The 411 On Letter Of Intent
LOIs Serve As A Stepping Stone For A Smooth NNN Transaction
Commercial real estate investments can range from a straightforward sale that can easily close in a matter of weeks to a lengthy, complex transaction that drag on for several months or longer. Regardless of whether your deal is a sprint or a marathon, the first step in moving an acquisition forward is engaging in a letter of intent (LOI). In fact, that LOI is a preliminary commitment that can play a critical role in simplifying the overall end-to-end transaction process.
LOIs are important in any CRE transaction, and that role is even more critical in the highly competitive triple net lease (NNN) investment sales market. The NNN market is crowded with both buyers and sellers, and good assets that are attractive and priced right tend to sell very quickly. According to CoStar, over 26,000 properties priced between $1M and $5M closed in the first nine months of 2020. The LOI process helps to enable quick deal flow as it simplifies the negotiation.
The Letter of Intent precedes the Purchase Sale Agreement (PSA) in the overall NNN transaction process
What is an LOI?
The days when two parties could seal a deal with a simple handshake are largely in the past. LOIs now serve as a standard component in the vast majority of CRE deals. The document outlines the basic terms of the transaction, such as the purchase price, amount of the buyer deposit, deadlines completing due diligence and any financing contingencies.
All the terms detailed in the document are business-specific (not legal). They have been negotiated and agreed to by both buyer and seller. The LOI signals that the two parties have agreed to terms in principal and also to proceed to the next phase. The LOI itself is fairly straightforward and short, usually no more than 2-3 pages long. At this stage, it is usually just the buyer and seller and their respective representatives (brokers) who are hammering out the details. Attorneys or legal counsel are usually not involved in this preliminary step.
Importantly, the LOI is non-binding. In principle, both sides have agreed to terms and are both acting in good faith to move forward to complete a formal Purchase and Sale Agreement (PSA). Both parties are bound by the LOI terms. For example, a seller can’t decide to raise the price once the LOI has been signed by both parties. However, either party can withdraw from the deal anytime (within the specified window of 10 days to execute PSA for example) without suffering any financial loss or retribution.
What are the key benefits to an LOI?
It serves as a simple outline and framework of agreed upon terms for the sale. Essentially, it starts the sale process with both parties on the exact same page in terms of price, timing, responsibilities, etc.
It helps to expedite negotiations. Effectively, the LOI allows buyer and seller to quickly come to preliminary terms and move forward with the important next step of crafting a PSA.
Because key terms are agreed upon up front, an LOI can help to pave the way for a smoother end-to-end transaction process.
Since the LOI is not a legally binding document it greatly expedites the forward progress of a potential sale. The LOI allows the seller and buyer to get to the “meat” of the deal terms relatively quickly without getting bogged down in the legalese. There is no back and forth with lawyers and redlining of contracts (although that comes later in the process).
The LOI simplifies the process from as seller’s perspective. A NNN property might receive multiple offers once it hits the market, and the seller can quickly and easily size up the offers based on the terms outlined on the individual LOIs. Consider the time savings for a seller to be able to review terms on a 2-page LOI document versus a 30-page contract, and then multiply that by five, 10 or even more offers.
Laying the groundwork for the PSA
Once that LOI is fully executed (signed), the transaction process moves to the next step, which is the contract or PSA phase. The PSA can be created in one of two ways. One, it can be drafted by the legal counsel. Or two, it can be created using contract templates available from third party vendors. Depending on the deal the parties may prefer to leverage the standard template as it offers neutral language, and this would minimize negotiating the fine points of the purchase agreement.
Brokers often play a vital role in both the LOI and the PSA in representing the best interest of their client – and helping to get both sides to agree to terms. In some cases, attorneys can get stuck in the weeds on a particular legalese matter, or a buyer or seller may dig too deep into their respective bargaining position. There is considerable value to be gained in having a good broker who also is a smart mediator. Brokers that are adept at negotiation and mediation can sort through complexities, keep a transaction on course and help drive the deal to agreement. That is especially important in the current NNN investment market where there are plenty of other investors waiting to pounce on good deals.
The Invest Net Lease group at Touchstone Commercial Partners has spearheaded LOI negotiations and completed hundreds of transactions yearly. To gather insight on the triple net lease marketplace and assess whether NNN assets align with your investment objectives and lifestyle goals contact Andrew Vu at 415-539-1120 for a free, no- obligation NNN consultation.