This article is an excerpt from chapter five of David Sobelman‘s The Little Book of Triple Net Lease Investing: Second Edition. This chapter in the book also includes a sample letter of intent for further exploration of the topic.
As the name suggests, a letter of intent (LOI) is a non-binding means of expressing your intention to buy a property (or a lease). Think of it as a basis for starting a conversation with a seller. That is, you’re letting him or her know in simple clear language that you’d like to buy a property, how you’d like to purchase it, and under what terms. An LOI is a preliminary stage to the negotiation and signing of a contract (assuming all parties agree).
The following points are typically covered in an LOI:
The initial purchase price is stated, so both sides have a starting point for negotiations on this subject.
This section stipulates the conditions that must b e m et during the due diligence period (before the final contract is signed). The conditions will vary with the deal, of course. In the example at the end of this chapter, the conditions include an environmental inspection, review and audit of financial arrangements, title review, etc.
Take note that the due diligence period will vary with the complexity of the project. A straightforward deal with, say, one building and a single income stream, for instance, can be closed easily within the 30-day period. A complex one, on the other hand, can take much longer due to the nuances that need to be considered (e.g., multiple buildings and multiple income streams).
A specific closing date or time period is stated in this section “after waiver of all contingencies.” In other words, all contingencies have been satisfactorily met.
Closing costs are outlined in this section as well who is responsible for paying them. Often, the buyer will be responsible for X amount of costs, while the seller is responsible for another portion of them. These costs can be substantial.
This is simply a method of dividing the financial responsibility for various areas between a buyer and seller in many real estate transactions. These include such areas as:
- Real estate taxes/assessments
- Security deposits
- Security contracts, etc.
This section specifies who the brokers are, and which broker is representing the buyer and which one is representing the seller. It also specifies the amount of the commission to be paid at closing.
Generally speaking, the buyer will put a specific amount of money into escrow upon sign- ing of the purchase agreement. In the example (later in this chapter), that figure is $25,000. Then, as you can see, this section specifies that the buyer will deposit an additional $75,000 upon satisfaction of all contingencies at the end of the due diligence period. Such terms are fairly standard for triple net lease deals. However, the deposit will vary, depending on the size of the deal.
This section states that the buyer has the right to transfer and assign the purchase agreement to another person or institution (to be formed) of his or her choice: e.g., a partnership, corporation, Limited Liability Company, etc.
Tax Free Exchange
Since I’ve indicated elsewhere in this book that triple net leases are often used as part of the government’s 1031 exchange, this contingency is often included in a letter of intent. Basically, it states that the seller will help the buyer complete the exchange within the required time period.
Finally, in the example that follows, I specify that the LOI is, “not intended to create a legal commitment binding upon either Seller or Purchaser.” This makes it clear to the intended party that the letter of intent is simply a means for further discussion and nothing else. In other words, it’s a legally executable, but non-binding document.
Assuming that upon receipt of the Letter of Intent, the seller wants to proceed, then it’s time to move to the Purchase Agreement stage, which is the subject of the next chapter.