The commercial real estate (CRE) world is full of intimidating and confusing terms and their similarly perplexing acronyms. From NOI and EBIT to USF and RSF, the industry jargon is enough to make your head spin. But there’s one term and acronym that’s truly important to understand: letter of intent (LOI).
An LOI is a preliminary agreement between a buyer and seller or tenant and landlord of a CRE property. As its name implies, the purpose of an LOI is to state the intent of a party to enter into a contractual agreement with another. Whether it’s to lease, purchase or sell a property, the LOI typically outlines the basic terms of a proposed CRE deal. They are an important step in working toward a formal agreement.
While they may be viewed as non-binding agreements by some, LOIs can in fact be treated as binding. Both parties’ conduct will determine the extent to which an LOI may be enforceable as a binding agreement, per the presumption of good faith. The presumption of whether an LOI is binding or non-binding is also based, at least in part, on the two types of provisions typically presented in an LOI.
Enforceable provisions are generally those meant to protect both parties’ interests in reaching a fair deal. For instance, exclusivity periods are meant to ensure a competing offer can’t swoop in and render the current deal obsolete. And confidentiality provisions protect both parties’ personal information.
The non-enforceable provisions typically include the proposed terms and are used as the jumping-off point for negotiations. These terms may include price, rent, timing, requested deposits and more.
These one- or two-page letters are submitted by a serious prospective tenant, buyer or representing CRE broker as an initial communication to the landlord or seller. They are used as the basis to begin negotiations. Oftentimes, they are passed back and forth and revised by both parties, respectively, until final terms are, at least initially, agreed upon.
After the prospective tenant or buyer has delivered the LOI, and both parties have amended the document according to their needs, due diligence efforts typically begin. Depending on the results of the due diligence process, the parties will then proceed into formal negotiations.
Whether you’re a prospective tenant or a building owner, clearly defined LOIs can protect your interests and help to guide an equitable and transparent final negotiation process. And with fair conduct acted out in good faith toward reaching the outlined deal, both buyer and seller are more fully assured a positive experience.
The CRE world can truly be intimidating and confusing. Whether you’re looking to buy, rent or sell, Chris Falk has the specialized experience you can rely on to help navigate these complex negotiations. Contact him for any of your CRE questions or needs at (801) 416-1024 or firstname.lastname@example.org.