The commercial real estate property of your dreams is finally in your sights. You’ve done your homework, working with your tenant representation broker, gone on tours, and sorted out your budget.
Unlike other residential housing transactions, commercial real estate can be challenging and is often a slow process. Existing renters may require additional time to leave, maintenance may be necessary, and the build-out details must be double-checked and confirmed. Prospective tenants don’t want to miss out on a good home! So, what steps should you take to secure a property? The answer is a signed Letter of Intent (LOI) formally expressing your interest in buying or leasing commercial real estate.
We will walk you through the importance of LOI and why it is helpful for any commercial real estate property.
What is an LOI?
A letter of intent (LOI) is a non-binding memorandum between two parties that lays the groundwork for potential future action or agreement. An LOI is also known as a Letter of Understanding, a Memorandum of Agreement, or a Memorandum of Understanding in various market segments.
In commercial real estate, a letter of intent (LOI) is used to put the essential aspects of a proposed acquisition or lease in writing. Before submitting a letter of intent to an owner or landlord, the party presenting the letter of intent should conduct research and examine various homes on the market.
After seeing the property and having informal discussions with the owner, the commercial properties broker representing the buyer or renter will usually produce a letter of intent. The LOI will include the price, due diligence duration, finance, and escrow or possession date.
What is included in an LOI?
The following items should be included in an LOI:
- Seller, buyer, or tenant
- Contact information and address
- Parties with authority to sign a final sale or leasing agreement
- A lease’s address and suite number.
- A description of the structure, which includes the lot size and square footage
- Number of parking spaces
- Property gross income, operational expenses, and NOI
- If the LOI is for lease, the type of rent must be listed. Examples of this include FSG or NNN, as well as any CAM charges.
- The purchase price plus earnest money and financing terms
- The seller or landlord will provide adequate time and an extensive overview of the paperwork.
- Rent and annual increases, rent abatements or tenant improvements (TIs), lease length, occupancy, and sublet rights are all included in the lease conditions.
- The deadline for signing the purchase contract or lease agreement is set for the next day.
- The LOI’s expiration date is typically 5-10 business days after submitting it to the seller or landlord.
- Names of any commercial real estate brokers involved in the transaction and the parties they represent
- After the transaction is complete, each broker receives a sales commission or a lease fee.
- It is important to note that the letter of intent is non-binding.
- Prerequisites for signing a purchase contract or lease, such as shareholder approval or city permit approval in the case of a partnership.
Check out our latest blogs to learn detailed information about buying commercial properties in Corpus Christi.
Pros and Cons of a Letter of Intent (LOI)
There are a few main advantages to LOIs. For starters, they are easy to prepare and less expensive than purchase agreements. Secondly, they don’t need tenants to put down any earnest money to secure the home. This gives them more flexibility and cash flow if the purchase falls through. Finally, they give tenants the option of providing papers to a possible lender. This can help with the financing.
However, there are a few disadvantages to creating and submitting a letter of intent. They add another layer of complexity to an already complex process. While LOI’s give landlords a glimpse into your desired terms, you will need to renegotiate the terms when it comes time to sign the commercial real estate lease. Extra steps in the bargaining process will cost both parties time and money.
LOI’s aren’t usually legally binding. Thus, there should be explicit language in the letter stating whether or not they are. While this can be beneficial to tenants who may need to withdraw an offer due to unforeseen circumstances, it allows the landlord to examine multiple bids with more favorable terms.
Because of the little time, it takes to prepare and send an LOI, tenants should carefully evaluate their options before asking their tenant representation broker. While LOI’s aren’t usually legally enforceable, they should be written in such a manner. Do not sign a letter of intent unless you understand the entire scope of its authority and the potential legal ramifications. After all, it’s less expensive to be thorough than to risk a legal battle later.
Despite the fact that a letter of intent is not legally binding, it should be issued in good faith. Both parties should strive to retain credibility throughout the negotiating process. Explain to the other party why specific terms need to be renegotiated, such as new information obtained or a substantial change in circumstances. Do you want to dive into the world of commercial real estate investing but don’t know where to start? Get in touch with our reliable realtors in Corpus Christi, TX to learn more!