What is a letter of intent (LOI) in commercial real estate (CRE)? An LOI is a non-binding document that outlines two parties’ commitment to do business together. It also outlines the most important aspects of the commercial real estate deal.
A commercial real estate LOI has three main goals:
- Acts as the foundation for contracts and other legal documents that will be drawn up as the deal is closer to closing.
- Shows that the parties are committed to moving forward together.
- Helps all parties outline and agree to terms of the deal.
Although a letter of intent is not legally binding, the involved parties may agree that certain points cannot be changed. For example, they may firmly outline the purchase price, financing requirements, and what the building will be used for.
When is an LOI Needed in Commercial Real Estate?
Besides wondering “what is an LOI?” You might wonder when an LOI is needed. In commercial real estate, an LOI is needed when the buyer and seller are prepared to move forward with a deal. Before drawing up an LOI, a commercial real estate investor should have a near-complete understanding of what they’re purchasing, how much the building costs, how they will secure funding, and what they intend to do with the building – all of which will be outlined in the LOI.
A letter of intent is typically drawn up by the real estate broker who facilitates the deal after the investor tours the property, researches the area, and has informal conversations with the seller about the nature of the sale. The broker will draw up the LOI with both parties’ interests in mind.
Once the LOI is finished, the broker will distribute it to the buyer and seller. Because an LOI isn’t a legally binding document, it can be sent via email or on official letterhead. All parties will have time to review the points, sign the document, and return it to the broker. If the commercial real estate deal is simple, the LOI may only be a few pages long. However, if the deal is more complex or involves many parties with a variety of responsibilities, the LOI may be 20+ pages long.
All parties can move on to drawing up the official, binding documents once the LOI is signed.
What is Included in a Commercial Real Estate Letter of Intent?
A commercial real estate letter of intent typically includes the following:
- Introduction: Every LOI should have a strong introduction paragraph. This section should explain why the LOI is necessary. For example, a CRE sale.
- Involved Parties: List all parties involved in the real estate transaction. This includes the buyer, the seller, the broker, and any other third parties, i.e., outside investors.
- Property Description: A strong LOI has a detailed description of the CRE property, including addresses, size, and lot boundaries.
- Terms: An LOI should include the sale price, land survey information, and other important property details. Buyers should list how they will obtain financing, the closing date, and how they intend to use the building.
- Disclaimers: An LOI is non-binding, which means any party can exit the deal at any time. Although a letter of intent typically comes when all parties are prepared to move forward, there may be a reason someone wants to back out before legal documents are signed. It’s helpful to, list why a particular party may change their mind, so others can prepare.
- Closing Statement: Summarize the main points of your LOI.
- Signatures: An LOI is only valid when signed by all parties. However, signatures do not make the document legally binding.
Why is a Letter of Intent Important?
Although letters of intent aren’t legally binding, they are still a crucial part of the commercial real estate investment process.
First, an LOI is important because it attempts to simplify the most important aspects of a complex transaction. Oftentimes, all parties gain a better understanding of the terms once they see them in writing. An LOI attempts to also simplify the negotiation process. Once everything is outlined in writing, all parties can edit and come together to reassess the terms.
Second, an LOI aims to protect all parties involved. Knowing the major terms of a formal arrangement before the documentation is drawn up allows everyone to prepare for what’s to come. Although the document is not legally binding, it may have certain binding agreements. For example, an LOI may include a non-disclosure agreement (NDA) that has legal consequences if broken.
Finally, a letter of intent allows the investor to show financial lenders that they are prepared to start buying process. This may be necessary for certain financial institutions or other investors to prepare the necessary documentation and financing.
Drawbacks to LOI in Commercial Real Estate
There are a few drawbacks to an LOI in commercial real estate deals. It’s important to understand the benefits and drawbacks, so investors can make the best decisions for themselves and their businesses.
A letter of intent is an additional step in an already complex deal. Some investors may choose to skip this step because they want the deal to move forward quickly. The additional time not only slows down the deal, but it can cost more in lawyer and broker fees.
That said, an LOI can save time and money in the long run. Although it may take an extra couple of weeks to write, negotiate, and sign the LOI, it can prevent large CRE deals from falling through. It can also prevent one party from taking advantage of another, which can lead to lengthy and expensive court processes.
Additionally, any party can back out of a letter of intent. Although these documents are typically drawn up in good faith, no one party has a legal obligation to another. This can be very helpful when extenuating circumstances arise and it allows sellers to consider multiple deals at once. However, knowing that the deal is not certainly moving forward may, at best, cause some anxiety and, at worst, cause one party to be blindsided by another backing out.
Hopefully, we answered all your questions about “what does letter of intent mean?” When understanding what is an LOI, it’s important to understand why they are necessary, what they include, and what their drawbacks are. Now, you can move forward to make decisions that will benefit your commercial real estate investment business.
Speed Commercial Real Estate
Speed Commercial Real Estate serves the Metro Jackson Area with comprehensive services in development, commercial brokerage, property and asset management, investment sales, and property owner and tenant representation. When you need a Letter of Intent, we will be at your side and protect your best interests. Contact us today to get started.