How to Successfully Structure a Letter of Intent

So L.O.I. can range anywhere from one page, to 5 pages. I’ve seen letter of intents right now with one that we’re working on and to like 20+ pages. So a letter of intent can be very simple. It can become complicated. But most importantly, sometimes it can also lead to complications, because we tend to kind of agree to the terms just to get things done, and you may not really understand the ramifications once you’re into an actual contract stage. Typically, a letter of intent, purchase price, earnest money, how long you have to close. How long of feasibility paid or due diligence paid you have. What kind of documents you’re going to get during the due diligence period. Those are probably your major concerns that you have. Sometimes an LOI can address certain things like title insurance, surveys, brokers, certain fees and expenses that might covered and may not be covered. But those are probably your most basic points in probably about every LOI you’re going to see. They’re going to at least cover purchase price, earnest money, closing paid and due diligence. Those are probably your biggest buckets of items that you really need to have in an LOI to substantiate the next process.

L.O.I. is not really legally binding contract or document at all. It’s like a memorandum unit of understanding. It’s a letter of agreement to kind of move forward. So a lot of folks have different schools of thought, and it comes as the buyer or the seller, but people have different schools of thoughts to LOI. Some folks spend a lot of time on the LOI. They go back and forth. Because what their intent is that the LOI really will then speed up the purchase and sale agreement time. So then before they engage their lawyer, they have kind of hashed out the majority of the big items between the buyer and the seller without having folks involved. Be able to hash out major items that are really important to you. So the goal is that it speeds up the purchase and sale of the item. Some folks say we just want to get into a PSA as quick as possible, because the LOI is nonbinding. So again it doesn’t mean anything. It doesn’t have the bearing and the effect that you need. So let’s just get past this and get into the PSA state. So it’s kind of a school of thought. There’s no really right or wrong, but it’s really about strategy. It’s really about how you approach things. Sometimes about what kind of team you have in the background. If you’ve got a very sophisticated build out and team and you’ve got people who got experience in this transaction side, you’ll see more sophisticated 6, 7, 8 page LOIs, because their team internally does a lot of that before they call the lawyer and say, “Hey, guys. We have enough LOI. Let’s get cracking.” Some folks say, “Well, let’s just kind of get this going and then let’s get the experts involved very quickly.”

Listen to full episode: https://lifebridgecapital.com/2019/09/ws332-how-to-successfully-structure-a-letter-of-intent-with-rahul-patel/

So number one, if you’re walking out of a deal. So I’ll kind of go through these, and there are different deals. But, number one, if you got – And we’re seeing it more and more now prevalent, people coming out of a defeasance, or a 1031. So somebody’s got a CMBS loan on it, Commercial Mortgage-Backed Security or a 1031. There are certain specific timing issues that really come into play. You can’t just kick the can down the road or close any specific day. You got to have certain trigger points. You really want to address that if you’re coming in or out of one. That’s going to become a critical item, and that may affect the buyer or the seller differently. So you want to really make sure that you spit that out from the beginning, because that could have an impact on another party, and that is a material item that you kind of want to let the buyer or the seller know when you’re coming into it, because that’s going to effectuate a lot of things. Another really kind of important item that I see, sometimes glance to over, is really a strong item, because I’d say it is not a binding agreement, is taking the property off the market. So what we typically look to do is put together a provision in there that’s a withdrawal of the property from market. What that does is it allows people to work that property. Have that kind of safety net that says while we work from this, that nobody just takes that property away from them. They can’t just pull it out from the market. Another better deal comes in to execute a PSA and go. Usually what happens is you can do a tight window where the property is then not marketable, and then that kind of creates a binding effect on that or a non-binding effect on that.