Letter of Intent for Commercial Industrial Purchase
Today we are going to walk through what is usually the first legal document that is presented to the seller of an industrial property, the Letter of Intent. This article will help you understand each of the entries to include, as well as the importance of a strong Letter of Intent in the initial offer. As they say, you never get a second chance at first impressions. Specific terms typically include property description, price, due diligence period, earnest money, closing date, financing contingencies, parties, assignability, etc.
Note from Spencer: This is another post in a growing section we call ‘A.CRE Legal‘. One of Texas’ top real estate attorneys, Ronald Rohde, has graciously offered to share his time, expertise, and open his library of real estate legal templates for the A.CRE audience. Click here to learn more about Ron or to contact him directly.
LOI for Commercial Industrial Purchase Template Walkthrough
Assumptions for Letter of Intent
The assumptions that I will make are that you’re purchasing an industrial property off-market or are unrepresented. Often our clients work with a commercial broker who prepares and submits the LOI. However, there are plenty of buyers who forgot a broker and request their attorney submit the LOI directly, or they even submit the LOI themselves. Although the letter should include all the important terms, don’t make it unnecessarily long. You need to be able to get the seller to agree to all the critical points of the deal, and then you will work out the details in the Purchase and Sales Agreement.
Are Letters of Intent Binding?
A Letter of Intent is designed to be a legal document, but not an enforceable agreement. That is to say, it’s a legal document with precise definitions and commonly understood clauses, but despite signatures from both parties, there is not an enforceable agreement requiring one party to complete the described transaction. There are many legal documents or clauses which may not be designed to be enforced in a court of law. For example, a Memorandum of Understanding (MOU) between two companies could go into great detail describing how the two companies would work together, but absent a second, enforceable agreement, the MOU would not be sufficient in a court of law.
Some clauses may want to be enforceable such as confidentiality, litigation rules, attorney’s fees, etc. Be very careful about mixing clauses within a broader agreement. Word choice must be carefully considered if you are introducing enforceable clauses.
Letterhead
We recommend that you have a formal letterhead, this is your first impression with the seller and you want them to have a sense of confidence and professionalism. This may be the first written interaction or the highest level of making an offer, therefore make sure to put some effort into it because it will make a difference.
Identify the Real Estate to be Purchased
For real estate transactions, the property must be identified with sufficient precision so that the seller knows which land and which building(s) you are interested in. Especially if they own multiple parcels within an industrial park, you must specify which buildings/land you are interested in purchasing.
How to Describe the Price
Price is seemingly just a number. But how do you intend to deliver that price? Will it be a cash closing with no financing contingencies? Owner finance and note? Any reserve for lease renewals prior to closing? Holdback for NOI targets? Think of major factors that would influence the “deal or no deal” while you want to present a competitive offer, you also don’t want to waste time, your own and the sellers, by pursuing a deal that will die once the full extent of the conditions is discovered. For industrial properties, they can often be owned by a large fund and you should consider whether it is part of a broader portfolio that would be better off selling together.
Earnest Money
Earnest money can also be a very persuasive factor when evaluating offers. How much needs to be deposited to be taken seriously? Higher earnest money demonstrates stronger availability of cash on hand, which should also translate to a higher likelihood of funding at closing. There is also the corresponding amount of risk if the contract goes hard.
Escrow Holdback
Considering that we are at the end of 2022 where there is a bit of a disconnect between buyers and sellers, interest rates have risen and the economy is a bit unstable, escrow holdbacks are becoming more common to allow the buyer to pay a higher price if certain financial or other milestones are met on the property. Definitely consider escrow or some type of deferred compensation based on milestones. Talk to your attorney about how to draft them and make sure you are protected.
Due Diligence in a Letter of Intent
Due diligence period: have you decided whether 30, 60, or 90 days is enough? Do you have your vendors prepped to enter the property? In a competitive market, having a shorter due diligence period, combined with vendors scheduled, can produce a very short review period. This, however, requires thoughtful pre-offer preparation and a system that can be implemented quickly and frequently without fail. We usually have a standard 60 days for an industrial property of this size, if there are significant manufacturing capabilities or office components, that would increase complexity which warrants a longer due diligence period.
Closing Date
Closing date, this is perhaps the easiest term to decide on as 30 days from due diligence is the standard. You could possibly push it to 15 but with lenders, if you have debt, at this point, you know that having a long closing period is not unexpected.
Conclusion
We have covered many, but not all of the possible terms which make it into your next Letter of Intent. The purpose will always remain the same and different Buyers will structure different elements to convey they purpose. Understand who your audience is, and what type of seller are you dealing with. If you are presenting a Letter of Intent to a less sophisticated seller, you can reduce it to two full pages, including signatures, because you don’t need to include all these details, and they probably won’t be interested in reading it.
On the contrary, if you are offering to a sophisticated seller you will want to specify all of these things, otherwise, you are going to set yourself up for a legal battle down the road and may kill your deal. Good luck and feel free to reach out with any additional questions on industrial Letters of Intent.
Download the Letter of Intent for Commercial Industrial Purchase Template
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Frequently Asked Questions about Letters of Intent for Commercial Industrial Purchases
Version Notes
v1.0
- Initial release
