LOI in Real Estate: How to Write a Commercial Real Estate LOI

A letter of intent (LOI) is a document that states an initial commitment between two parties that intend to enter into a transaction together. This document has various applications, from government grants and real estate deals to employment and college applications.

A real estate LOI details the basic terms and provisions of the proposed real estate transaction, which the buyer and seller can negotiate in discussions moving forward. The buyer and real estate broker draft an LOI during the negotiation process over a piece of property, and sign them once they agree on the terms. The document is a precursor to a legally binding commercial real estate sales contract.

A commercial real estate (or CRE) letter of intent indicates a serious buyer’s interest in purchasing an income-generating commercial property. The commercial real estate buying process is expensive, time-consuming, and complicated, and letters of intent clarify and record the many elements of the exchange.

An LOI details all the major points of the real estate purchase or lease; it is not a binding document. Instead, it signifies the buyer is sincerely interested in making a purchase and has plans to negotiate in good faith. A commercial real estate broker will typically write an LOI, but the buyer can also draft one themselves.

Letters of intent are important because they put the terms of a complicated transaction in writing. They also make difficult negotiations clearer and easier to navigate. In commercial real estate, an LOI can protect each party while they prepare to make a more formal arrangement in the near future.

Even if it is not a binding agreement, a letter of intent may contain elements of a binding agreement, such as information on non-disclosure agreements (NDA) or agreements to negotiate in good faith. In that manner, they are similar to a term sheet or a memorandum of understanding (MoU). The details of an LOI are always presented in letter format and not in bullet points, as is the case with term sheets.

An effective LOI features a few key elements, including:

1. 1. Introduction: Start your LOI with an introductory paragraph. This section should provide a general summary of the reason for the LOI (like the exchange of a piece of property).
2. 2. Parties involved: Names the parties involved in the real estate transaction in the LOI. This includes the buyer, the seller, the broker, and any other third parties who may benefit or feel any effects.
3. 3. Property description: An LOI should include a detailed description of the exchanged property, including addresses, size, and lot boundaries.
4. 4. Terms: LOI must include the terms of the offer, including (but not limited to) the intended sale price, land survey information, and other property details. Buyers should list their intended financial lender, as well as the closing date for the property.
5. 5. Disclaimers: Although either party can back out of an LOI, it helps to include any information that can indicate why this may happen. LOI negotiations typically happen in good faith, so listing why a particular party may change their mind can help the other party properly prepare.
6. 6. Closing statement: A closing statement helps summarize the main points of your LOI, clarifying what is at stake and both parties' goals.
7. 7. Signatures: An LOI is only valid if all involved parties sign it. However, this still does not make the document legally binding.

Follow these steps to write an LOI for an intended commercial real estate transaction:

1. 1. Structure it like a letter. Write an LOI in the form of a letter rather than a list of bullet points.
2. 2. Write the opening paragraph. Write a brief paragraph about the general reason for your LOI, and declare the overall goal of this non-binding contract.
3. 3. State the parties involved. State the names of all the parties participating in the transaction, including the buyer, seller, real estate brokers, and any relevant third parties. This clarifies legal and financial responsibility and defines property obligations. Include who the broker represents and their commission from the transaction.
4. 4. Draft a property description. Write a detailed description of the property you intend to exchange and include the property’s physical address, lot size, and square footage. Address the projected revenue value that the commercial property can generate and the operating costs like building management and maintenance.
5. 5. Outline the terms of the offer. Include the projected purchase price (including earnest money in escrow) for the transaction and any relevant sales or lease terms. Outline what you expect from both parties during the due diligence period between the acceptance of the LOI and the closing or lease signing. Include relevant property information, tax returns, title insurance policy, land survey information, and/or utility bills (for sellers). Buyers should name the intended financial lender as well. They should also enumerate the closing costs, the intended date for possession of the property, as well as the expiration date of the LOI agreement.
6. 6. Include disclaimers. State any caveats or disclaimers that may affect the terms of the agreement. Disclose any conditions or reasons why either party may terminate or void the agreement (even though either party can back out at any time for any reason).
7. 7. Conclude with a closing statement. Close your letter with one or two sentences that sum up the major points of your LOI. This should give an overview of what both parties should do while negotiating a formal agreement. Acknowledge that both parties understand that terms may change after official proceedings start but that each agrees to negotiate in good faith. Both parties should provide their signature at the bottom of the document indicating they have read, understood, and agreed to all of the terms and conditions listed.

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