In a leasing project, you will likely encounter a Letter of Intent (LOI). This article explains the essential details you need to know about an LOI, including its purpose, usage, and significance in commercial real estate transactions.
What is a Letter of Intent (LOI)?
A Letter of Intent (LOI) outlines the foundation for a future agreement between two parties. It serves as a preliminary agreement that a tenant and landlord or buyer and seller negotiate. The LOI details the main economic terms and key points proposed for a lease agreement. Essentially, it drafts the crucial items both parties evaluate to decide whether to proceed with an official contract. While the LOI is typically non-binding, both parties can agree to make it binding.
When Do You Use an LOI in Real Estate?
Typically, a potential tenant, buyer, or representing broker submits a Letter of Intent as an initial offer in a commercial real estate transaction. This submission relies on basic information that the landlord provides and preliminary due diligence on the property. After the LOI reaches the other party, they begin negotiations and formal due diligence before finalizing a purchase or lease agreement. While parties often agree on LOIs, they may change or withdraw the terms and conditions since the LOI is non-binding and subject to further verification.
In commercial real estate, an LOI puts the major points of a proposed lease into writing. The party submitting the LOI should research, inspect, or tour available properties before submission. Generally, a commercial real estate broker representing the buyer or tenant drafts the LOI after inspecting the property and discussing terms with the owner or landlord. The LOI outlines key deal points such as rent, the due diligence period, financing, and the close of escrow or date of possession.
Why is the Letter of Intent Important?
A Letter of Intent plays a crucial role in commercial real estate leasing or buying. Since buying, selling, or leasing commercial real estate is often tedious, complex, and costly, even experienced investors and tenants rely on the LOI to ensure that both parties reach a mutual understanding before diving into the complexities of contract-making.
Moreover, the LOI acts as a stepping stone between initial discussions with the property owner and the drafting of a legally binding lease contract. It allows the parties to outline key points and familiarize themselves with the basic terms of the proposed transaction. This step is vital before negotiating contract terms and paying a real estate attorney to draft or review a lease agreement.
For landlords, the LOI provides an excellent way to assess the seriousness of a prospective tenant. Additionally, creating an LOI involves no cost, allowing prospective lessees or buyers to submit multiple LOIs, hoping that one will be accepted. However, if a prospective lessee’s terms significantly deviate from the property owner’s expectations, this deviation may indicate that the lessee is not a good fit or is not serious about completing the transaction.
What Does an LOI Include?
A typical Letter of Intent includes the following:
- Parties Involved: Names of the tenant and landlord, contact information, and the party authorized to execute a final sales or lease agreement.
- Property Details: Address, suite number, building description (including lot size and square footage), and type of rent (Full Gross Service or Triple Net Lease).
- The Offer: Lease price, down payment, due diligence period, lease terms (including rent and any annual increases), rent abatements or tenant improvements, lease length, and target dates for signing the lease agreement.
- Disclaimers: Statements clarifying that the LOI is non-binding, along with any preconditions for signing the lease.
How to Write an LOI
The structure of a Letter of Intent typically includes:
- Introductory Paragraph: Describes the purpose of the LOI, such as expressing interest in leasing the property.
- Parties Involved: Identifies the entities involved, including their legal and home state, to reduce the risk of incorrect information being used in the lease agreement.
- Key Deal Points: Describes the property, terms of the offer, and any commercial real estate brokers involved, along with other key terms specific to the transaction.
- Closing Paragraph: Clarifies whether any parts of the LOI are binding, includes a confidentiality clause, outlines remedies for breaching any binding provisions and requests that the receiving party sign and return a copy before the LOI’s expiration date.
Conclusion
In conclusion, a Letter of Intent serves as a guiding document for parties before they enter into any formal lease or purchase agreement. It outlines the key points both parties want to convey, ensuring a mutual understanding. Although non-binding, the LOI plays a crucial role in the early stages of real estate transactions, allowing both parties to clarify their intentions and proceed with confidence.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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