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Understanding the importance of a letter of intent

On Behalf of | Sep 16, 2021 | Real Estate |

If you plan to purchase a commercial property, one of the first formalities necessary is a letter of intent (LOI). This is typically no more than a few pages, although it can be longer depending upon the complexity of the potential transaction and/or property. (Note that LOIs are also used by prospective tenants of commercial properties.)

All LOIs by prospective buyers include certain elements. Let’s look at what needs to be included in an LOI.

The purpose of an LOI

The LOI states your intent to buy a piece of commercial real estate. It’s a nonbinding initial offer that begins the negotiations and formal due diligence process. 

In the LOI, you summarize the terms of your offer for the seller. It can be written by the prospective buyer or a broker representing them. That offer is based on some preliminary due diligence on the property and information that the landlord or seller has provided.

What’s included in an LOI?

The letter will include the preliminaries, such as the parties’ names and contact information and the address and description of the property. The LOI will also include:

  • The purchase price
  • Financing or loan contingency terms
  • The amount of the escrow deposit and the agent’s information
  • The amount of time the buyer has to perform their due diligence and any documentation the seller needs to provide
  • What inspections will be performed, how long the prospective buyer has to get them completed
  • The conditions under which the buyer can exit the agreement based on those inspections
  • The intended closing date and costs

As noted, LOIs are nonbinding. Terms can change and the buyer can withdraw their initial offer. However, it’s an essential first step to getting a potential purchase going. If the buyer and seller proceed with the transaction, they’ll move on to a formal binding purchase agreement.

Just because an LOI is nonbinding, that doesn’t mean it shouldn’t be carefully written. It provides the initial terms between a buyer and seller for a commercial real estate purchase. That’s why an LOI should never be written without experienced legal guidance.