Understanding the term, LOI has eluded most seasoned investors and starting realtors alike. A Letter of Intent is an informal transaction contract showing the interest and commitment of the parties involved in an ongoing transaction.
But what is LOI in real estate?
We’ve got you covered if you’re still wondering how to use an LOI and how it works for a commercial real estate broker. We will provide a detailed analysis of everything you should know about LOI in real estate.
What is the Meaning of LOI in Real Estate
An LOI in real estate is similar to a sales contract that outlines a mutual agreement between a buyer and property owner over a proposed real estate transaction. It is usually a non-binding agreement that allows the parties involved to negotiate on the terms as time passes.
Once a prospective buyer indicates interest in a commercial property, both parties go through a negotiation process and, in turn, make up a draft agreement that discusses the lease terms or purchase agreement. If the deal is mutual, the two parties participating can go ahead to sign the document.
The signed agreement becomes the Letter of intent between the prospective buyer and the commercial real estate broker.
As the proposed transaction progresses, the two parties can always review these terms till they’re in a mutual agreement. Once this happens, the Letter of intent becomes a precursor document that leads to an officially binding contract.
At this point, the two parties can allow a lawyer to examine the LOI and draft a finalized contract.
Purpose of an LOI in Commercial Real Estate
It is common knowledge that a commercial real estate transaction can be expensive and somewhat complicated. When dealing with a starting investor interested in a commercial property, it becomes more tasking and takes up valuable time.
To avoid such complications and provide clarity, a Letter of Intent indicates purchase agreements for the sales of commercial space between buyer and realtor. An LOI serves as a temporary offer provided by the broker or, in some cases, a buyer based on existing information provided by the broker.
After inspection, further negotiations continue, and what follows is editing the LOI before a formal contract is drafted and issued.
The Letter intends to provide a general description of sale or lease terms that both parties sign and negotiate till they come to a satisfactory conclusion. After that, it becomes easier to draft a legally binding contract for the property sale.
It is important to note that the Letter of intent is not a formal agreement but a document that indicates that a buyer is genuinely interested in a specific property and is willing to go through with the potential transaction in good faith.
What a Letter of Intent Includes
To create a real estate letter of intent that is fit for commercial use, it needs to contain these key elements:
Like with most business offers, your Letter of intent should include an introduction in one or two paragraphs. Here, you have to state why drafting the LOI, which in this case is due to a potential commercial real estate transaction.
Names of Parties Involved
At this stage, you have to list the names of everyone involved in the real estate transaction. The list includes:
- Name of the property owner
- Commercial real estate broker
- Escrow company involved directly or indirectly.
You can also include the contact information and address of the parties involved.
Commercial Property Description
Your Letter of Intent should include a well-detailed description of the subject property, including its address, suite number, landmark, size, measurement of landscape, and even property failures. It should also contain other necessary information like the rent type and the property’s gross income.
Including such essential information about the property ensures no future disagreement over undisclosed details between buyer and seller.
Terms of LOI offer
Here, both real estate broker and buyer can negotiate and then state their terms for the commercial real estate transaction. The buyer can include the closing date for the property purchase, their financial information, and even those of their financial advisors.
The real estate broker should include:
- Purchase price
- Due diligence period
- Lease term
- Inspection period
- Closing costs
- Agreed closing period for signing the LOI
- The Letter’s expiration date. An LOI is usually valid for between five to fifteen days. However, it could be longer depending on the agreement between broker and buyer.
Although a Letter of Intent is not a non-binding agreement during a commercial real estate transaction, The party issuing the LOI must include a disclaimer in the offer.
State possible reasons the other party may withdraw from the proposed transaction even after the negotiation.
Adding an ending remark may not be necessary when drafting an LOI, but it still plays an important role. It summarises the purchase or lease agreement between both parties and the potential risks and benefits of the real estate transaction.
A letter of intent may not be a binding contract; however, it requires the parties’ signatures for it to be intent binding. Like every typical sales contract, Both parties must sign an LOI before it becomes a valid document in a commercial real estate transaction.
Breakdown of an LOI in Real Estate
A Letter of Intent is drafted and offered once an interested buyer has shown commitment toward a commercial real estate transaction. The question remains, ‘How is a Letter of Intent applied in real estate?’ Here’s a simple breakdown of how to apply an LOI in commercial real estate.
What Steps Leads to a Letter of Intent Offer in Real Estate?
A letter of intent follows a process that begins when a prospect views a series of real estate deals and shows interest in a property. After that, the following steps lead to an LOI offer:
The buyer or tenant contacts the real estate broker about the subject property and both parties agree on the inspection date.
At this stage, both parties visit the property for a proper inspection. This vital point greatly determines if an LOI will eventually be offered.
