Letter of Intent- Why Use it?

You can formally state your intention to purchase a commercial property prior to writing a legal binding contract using a letter of intent (LOI) or memorandum of understanding. The letter of intent is presented to a seller in the preliminary stages of a commercial  investment project. The intentions of a buyer or buyers representative, often the managing partner, are spelled out clearly and simply so the seller knows exactly how the buyer (or syndication) wants to purchase the property, and under what terms. Spelling out the terms of a purchase agreement prior to writing a formal legal purchase agreement allows the seller to respond prior to presenting the final agreemnt. This will save legal expenses and helps define a timetable of action for both parties.  Once agreed, you can begin formalizing the due diligence process and expect to receive documentation from the seller about the property.

When to use a letter of intent

The LOI is commonly (and should be) used when buying any commercial property. It is a way for the seller and buyer to begin the formal acquisition process following verbal communication about the sale of the property. The seller can feel more comfortable about your intention and ability to close on the property. The letter of intent is an outline of the buyers intention to follow through with the purchase subject to the representation of the facts by the seller as true and correct. The facts are substantiated during the due diligence period following a signed letter of intent. The LOI  allows for an understanding between the buyer and the seller to take place, without lengthy and costly legal positioning taking place. All facts and figures about the subject property can  be verified so that the buyer understands exactly what he or she is getting in the property. If the buyer finds something that he or she can not accept, during the due diligence process or something not originally expected, he or she can back out without any recourse or punishment.

If the terms of the letter of intent are accepted, then the due diligence period will begin. It will continue until the time agreed upon by both parties expires, then a binding legal contract is constructed. Terms may change during this time if certain aspects of a property, previously not disclosed, are discovered. For example, the property may be in a lot worse condition than originally thought, causing the buyer to negotiate a decreased purchase price or the buyer will not want to purchase the property and will safely option out of the non-binding contract.

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