Letter of Intent - Posted by Joe-M

Posted by Joe-M on March 28, 2009 at 22:33:24:

That is a good idea, however we are still waiting for seller to sign the LOI. He doesn’t seem motivated. His broker indicated that the building clears $100k annually!! maybe that’s why he is not hurry to sign the dotted line. This Thursday he is going to negotiate the terms of LOI set forth by me and my broker. Being this is my first commercial deal, it would be a interesting experience.

Joe

Letter of Intent - Posted by Joe-M

Posted by Joe-M on March 19, 2009 at 08:48:51:

I posted this in the wrong spot before…sorry…

Today I received the letter of intent and since I haven’t seen one of these before, there are items that concern me; hopefully you can shed some light. This property is located in the state of California and the closings are through Title-Escrow Company. Here are the items of question:

1-Buyer shall pay 50% of city transfer taxes? Is this common or shall I check with the local city government.
2- A Purchase and Sale Agreement shall be prepared by the seller within 10 business days of the full execution of the letter of intent. Both seller and buyer agree to negotiate and then execute a mutually acceptable Purchase and Sale Agreement within 14 days thereafter with buyer deposit $50K into an escrow account. The buyer has 30 days from the execution of the Purchase and Sale Agreement. (It concerns me that we have to sign a contract with agreed price tag before I do the due diligence. Is this a common practice?)
3-Seller shall provide buyer with all the material documents and instruments within 5 business days after the Purchase and Sale Agreement, (Since the due diligence period begins right after signing the Purchase and Sale Agreement. This means potentially a week can go by from the time clock is ticking and I wonâ??t have any of the documents like leases, P&L docs and so on to start the due diligence. Again is this something common?).
4-Buyer shall make an additional $50K deposit into an escrow after all contingencies are removed. This money is non-refundable and applicable toward the purchase price. (The word â??non-refundable is alarming to me, so what happens if we didnâ??t like the outcome of the due diligence; are we out a $100k?).

Thanks in advance,
Joe

Re: Letter of Intent - Posted by SteveO

Posted by SteveO on March 19, 2009 at 08:58:12:

It is common to sign the contract in advance of the dd completion. You have an opportunity to renegotiotiate or let the deal go as long as you have this written into the contract.

Be careful on this though. Some buyers try to put the seller over a barrel by tying up the property and hammering hard on price reductions. The only time a price reduction is warranted is when there are discoveries that were either misunderstood or misrepresented. Market changes can be taken into consideration as well.

five days for delivery of the dd items is common. The items that will take the most time are the physical inspections and reports. I would suggest that you start lining those up before the contract is signed. You can also request certain items in advance while you are negotiating the contract. If the seller refuses without a reason, you will get a flavor of what the rest of the transaction will be like.

Make sure that the contract says that your money in fully refundable during the dd inspection period. If you don’t have it already, look into adding a finacing contingency. Money is tough to come by for commercial deals these days. This way your money is refundable if the financing does not go through. You will lose all the costs for reports, inspections, loan applications fees, etc… This is part of the business though.

Manage your process during the purchase to insure that your dd money is protected. You want the deal but if things don’t go the way you need them to, you want to be able to get your money back. Work quickly and make your decisions in advance.

Re: Letter of Intent - Posted by Joe-M

Posted by Joe-M on April 08, 2009 at 11:32:02:

Well after sending the seller our copy of the LOI, he countered it yesterday. He has bumped the price by $200K and asked that we (the buyer) to pay the broker fee for our broker. It doesn’t seem he is motivated to me.

Thanks,
Joe-M

Re: Letter of Intent - Posted by Joe-M

Posted by Joe-M on March 24, 2009 at 22:14:03:

Thanks Steve, today we revised and deliver our own version of the LOI to the seller’s broker, they can meet alll our demands except they don’t have the financial statements on the tenants. This is a office building with year to year leases however they haven’t had any vacancies for years. Should the absence of financial statements be a major concern?

Thanks,
Joe.

Re: Letter of Intent - Posted by Tai

Posted by Tai on March 25, 2009 at 07:50:52:

In my limited experience with office tenants, you usually do not get financial statements of tenants for small office tenants because the lease usually do not say they have to provide that. With NNN and big commercial tenants, the lease provides for financial statements, but then these are typically public companies so the financials are public info.

so, I would not consider absence of financial statements a major concern here.

Note that, in this economy, past vacancy rate mean little. And with year-to-year leases, the tenants may have little to lose if they break the lease. I usually like to see 3-5 year leases, knowing that most small companies fail in 2 years.

One more thing, with small office tenants I would like to see personal guarantee on the lease if possible, so that there is recourse if the company closes.

Tai

Re: Letter of Intent - Posted by Joe-M

Posted by Joe-M on March 25, 2009 at 11:03:02:

Thanks for the advise. I was getting worried about the FS. These tenants been leasing there for a while and you are right there are small companies. mainly therepists and lawyers.

Thanks,
Joe

Re: Letter of Intent - Posted by SteveO

Posted by SteveO on March 26, 2009 at 07:43:00:

Seems like therapists would be thriving right now. :slight_smile:

Re: Letter of Intent - Posted by Jusk

Posted by Jusk on March 26, 2009 at 08:21:24:

You might go to the tenants after you buy and to try renegioate the leases with longer terms by maybe dropping their rates for the first year…if they’ve been there a long time there’s no reason they shouldn’t been on longer term leases…