Here, the prospect conducts a thorough inspection of the building, including its facilities, to ensure no structural defects or visible material. If the prospect is satisfied, they can advance to the next Step.
After the property inspection, both parties negotiate, and the buyer decides if he wants to forge ahead with the commercial real estate transaction. Once the lease agreement or purchase agreement is conclusive, a Letter of Intent is drafted and presented to the property owner.
Since an LOI isn’t legally binding, further negotiations can still be possible before the presentation of the final purchase contract.
Who Sends the LOI in Real Estate?
Anybody can send the Letter of intent in commercial real estate.
Although real estate brokers mainly carry out this process, a buyer or tenant can be the one to send their Letter of Intent. Since a Letter of Intent is non-binding, the point of origin does not affect its validity.
Tips for Writing a Real Estate Letter of Intent
A Letter of Intent is typically between one to five pages, depending on the commercial real estate purchase scale. It is essential to be concise when preparing one.
If you have no idea how to write a Letter of Intent, here are simple tips:
- According to its name, a Letter of Intent isn’t a random note. Hence it should be written in the form of a letter. It shouldn’t contain colloquial terms and must be written formally, without bullet points.
- Start by writing an introductory paragraph, stating the purpose of the LOI and what both parties hope to achieve.
- Carry out enough research on the parties who will be actively involved in the transaction process. Research is necessary to ensure you’re dealing with a qualified professional who understands the rudiments of real estate.
- Make sure to include the full names of the buyer, seller, and real estate broker, as well as the escrow if one is present. The LOI should also include valid contact information of all parties involved.
- In straightforward terms, state the property description, purchase agreement, lease term, tax information, purchase price, insurance policy, the annual tenant rent, land survey information, and other terms of the offer.
- When writing a Letter of Intent, try as much as possible to include conditions that may render the LOI void. Research on possible reasons why the LOI might be terminated or withdrawn.
- Include the closing remark that summarizes the offer’s key points, such as completion dates for the purchase agreement, closing cost, desired financial terms, and even the expiration date of the LOI.
- Finally, you have to write your Letter of Intent using simple words that can be easily understood by everyone involved in the commercial real estate transaction.
Legal Implications of an LOI in Real Estate
A Letter of Intent has no legal binding status on both the buyer/seller and the real estate broker. It is primarily drafted in good faith that a prospect will go ahead with a commercial real estate transaction.
However, both parties can decide to make the document a binding contract between themselves. Once they agree with this, none can terminate or withdraw the terms of the offer stated in the LOI.
A court can take over the case if anyone deviates or goes against stated agreements.
Although it is rare, a court can decide that a Letter of Intent becomes a binding contract if both parties initially agreed to make it a binding agreement.
Why an LOI is Necessary for Commercial Real Estate
Experienced real estate brokers and investors agree that commercial real estate deals are time-consuming and complicated. A Letter of Intent is essential in such cases because it saves time and ensures that both broker and prospect are in agreement.
Most experienced realtors and investors offer an LOI because it is a fast way of reaching a mutual point with prospects. Besides, it is free and doesn’t necessarily require payment of earnest money from any of the parties.
While it is non-binding, an LOI helps strengthen the level of commitment of the parties involved in the negotiation and transaction process. A Letter of Intent on offer saves both parties the stress of getting deeply involved in a transaction only to lose it eventually.
The meaning is that although an LOI is nonbinding, a buyer must have shown a certain level of commitment for one to be drafted. To a large extent, it displays good faith on the buyer’s part to complete the transaction.
A Letter of Intent is also necessary for commercial real estate because it clarifies what to expect. Since the LOI contains terms of the offer that has been agreed upon, it becomes easier for both parties to immediately complete the deal since the LOI already provides a mutual ground.
Hence, the real estate lawyer finds drafting a legally binding lease or purchase contract much faster and easier.
An LOI is essential in commercial real estate because it prepares both parties, especially the buyer, on what to expect when the actual purchase contract is released.
Knowing the agreement in the Letter of Intent, they can ascertain if the purchase contracts meet their terms. This knowledge, in turn, prevents any form of foul play before and after property purchase.
The Bottom Line
A letter of Intent (LOI) is an efficient way of hastening the commercial real estate deal while at the same time ensuring both parties are on the same page. An LOI isn’t legally binding but helps showcase commitment toward completing a commercial transaction.
Since an LOI is non-binding, some people may not take the terms of the offer seriously. Both parties must work hand in hand without going against the stated agreement. If the LOI needs changes at any point, there must be communication between both parties before such an action can occur.
Once credibility is maintained, it dramatically reduces the need for renegotiation or misunderstanding. It also enhances the broker’s professionalism, thus increasing the chances of a successful transaction.