How To Write LOI that Holds Seller to Cap Rate

[Kim Hopkins]

Hello! 

We have a great prospective property we're looking at. The broker OM says they're selling it at a 7.5% cap rate and $5.7m purchase price. 

Based on our experience, We are pretty sure their expenses are understated (they're at 23% of gross income and almost always are closer to 30%). 

They also have a sloppy typo where rent roll totals $410k on the rent roll page but is shown as $420k on the page where they use it to calculate NOI and purchase price (which would make a huge difference in offer price!)

We want to tie up the deal and show them that we're willing to do it at a 7.5% cap rate on the correct numbers, but we can't get the correct numbers until we're in contract and we don't want to retrade If the numbers were misstated (that never goes well in our experience).

Has anyone ever written an LOI that says something like this:

Buyer and seller agree that the purchase price is calculated by applying a 7.5% cap rate on actual annual income and and expenses and any decrease in NOI actuals from the OM will be reflected in an adjusted offer price.

Any ideas? Best way to handle this kind of situation? 

[Greg Scott]

While I understand the concept, how do you decide what is the "true" NOI?

I could see arguments ensuing about whether an expenditure is a capital improvement that goes to the balance sheet or a repair which hits NOI. If the seller stops taking a management fee and the NOI goes up, can they force you to pay more? Seems like there would be too much opportunity to play games.