A.CRE

Letter of Intent

A non-binding legal document used to communicate the high-level business terms in a real estate transaction. The letter of intent, or LOI, is most often used by the buyer at the early stages of a real estate purchase. The buyer sends a “letter” to the seller conveying the terms under which the buyer would proceed the acquisition of a seller’s property.

Terms outlined in a letter of intent generally include purchase price, amount and treatment of earnest money, timing of closing, the condition of the property upon closing, and other high-level business terms the seller and buyer must agree upon before drafting the lengthier, and binding, purchase and sale agreement (PSA).

Putting ‘Letter of Intent’ in Context

Scenario Overview

Dr. Michael Reynolds, a Tennessee-based physician, recently sold an apartment building in California and has 45 days to identify a replacement property as part of a 1031 Exchange to defer his capital gains taxes. Dr. Reynolds, an experienced but part-time investor, is interested in single-tenant net lease (STNL) properties for their stability and minimal management requirements. Represented by his broker, he has identified a 3,500-square-foot fast-food restaurant leased to a nationally recognized brand with 12 years remaining on the lease. The property, located in a suburban retail corridor of Nashville, Tennessee, is listed for $2.5 million.

Dr. Reynolds and his broker decide to submit a Letter of Intent (LOI) to the seller to begin negotiations. The LOI outlines the major terms under which Dr. Reynolds is prepared to proceed with the acquisition.

Terms Outlined in the Letter of Intent

  • Purchase Price: $2,400,000 (slightly below asking, to account for deferred maintenance on the parking lot).
  • Earnest Money Deposit: $50,000 to be held in escrow, refundable during the due diligence period.
  • Due Diligence Period: 30 days from the date of execution of a Purchase and Sale Agreement (PSA). During this time, Dr. Reynolds will inspect the lease, property condition, and tenant’s financials.
  • Closing Timeline: Closing to occur within 15 days of the conclusion of the due diligence period, or a total of 45 days from PSA execution.
  • Condition of Property at Closing: Seller is to ensure the property is delivered in “broom-swept condition,” with the parking lot patched and restriped as noted during a pre-inspection walk-through.
  • Contingencies: The transaction is contingent on Dr. Reynolds securing debt financing at terms no less favorable than 70 percent loan-to-value (LTV) at 6.25 percent interest.
  • Other Key Terms: Seller agrees not to solicit or entertain other offers during the LOI negotiation and due diligence period.

Next Steps After the LOI

Once the seller accepts the LOI, the parties will proceed to draft and negotiate a Purchase and Sale Agreement (PSA). The LOI itself is non-binding, meaning neither party is legally obligated to move forward until the PSA is executed. However, the LOI serves as a framework for negotiations, reducing misunderstandings and aligning both buyer and seller on the key transaction terms.

Contextual Insights

The LOI allows Dr. Reynolds to quickly communicate his intent and terms without committing to the more costly and time-consuming drafting of a PSA upfront. For the seller, the LOI demonstrates that Dr. Reynolds is a serious buyer while still allowing them flexibility to negotiate the finer points of the deal before proceeding to a binding agreement. The process aligns with the tight timelines required for a 1031 Exchange, ensuring Dr. Reynolds can meet his tax-deferral goals.

Frequently Asked Questions about Letters of Intent in Real Estate Transactions

A Letter of Intent (LOI) is a non-binding legal document used to communicate the high-level business terms in a real estate transaction. It outlines terms such as purchase price, earnest money, closing timeline, and contingencies before drafting a formal Purchase and Sale Agreement (PSA).

An LOI is used to streamline negotiations by aligning both parties on key terms before investing time and resources into drafting a binding PSA. As shown in Dr. Reynolds’s case, it facilitates faster decision-making, especially under tight timelines like a 1031 Exchange.

Common LOI terms include the proposed purchase price, earnest money deposit, due diligence period, closing date, property condition upon closing, contingencies (e.g., financing), and exclusivity clauses. In Dr. Reynolds’s LOI, these terms structured the preliminary deal framework.

No, a Letter of Intent is typically non-binding. It expresses serious interest and outlines proposed deal terms but does not legally obligate either party to complete the transaction until a binding PSA is signed.

An LOI enables buyers like Dr. Reynolds to initiate negotiations and identify replacement properties within the strict 45-day identification window required under a 1031 Exchange, helping meet IRS deadlines for tax deferral.

Once an LOI is accepted, the parties draft and negotiate the binding Purchase and Sale Agreement (PSA), which includes more detailed legal and operational terms. The LOI serves as the roadmap for this contract.

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