NNN properties can be quite lucrative for investors who are looking for a long-term, low-touch, and high-return investment property. Triple net lease property investments are a low-risk way to build equity and gain a consistent investment revenue stream, but as with any commercial real estate transaction, there is a specific process that must unfold successfully for an NNN property transaction to be completed.
An important step in the NNN property buying process is the drafting and submission of an LOI (or Letter of Intent) from the interested buyer to the seller. But what is an LOI or Letter of Intent? And why is it an important part of acquiring an NNN property?
This guide will explain the basics of a real estate letter of intent, outline the purposes and advantages of an intent to purchase agreement in an NNN deal, and provide letter of intent to purchase commercial space timing tips and templates for NNN properties.
What is a Real Estate LOI?
A Letter of Intent (LOI) is a document presented to a seller of a property by an interested buyer. An LOI isn’t a binding, legal contract, but it does show an act of good faith and outlines the key aspects of a buyer’s proposal to purchase a property.
In essence, an LOI is much like a real estate offer letter that is used commonly in residential property purchases. A commercial letter of intent will contain all the details and include intricacies inherent to large purchases on investment properties. The LOI outlines all the details a seller will need to consider the buyer and start the process of reaching agreeable terms on the sale of the property.
An LOI will typically include information such as:
- The buyer’s information
- Earnest money a buyer plans to put down to secure the property
- Financing information and terms
- Proposed closing date for the transaction
- Disclosure of any special circumstances (such as a 1031 Exchange or other deal specifics)
- Details on any due diligence allowed for the buyer prior to final purchase commitment.
An LOI is executed when both parties (the seller and buyer) agree to the terms presented and sign the document. Once signed, the LOI will serve as an outline and guide for preparing all the legal (and binding) documentation needed to start the official sale process and close the deal, transferring ownership legally from the seller to the buyer.
What is the Purpose of a Real Estate LOI?
An LOI is a letter of intent to purchase a property. The purpose of an LOI is to clearly outline all the information and intentions of a buyer, in regard to a property they’re interested in purchasing.
The letter of intent to purchase real estate shows that a buyer is serious about the property and has all the funds, financing, and other considerations in place in advance of making a large purchase such as an NNN property.
Advantages of a Real Estate LOI
An LOI or Letter of Intent serves as an intent to purchase letter from the buyer to the seller. It shows intent, motivation, and also outlines the buyer’s financing terms to demonstrate that they are both willing and able to purchase the property as outlined in the LOI/Letter of Intent.
An LOI has many advantages in the competitive NNN market, such as:
- Demonstrates the interest and motivation levels of both the buyer and the seller
- Outlines all the key details and information necessary to move forward in a purchase/sale agreement
- Brings any issues or deal terms to light quickly, that may need to be worked out and negotiated
- Helps facilitate contract negotiations necessary to reach a final, binding purchase agreement
- Sets up terms for allowing buyer to complete due diligence (property inspections, review of NNN tenants lease terms, etc)
- Helps finalize financing terms and funds through identification of a specific property to purchase
- Facilitates a smoother transaction and faster close time by outlining all deal specifications upfront
Additionally, an LOI can require the seller to pause their marketing on the listing for 7-10 days to allow time for consideration of the buyer’s offer, without having to adjust or compete with any other offers that may come in during that time frame.
The Role of an LOI in a 1031 Exchange
We have noticed an uptick in 1031 Exchange buyers who are looking to transition from a higher risk and higher touch property (such as an apartment complex) to an NNN property that is lower touch and lower relative risk. In a 1031 Exchange, an investor is selling one property and using the tax-free funds from escrow to put toward a new purchase that is similar to the one being sold. After the sale of their property, a 1031 Exchange buyer typically has 45 days to identify the replacement property, which is known as the identification period.
As such, an LOI can also be an important aspect of a 1031 Exchange deal, as it then serves as a declaration of identifying a purchase property in the exchange. A key element of taking advantage of the tax breaks in a 1031 Exchange is identifying a suitable property within an allotted time frame in the deal. The LOI can help a 1031 Exchange buyer meet the guidelines of their deal by selecting and making an offer on the property they’ll be buying in the exchange.
When Should a Triple Net Lease Letter of Intent Be Drafted?
A letter of intent to purchase commercial real estate, such as an NNN property, should be drafted up quickly, but should only be done when a buyer has funds and financing in place and ready to go as soon as an offer is accepted. Once financing details are locked in, a buyer can begin looking seriously at properties that are in their price range, and that will fit nicely into their commercial real estate portfolio.
As soon as a buyer has located a property they’re interested in purchasing, a letter of intent to purchase property should be drafted and presented to the seller. Time if often of the essence in NNN deals, since the most promising ones will move quickly and typically have multiple, competitive buyers submitting a commercial letter of intent to purchase.
The triple net properties with ideal locations, traffic, and long-term leases in place tend to move on the market quickly (especially in bustling geographical areas or cities with high growth and economic rates). Crafting a compelling LOI, that is an initial intent to purchase agreement, demonstrates buyer intent, means, and motivation will help a buyer compete and secure the property they wish to purchase with more ease and speed.
Commercial Real Estate Letter of Intent Template: NNN Properties
Each NNN property is unique, and the terms of an LOI and deal will be specific to each individual buyer and seller. You can find many examples of a real estate letter of intent template online, but unless you have a strong background in real estate and legal contracts associated to NNN transactions, enlisting the help of an NNN lease advisor is ideal for a smooth experience, from locating a property to preparing an LOI to closing the deal.
However, a typical LOI for an NNN property may include (but not be limited to) the following details and information:
- Effective Date of LOI
- Introduction to the Basic Terms of the LOI
- Buyer Name
- Seller Name
- Business or Property Name
- Proposed Purchase Price
- Address of Property in LOI
- Legal Name or Description of the Property
- Payment at Closing
- Binding Effect (If Applicable)
- Bank Account Balance Declaration
- Seller Conduct
- Closing Date and Terms
- Closing Costs and Terms
- Termination Clause and Terms
- Information Access and Confidentiality
- Return of Materials
- Special Conditions or Considerations
- Buyer and Seller Confidentiality Clause
- Good Faith Negotiations
- Standstill Agreement
- Governing Law
- Counterparts and Electronic Means
- Buyer Signature, Printed Name and Date
- Seller Signature, Printed Name and Date
Arranging proper financing, locating the best NNN property opportunity, and quickly drafting and presenting a complete, clearly outlined LOI helps buyers compete in a hot NNN market and facilitates a smoother, faster transaction close when all the pertinent details are outlined and accepted in this initial step.
Working with an expert in the NNN space, who knows the potential in triple net lease investments and understand how to create a compelling and timely LOI can help buyers secure a great NNN property deal that closes quickly and seamlessly.
Sands Investment Group is a distinguished team of experts in the triple net lease space, with the expertise and experience to help you buy or sell NNN properties. We’re the fastest growing net lease investment company in America, with over 2,100 transactions in 48 states (worth $4.5 Billion) since 2010. We understand every piece of the process and can help you navigate the phrasing and timing of your LOI successfully.
Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.