Letter of Intent or LOI Defined

What does LOI mean, besides being an acronym? LOI is an abbreviation you will hear in different business’s and can mean different things relative to the industry in which it is being used. In regards to commercial real estate LOI stands for “letter of intent“. It is used during the initial stages of a transaction. The transaction can be a purchase or lease of a property.

An LOI or letter of intent is a non-binding proposal or agreement between the buyer and seller or tenant and landlord. This is the first formal step in most transactions.  An LOI should be as detailed as possible and lay out the important points. To be certain the LOI is in fact non-binding, it will consist of a section that explicitly states it is not a binding contract. Neither party can rely on the LOI as creating any kind of legal obligation. The LOI memorializes the terms of a real estate transaction before it is finalized. It is an agreement that states the desire to enter into a real estate transaction, such as a sale or lease. It outlines the crucial terms before the purchase contract or lease is signed. Any party involved in the transaction can draft a LOI which ultimately conveys that the tenant or landlord is serious in regards to committing to a purchase or lease and ready to move forward. The LOI is a good tool to see if the subject property is a good fit. It will flush out properties that will not work and determine how serious the tenant/owner is.

The following is a list of common subjects or themes that should be present in a LOI:

  • These terms Identify the parties involved Buyer/Seller or Tenant/Landlord
  • It will also have the names of all parties involved such as tenants name or DBA name
  • The LOI should stipulate a time frame for approval
  • It should state that the LOI is Non-Binding
  • There should be language stating that the LOI will be succeeded by a signed lease or purchase agreement
  • Contingent on the type of use, there are other provisions that need to be addressed in the LOI
  • It should set out key matters such as subject property, suite number, floor number, a description of the space, term (length of lease), lease commencement, sale price, rental rate, rental increases, type of rent structure (triple net, modified gross, full service grow), any restrictions or exclusivity and who is responsible for what.

 

When subject to the extensive documents that comes with a real estate matter, LOI’s save time and money. The expectation is to come to a settlement on all main deal topics in advance so all the monotonous paper work that comes with the transaction is done with the goal to close the transaction. The LOI assists to convey concerns at the beginning of the transaction so as not to go down a fruitless path. Every transaction should start with an LOI. Before an broker submits the LOI he or she will send it to the buyer/tenant in order for them to review and approve it. Afterwards the agent will send it to the seller/tenant broker for review and submittal for the seller/tenant.

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