Letter of Interest

Definition of a Letter of Interest (LOI)

In the context of commercial mortgages, a Letter of Interest (often abbreviated as an LOI and sometimes referred to as a Term Sheet) is a preliminary document issued by a lender to a prospective borrower. It outlines the general terms and conditions under which the lender is willing to consider providing financing for a commercial property. It serves as a formal "expression of interest" rather than a final legal commitment to fund the loan.

Detailed Description and Key Components

An LOI is typically issued after a lender has performed a high-level review of the borrower’s initial financial package and the property’s performance, but before the exhaustive underwriting and due diligence process begins. While the document is generally non-binding, it acts as a roadmap for the transaction and ensures that both parties are aligned on the deal's economics before incurring significant costs.

A standard Letter of Interest for a commercial mortgage usually includes the following details:

• Loan Amount: The total amount of capital the lender proposes to provide based on current information.
• Interest Rate: The estimated rate, which may be fixed or floating, often expressed as a spread over a benchmark like SOFR or Treasury yields.
• Loan Term: The duration of the loan before it matures (e.g., 5, 7, or 10 years).
• Amortization: The schedule over which the principal will be repaid, or if the loan is interest-only.
• Loan-to-Value (LTV) Ratio: The maximum percentage of the property’s appraised value that the lender is willing to finance.
• Fees: Disclosure of estimated costs, including origination fees, application fees, and "good faith" deposits required to move to the next stage.
• Contingencies: Specific requirements that must be satisfied for final approval, such as a satisfactory appraisal, environmental reports, and site inspections.

The Purpose and Importance of the LOI

The primary purpose of an LOI is to provide the borrower with a written summary of terms to evaluate against other financing options. It allows the borrower to "shop" the deal or move forward with a specific lender with a reasonable level of confidence. For the lender, the LOI serves as a screening tool to ensure the project fits their current risk profile and investment criteria.

Once the borrower signs the LOI and often pays an initial deposit, the process moves into the formal due diligence phase. It is important to note that because the LOI is non-binding, the lender reserves the right to modify the terms or decline the loan if the formal underwriting process reveals issues regarding the property's condition, the borrower's credit, or the accuracy of the initial financial data provided.