How to make an offer on commercial real estate
When buying commercial real estate, the offer process consists of two main steps:
- Negotiating broad terms via a Letter of Intent (LOI)
- Negotiating specific terms via a Purchase and Sale Agreement
Letter of Intent
A Letter of Intent (LOI) is an informal method of negotiating the most basic terms of the transaction. It is sometimes known as a Memorandum of Understanding (MOU). The LOI consists primarily of a cover letter and an outline of the important terms, including:
- Names of buyer and seller
- Seller concessions
- Required documents for review
- Closing date
- Contingencies and time-lines:
- Due diligence
It is important to only include the most important terms in the LOI. Along with making it easier to come to agreement, this helps keep the LOI from becoming too long and detailed. The LOI does not replace a full Purchase and Sale agreement. However, it can make the process of creating one much easier.
Purchase and Sale Agreement
The purchase and sale agreement (PSA) is a contract that governs the details of the purchase process from a legal perspective. The PSA and any addenda attached will include all of the details not covered by the LOI. In the Pacific Northwest, the Commercial Broker’s Association provides a standard Purchase and Sale Agreement contract and addenda. This helps provide a basic agreement that covers many of the most common terms and contingencies. It also formalizes some local customs in the market.
It is important that you have an attorney review the terms of your contract before finalizing it. Ideally, you should have your attorney involved from the start, beginning with the LOI process. You want to make sure the attorney understands your goals, needs and intent so that they can ensure the contract actually reflects those items. Also, by making sure the attorney understands what you have intended, you avoid having the attorney trying to run the negotiations.
Be sure to review the contract terms with your accountant. Financing terms, allocation of purchase price, etc. can all have tax and accounting consequences. Again, involving a professional from the beginning of the process and making sure they understand your goals and intent will help them make sure the accounting and tax consequences match your goals.
There will be some back-and-forth in both steps of the offer process. Real estate brokers will typically move from written to verbal negotiations, and back, as the negotiations progress. This is especially helpful if the buyer and seller are going back-and-forth on some specific detail. In some cases, it helps to have the parties meet in person to discuss any problematic details. When discussing details verbally or in person, it’s important to follow up with written confirmation to ensure that the views expressed by either side during the conversation are well documented.