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Why the LOI is Vital for Success in Commercial Real Estate

CEO Khai Intela
When it comes to commercial real estate transactions, experienced investors and tenants understand the importance of a Letter of Intent (LOI). This document serves as the foundation for potential deals involving buying, selling, or leasing...

When it comes to commercial real estate transactions, experienced investors and tenants understand the importance of a Letter of Intent (LOI). This document serves as the foundation for potential deals involving buying, selling, or leasing office spaces. Unfortunately, many parties make critical mistakes that could easily be avoided. In this article, we will delve into the significance of the LOI and provide valuable insights on how to structure and write one effectively.

Understanding the LOI

A LOI, also known as a letter of intent, is a non-binding document between two parties that outlines the key aspects of a proposed transaction. It serves as a guiding document for drafting a formal binding contract and signifies the parties' commitment to moving forward with the deal. While the overall LOI is non-binding, certain sections can be mutually agreed upon as binding, such as the purchase price or financing structure.

First Central Tower First Central Tower

The Role of the LOI in Commercial Real Estate

A LOI is commonly used to put the major points of a proposed purchase or lease into writing. Before presenting a LOI to the owner or landlord, it is crucial to conduct thorough research and property tours. Typically, a commercial real estate broker representing the buyer or tenant will draft the LOI after touring the property and engaging in informal discussions with the owner. The LOI outlines key deal points such as price, due diligence period, financing, and closing details.

The Significance of the LOI

A LOI plays a pivotal role in commercial real estate for several reasons. Firstly, it serves as a middle step between initial discussions and the creation of a legally binding sales contract, saving both time and resources. Rather than diving straight into a lengthy contract, parties can quickly and easily memorialize the basic terms of the proposed transaction through a LOI.

LOIs also help determine the seriousness of prospective buyers or tenants. As an LOI is non-binding and free to make, it is essential for property owners to gauge the commitment level of potential parties. Significant deviations from a property owner's Offering Memorandum in the LOI may indicate a lack of seriousness.

City Center in St Petersburg City Center in St Petersburg

What to Include in the LOI

When drafting a LOI, it is essential to include the following items:

Parties

  • Names of the seller, buyer or tenant
  • Address and contact information
  • Responsible parties authorized to execute the final agreement

Property

  • Address and suite number (for lease negotiations)
  • Building description, including lot size and square footage
  • Parking and signage details
  • Property gross income, operating expenses, and NOI based on seller's representations
  • Rent type (e.g., FSG or NNN), including CAM charges (for lease LOIs)

Offer

  • Purchase price, including earnest money and financing terms
  • Due diligence period and description of documents to be provided
  • Lease terms, including rent, annual increases, abatements or tenant improvements (TIs), lease length, occupancy, and rights to sublease
  • Target date for signing the purchase contract or lease agreement
  • Expiration date of the LOI (usually 5-10 business days after presentation)

Brokers

  • Names of any commercial real estate brokers involved in the transaction
  • Disclosure of each broker's representation
  • Sales commission or leasing fee, if applicable

Disclaimers

  • Notice that the LOI is non-binding
  • Pre-conditions to signing the purchase contract or lease, such as approval by shareholders or city permits

Writing an Effective LOI

An LOI should typically span 2-3 pages and include the following structure:

  1. Introductory paragraph: Clearly state the purpose of the LOI, such as expressing interest in purchasing the property or leasing available space.
  2. Parties to the proposed transaction: Provide details of the entities involved, including their legal names, home states, and entity types (e.g., LLC).
  3. Key deal points: Outline property description, offer terms, involvement of commercial real estate brokers, and other specific terms and conditions.
  4. Closing paragraph: Clarify the binding/non-binding sections of the LOI, include a non-disclosure agreement or confidentiality clause, remedies for breaching binding provisions, and request the other party's signature before the LOI's expiration date.

The Final Word on LOIs

A LOI is a quick and straightforward way to propose and describe a transaction without the need for an earnest money deposit. It acts as a reference point for lenders or business partners and showcases a basic level of commitment. While non-binding, an LOI should be presented in good faith, with both parties maintaining credibility throughout the negotiation process. If renegotiation is necessary, transparently communicate any changes in circumstances or new information.

Ready to make your mark in commercial real estate? Get started by exploring Feldman Equities or reaching out to 813-221-6699 for expert guidance and support.

Remember, a well-crafted LOI can set the stage for success in commercial real estate transactions.

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