisition process of a real estate property. In a prior blog (The Importance of an Offering Memorandum in Commercial Real Estate), I explained the importance of an informative Operating Memorandum as a starting point to analyzing the merits of a commercial real estate purchase. The next step in the negotiation process is deciding if you, as a real estate investor, can come to a meeting of the minds with a commercial property owner, by writing down the key components of a transaction. Instead of spending a lot of time, and money, conferring with your legal counsel and drafting a formal purchase agreement, commercial real estate brokers representing buyers will submit Letters of Intent (LOI) to the seller’s broker to see if the key aspects of a purchase are acceptable to the seller. Therefore, the purpose of a Letter of Intent is best described as a non-binding, short document that a potential buyer specifies the general terms by which they will work in good faith and agree to purchase a property. The seller will either agree to the terms or counter with different terms that they are willing to accept. A commercial real estate transaction can be complicated, the real estate LOI is a guiding document that leads to a definitive agreement. Let’s dive into six key components of the Letters of Intent and some of affiliated characteristics of a LOI.
Introduction
The Letter of Intent can start with a brief introduction that reflects the serious expression of interest by a buyer. However, a disclaimer notes that the LOI is a non-binding agreement. It may also include the reason(s) for the LOI.
Property Description
A description of the property, including the property address, must be noted. Some LOI’s will note the type of property (e.g. single tenant, multifamily, self-storage etc.).
Purchaser/Seller/Brokers
The name of the buyer or the potential of an assignee is included. In some LOI’s the seller information is placed at the end of the document with the seller entity left blank so it can be filled in since sometimes the actual selling entity is not known. The buyer’s and seller’s brokers will be stated and how the commission will be paid.
Terms
The core of the LOI are the terms which include the purchase price, deposit, additional deposit, costs/expenses, due diligence period, title, governing law, closing, and expiration of the LOI. These are the fundamental areas that are important to state so the LOI conveys clarity on the buyer’s intent. A buyer may have a particular escrow company they prefer to use and can be stated in the deposit information. Under costs/expenses this can include who is to pay for the due diligence, legal, engineering, environmental, accounting, etc. There may be a note stating costs will be apportioned, as customary, based on the jurisdiction in which the property is located. The expectation of a good and marketable, insurable title at closing, free and clear of liens and encumbrances not approved by the purchaser is spelled out under the title section. The closing timeframe will be stated and can be tied to the expiration of the due diligence period or some other performance metric.
Summary
A final note can include the non-binding nature of this document, however, it will state if the parties come to an agreement, then the expectation is a formal agreement, and a binding contract will be forthcoming.
Signature Block
The last portion of the Letter of Intent will be a section for the buyer and seller to sign the document. This will include the entity names, signature and title line of the authorized signor, and the date.
Final Words
A commercial purchase agreement may involve complex negotiations. The main advantage of using a Letter of Intent is time. It does not take a lot of time to craft an effective LOI. This can save a buyer valuable time, further negotiations, and potential costs of having to draft a purchase and sale agreement with input from a real estate attorney and other professionals. If you have any questions about a Letter of Intent, please reach out to Greg Moore at Evans & Moore Associates.