5 Things to Know About a Letter of Intent (LOI)

Posted by Matthew Lindsay on Wednesday, October 31st, 2018 at 10:30am.

When looking to lease or purchase a commercial property, you want to start the process by walking the property, looking at financials and making sure the property use fits your needs. The next step is to submit a letter of intent, or LOI, to start the process of negotiating terms with the property owner. Below are five things to be addressed in the LOI.

5 Things to Know About a Letter of Intent (LOI)

  1. Purchase Price and Terms

One of the first things that the owner will want to know is what the buyer is paying for the property. This can come in a variety of different ways, but at the end of the day it needs to be specific how the price is going to be settled.

In a lease, this is typically calculated in a dollar amount per square foot and will have a set percentage escalated annually.

  1. Earnest Money and Terms

Earnest money is the deposit that you submit with the offer. It is a sign of good faith on the part of the buyer to the seller that they intend on purchasing the property. During the due diligence the earnest money is typically refundable while after this period it typically becomes non-refundable. Those terms should be specifically spelled out in the letter, so there is no questions about what is to happen.

  1. Source of Funding

The seller is going to want to know how the buyer is going to pay for the property. Is it going to be financed? Cash? Is the owner going to hold a note for part of the price and what are the terms. The source of funding can affect other parts of the deal and because of that it is important to know how that will come together.

  1. Timing of Transactions

The contract needs to specifically outline the time frame of everything that needs to be done, as well as the closing date. This will entail the property’s physical inspection, legal and political analysis, market, feasibility of use, and financing to name a few. If these are not outlined, the buyer can tie up a property for an extended period of time, whereas the seller might be able to engage a better qualified buyer.  

  1. After Sale Responsibilities of Seller/ Additional Clauses

At times, the seller may have additional obligations to the buyer after the sale. This may look like consulting on a business, a period of time that the seller transfers management, the owner may leaseback space for a period of time or many other circumstances. Additionally, the buyer have other items that they need to add to the contract and should address those in the letter of intent.

 

In summary, the LOI is your outline to the contract that you will be putting together with the seller. It is the preface to the contract and lets parties start the negotiations.

If you have any questions about this or any other commercial real estate related topics, send an email to matthew@precisionhomegroup.com

 

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