What is a Letter of Intent?
In a leasing project, it is likely you will come across a Letter of Intent (LOI). In this article, we have rounded up everything you need to know about a Letter of Intent.
A Letter of Intent (LOI) is a written non-binding document between two parties that serves as the basis for a contemplated future agreement. It is a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller. The Letter of Intent stipulates the dominant economics and key points with proposed terms in a lease agreement. They are designed to describe or draft the essential items that both parties can assess to decide whether to proceed or continue to an official contract. Thus, a letter of intent is a nonbinding document that encapsulates the basic terms of the offer and the initial goal of the parties without the extensive legal norms included in a real estate contract. This gives the seller or the landlord a concise picture of the scope and terms of the real estate purchase or lease agreement. It is rather important to note that a letter of intent could be binding if the parties decide that it is binding.
When is LOI used in real estate?
A letter of intent is submitted by a serious soon-to-be tenant, buyer, or representing broker in a commercial real estate transaction as an initial offer. It is planned based on basic preparatory information furnished by the landlord as well as the introductory due diligence of the property. Negotiations and formal due diligence begin after the Letter of Intent has been conveyed and prior to a formal purchase or lease agreement is entered into. It is not infrequent for Letter of Intents to be submitted and agreed upon, only to have the terms and conditions subsequently changed or even withdrawn altogether. This is so because a Letter of Intent, at its core, is a nonbinding document that merely states the buyer's intent subject to verification and due diligence, all of which can be amended or changed any time.
A letter of intent is used in commercial real estate to put the major points of a proposed lease into writing. The party submitting the letter of intent should research, inspect, or even tour available properties on the market before submitting a letter of intent to the landlord. Generally, a letter of intent will be drafted by a commercial estate broker representing the buyer or tenant after the inspection or tour of the property and conducting a spontaneous discourse or conference with the owner or landlord. The Letter of Intent will, therefore, serve as a vehicle to outline the key points of the deal, such as but not limited to: (a) the rent; (b) due diligence period; (c) financing; and (d) the close of the escrow date or date of possession.
And while a letter of intent is a non-binding document, the act of furnishing one certainly demonstrates that the buyer or tenant is committed to moving forward on a deal and intends to advance in good faith the deal. However, there are instances where a party may change the terms of the Letter of Intent or even withdraw from the deal altogether based wholly on desired terms not being agreed to, new information after performing due diligence and after verifying information provided by the parties.
All in all, a Letter of Intent is used to convey the key points of the parties from the lease price to the close of the escrow date or date of possession. To this end, the potential tenant must be diligent in researching or inspecting the properties since new information may serve as a basis for continuing or even withdrawing from the potential deal. In the same vein, the landlord must likewise be diligent in taking care and preserving its properties so that potential lessors will not be discouraged.
What is the importance of the Letter of Intent?
A letter of intent is one of the essential documents in commercial real estate leasing/buying. This is because buying, selling, or leasing commercial real estate is, most often than not, a tedious, convoluted, and costly process even to the most experienced investors and tenants. Hence, a Letter of Intent guides the parties to ensure that they have a meeting of the minds or that the contract conveys what they genuinely intend before going into the intricacies of contract making regarding leasing commercial real estate.
A letter of intent will serve as a stepping stone between introductory discussions with the property owner and the drafting of a legally binding lease contract. The Letter of Intent serves as a modality for the parties to put their key points and provides them with a quick and easy way to familiarize themselves with the basic terms of the proposed transaction. This is crucial before negotiating the contract terms and before paying a real estate attorney to draft or review a lease agreement.
Likewise, letters of intent are an excellent way for the landlord to determine who the prospective tenant is. Furthermore, making a letter of intent does not entail any costs; hence, a prospective lessee or buyer may submit as many Letters of Intent as possible, expecting that at least one is accepted. However, suppose the terms of the prospective lessee significantly deviate from that of the property owner’s. In that case, this could be a tell-tale sign that such prospective lessee submitting the Letter of Intent may not be a good fit for the owner to move forward with or be serious about completing the proposed transaction.
What are the contents of an LOI?
A Letter of Intent generally includes:
The parties: (a) the name of the tenant; (b) the address of contact information; (c) the party authorized to execute a final sales or lease agreement.
The property: (a) the address and the suite number of a lease of the negotiated lease; (b) the building description including lot size and square footage; (c) Type of rent, whether Full Gross Service (FSG) or a Triple Net Lease including any Common Area Maintenance (CAM).
The offer: (a) The lease price as well as any down payment thereof; (b) Due diligence period and general description of documents that the landlord will provide; (c) Lease Terms, including rent and any annual increase; (d) rent abatements or tenant improvements; (e) length of lease; (f) target for signing the purchase contract or lease agreement; (g) Expiration date of the Letter of Intent.
Any Disclaimers: (a) that the Letter of Intent is not binding, and any (b) preconditions in signing the lease.
How To Write an LOI
The typical structure of a Letter of Intent is as follows:
Introductory paragraph. The preceding paragraph serves to describe the purpose of the LOI, such as your interest in leasing the property;
The parties to the proposed transaction. This includes entities which are involved, the legal and home state to reduce the risk of the wrong information being used in the lease agreement;
The key points in the deal. This includes the description of the property, the terms of the offer, and the disclosure of any commercial real estate brokers involved in the lease transaction, as well as any other key terms and conditions specific to the proposed transaction.
The Closing Paragraph which includes whether or not certain parts of the LOI are binding, a non-disclosure agreement of confidentiality clause, remedies for breaching any binding provision in the LOI, as well as a request that the party receiving the LOI to sign and return a copy thereof proper to the expiration date of the LOI.
Conclusion
A letter of intent is a non-binding document that serves as a guiding light for the parties before entering into any formal lease or purchase agreement. It details the key points the parties want to convey to the other party to the end that they would have a meeting of the minds. Furthermore, considering the letter of intent is not binding, it is not infrequent that the offer may be withdrawn before the commencement of the formal agreement.
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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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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