Making the Offer

The anatomy of a Letter of Intent

Part 1 - Why Use a Written Letter?

If after days, weeks or even months of driving around you finally have found a space (or spaces, as the case may be) that suits your needs and fits within your budget, it’s probably time to think about making your initial offer. Before you do however, you should have done at least an initial site inspection of the space and put together a preliminary construction budget and operating budget. Also, if you've done a Market Plan, you should have a real good understanding about the trade area, the dynamics of the site (including any possible code restrictions), the Fair Market Value and...if you will be able to afford the whole darn thing.

Does that sound like a lot of work? It is...That's why finding good real estate and making good deals is a full-time job. Taking shortcuts can be bad. Many companies use their offer letter (Also known as a Letter of Intent or LOI) as an opportunity to discover the “real” deal that lies somewhere between the euphoria of discovering the location and angst of negotiating the actual lease. Because a well crafted letter will usually quickly bring to the surface any big issues that may be lingering just out of sight and avoid any possible misunderstandings during the negotiation phase - when you’re spending money, it is considered a valuable tool in real estate development.

One thing to keep in mind is that not every deal can (or even should) be made and, if there ever was ever a time for “transparency” and/or full-disclosure, it’s right now…when your investment of time and money is at its absolute lowest. You don’t ever want to find yourself in a position where after you’ve invested hundreds of hours and thousands of dollars in a site, you reach an impasse with the Landlord over a major issue. The further along you get in the process, the harder it will be for you to walk away.

A well written and agreed upon LOI will also serve as the basis or starting point for creating the lease or purchase contract that you’ll eventually be discussing and, because you took the time to address all of your major issues up front, it’ll most likely save you and your attorney from many potential headaches. Larger companies tend to have some variation of a standardized LOI format and it is usually distilled from their lease and/or purchase contracts. Since you may be using the Landlord’s Lease or Purchase contracts, it is very important that you and your attorney, not the owner or the broker, creates the LOI.

Taking the time to identify all of the major terms and conditions up front; you, as well as the Owner/Landlord and your respective attorneys will have a pretty good understanding on how the deal is meant to be structured and your contract negotiations should go a bit quicker and smoother since you've already agreed to the major terms and conditions. You’ll probably want to be as specific and detailed as possible without going overboard, make sure to address both business and legal issues but keep in mind that the LOI should cover your basic understanding of the deal, it’s not the lease itself and usually shouldn't be longer than three or four pages.

Next: Identifying the parties, the location
and your use

 

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