LOIs are beneficial for many reasons, which we’ll discuss in more detail below. Namely, they help the prospective buyer and seller (or landlord and tenant) come to general, high-level terms before moving forward with a more stringent due diligence process. Those who use an LOI often have a leg-up when negotiating the terms of a sale or lease relative to their peers bidding on the same assets.
In this article, we look at what is a letter of intent in commercial real estate, including how to write one using the templates provided.
A letter of intent, commonly referred to as an “LOI,” is a simple, 1-3 page document that prospective buyers or tenants use to outline the terms of their offer for a property. It includes the basic terms of what they’re willing to pay for a property and under what conditions.
The main purpose of an LOI is to help the owner and buyer reach a mutual understanding on deal terms before moving into a longer, more formalized due diligence period.
It is important to note that LOIs are non-binding. This is a major difference between an LOI and a purchase and sale agreement (PSA), the latter of which is a formal contract between the two parties. Because PSAs are legally-binding, they tend to be much more robust and significantly longer (often 20+ pages long with language crafted by both brokers and attorneys). Using an LOI is a great way to iron out big-picture items before moving to the longer, more time-consuming PSA negotiation phase. Although non-binding, both parties should be reviewing the LOI in good faith.
LOIs are often used for both the purchase of commercial real estate as well as the lease of commercial property.
A letter of intent is used in commercial real estate transactions whenever negotiations are expected to be complex. They are typically drafted after someone has already viewed the property and had preliminary conversations with the owner and/or broker about moving forward with the transaction. The LOI will then serve as an initial offer that is prepared based on any preliminary information that has been provided by the seller or seller’s broker.
Letters of intent should be used to start the negotiation process and nail down key terms. They are a way of formalizing what has been discussed verbally by putting the specifics of those conversations down on paper.
Once an LOI has been agreed to and signed by both parties, the next step will be to move forward with a legally-binding lease or purchase and sales contract prior to closing on the deal.
While LOIs are useful, they are not required. Many people lease and/or purchase commercial real estate without using an LOI at all. That said, there are a few key reasons why someone would want to use a letter of intent, including:
Letters of intent are often used by businesses looking to lease office, retail, industrial and other commercial property. Regardless of how the property will be used, an LOI for leased commercial space will generally include the following:
While there is a minimum set of expectations around what should be included in an LOI for leased commercial property, there is no maximum. LOIs are generally simple, but if a tenant feels that there are more details that need to be discussed, it is acceptable to include those terms in the LOI as well.
Letters of intent are equally as common among real estate investors and developers looking to purchase commercial property. The LOI will outline, at a high-level, how the seller plans to acquire the property and under what terms. This is an important precursor to the sale of a commercial asset given how complicated and nuanced commercial real estate PSAs tend to be. An LOI can save the buyer and seller significant time if they’re able to come to general terms in advance of moving forward to a full-blown PSA. The PSA can then be used to resolve the finer points of the transaction.
At a minimum, these are the basic things that will be included in an LOI to purchase commercial property:
This list is not exhaustive, but these are the common terms that are generally described in an LOI to purchase commercial real estate. It serves as a roadmap for the buyer and seller as they contemplate whether to move forward. The LOI should be in writing and signed by both parties.
Again, an LOI is not necessarily required but both sellers and their brokers will usually expect a prospective buyer to submit an LOI before moving forward with negotiations. In short, use of LOIs have become an industry standard.
Before shopping around for a commercial property to lease or buy, it is worth drafting a “template” LOI designed to meet your specific needs. Then, before submitting that LOI to any owner, have your broker or attorney review the template language to make sure your interests have been sufficiently protected. While LOIs are non-binding, they help to set the stage for further negotiations. Assuming the owner accepts and signs your LOI, you want to be sure certain items have been sufficiently addressed prior to moving into the due diligence and formal PSA stage. Once the LOI has been blessed by your attorney, you can use that template to pursue various commercial properties.
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