What is a letter of intent?

| Nov 30, 2020 | Real Estate Transactions | 0 comments

Investing in commercial real estate is a different process as compared to investing in residential properties. For instance, a common feature in commercial real estate absent in residential is a letter of intent.

You will not always use a letter of intent, and when you do they are typically not binding. According to Million Acres, a letter of intent is a formal notice from a real estate investor that they have an interest in a particular commercial property.

What is in the letter of intent? 

Letters of intent are typically very short: no more than 2-3 pages. The letter of intent is the formal beginning of the due diligence and negotiation process that happens prior to formally entering into an agreement with each other using a lease.

Typically, the letter of intent will involve the terms of the offer summarized in basic language. The letter of intent intends to give both the seller and the landlord a concise summary of what the legal terms are for the purchase or lease agreement. The purchase or lease agreement will then hold the greater details of the contract.

When should I use a letter of intent? 

Keep in mind that letters of intent are non-binding. It is not unusual for both parties to agree upon an initial letter of intent and then completely change the terms over the process of formal negotiations.

Letters of intent are essentially formalized initial offers. It shows that the buyer has already done a modicum of due diligence on the property. This indication of serious interest then incentivizes the seller to engage in more detailed negotiation.