What Is a Letter of Intent in Commercial Real Estate?
So you've found the perfect commercial space. Maybe it's a retail storefront with that killer corner location, or an office building that actually has enough parking for your team. You're excited. You're ready to make a move.
But ahead of you hire a lawyer and start drafting a full purchase agreement or lease, there's an important step that often gets overlooked: the letter of intent, or LOI.
Honestly, the LOI is one of the most misunderstood documents in commercial real estate. Some people think it's just a casual note expressing interest. Others treat it like a binding contract and get spooked. That truth sits somewhere in the middle.
Let's break down exactly what this document does, why it matters, and how you can use it to your advantage.
What You Need to Know About LOIs
A letter of intent is essentially your opening handshake in a commercial real estate deal. It's a document that outlines the basic terms you're proposing for a property—whether you're buying it or leasing it. Think of it as a roadmap for the negotiations that follow.
Here's the thing: an LOI is typically non-binding for the actual deal terms. That means neither party is legally obligated to complete the transaction based on what's written in the letter. But there are usually a few binding clauses tucked inside, like confidentiality agreements or exclusivity provisions (more on that later).
Why bother with an LOI at all? Because it saves everyone time and money. Imagine spending thousands on legal fees to draft a full lease, only to discover the landlord won't budge on the rent you need. The LOI lets you hash out the big-picture stuff first—price, square footage, timeline—before you invest in the expensive paperwork.
In my experience, the LOI is where deals are actually won or lost. Sure, the final contract matters, but by the time you get there, most of the heavy lifting is done. The LOI sets the tone, establishes trust, and filters out serious players from tire-kickers.
Step-by-Step Instructions for Drafting a Strong LOI
Ready to put pen to paper? Here's a straightforward process that works whether you're a seasoned investor or a first-time buyer.
Start with the basics. Put the property address, the names of all parties involved, and the date at the top. It sounds obvious, but you'd be surprised how many LOIs skip this step. You need to be crystal clear about who's making the offer and which property you're talking about.
Identify the type of transaction. Are you purchasing the building outright? Leasing it? Maybe you're doing a sale-leaseback where you buy the property and lease it back to the seller? Be explicit. If it's a lease, specify the type (gross, net, triple net) and the proposed term length.
State your price or rent terms clearly. For purchases, include your offer price and proposed earnest money deposit. For leases, state your proposed monthly rent, annual escalations, and any free rent or tenant improvement allowances you're requesting. Don't be vague here. Ambiguity kills deals.
Outline the timeline. When do you want to close? When does the lease term start? Include a proposed due diligence period—this is your window to inspect the property, review financials, and make sure everything checks out.
Address contingencies. What needs to happen for you to move forward? Common contingencies include obtaining financing, completing environmental assessments, or getting zoning approvals. List them out so the other side knows what you're working with.
Include the binding provisions. Even though the LOI is mostly non-binding, you'll want to include a few enforceable clauses. A confidentiality clause protects your financial information. An exclusivity clause (sometimes called a "no-shop" clause) prevents the seller or landlord from negotiating with other parties while you're doing your due diligence.
Set an expiration date. Give your offer a shelf life. Something like "This LOI expires if not accepted within 10 business days." This creates urgency and prevents the other party from sitting on your offer while shopping it around.
Get signatures. Both parties should sign the LOI to show they're on board with the terms. Even though it's non-binding, a signed LOI signals good faith and keeps everyone accountable.
Keep in mind that the LOI is a starting point, not the finish line. You're going to negotiate. The other side will come back with counteroffers. That's normal and expected. Don't get emotionally attached to any single term—stay flexible and focused on your overall goals.
Common Mistakes to Avoid
I've seen more deals fall apart over LOI mistakes than almost anything else. Here's what trips people up:
- Making it too binding. Some buyers try to include every possible term and make the whole thing legally enforceable. This scares off sellers and landlords. Keep the binding parts limited to confidentiality and exclusivity. Let the actual purchase agreement or lease handle the legal heavy lifting.
- Being too vague. On the flip side, some LOIs are so wishy-washy that they're useless. "We propose fair market rent" isn't a term. It's a cop-out. Put actual numbers on the table. You can always negotiate later, but you need a concrete starting point.
- Ignoring the due diligence period. This is your safety net. Without a proper due diligence period, you're essentially buying a pig in a poke. Make sure you have enough time to inspect the property, review leases, double-check environmental reports, and verify financials.
- Forgetting about the deposit. Whether it's an earnest money deposit for a purchase or a security deposit for a lease, spell out the amount and when it's due. This shows you're serious and protects the other party if you back out without cause.
Pro Tips for Negotiating Your LOI
Alright, let's get into the insider stuff. These are the things experienced investors know but rarely share:
- Let the other side go first. If you're responding to a listing or a landlord's proposal, let them draft the initial LOI. It gives you a window into their priorities and what they're willing to concede. Then you can craft your counter accordingly.
- Use the LOI to test the waters. If you're not sure about a particular term, include it anyway. The other side's reaction tells you a lot about their flexibility. Maybe they reject your request for six months of free rent, but they come back with three. Now you know where the negotiation starts.
- Keep it to two pages. An LOI should be concise. If you're writing five pages, you're basically drafting the contract ahead of you've agreed on the fundamentals. Keep it tight and focused on the big-ticket items.
- Be polite but firm. The tone of your LOI sets the tone for the entire transaction. You want to come across as professional, reasonable, and serious. Avoid ultimatums and aggressive language. You're starting a relationship, not ending one.
- Don't skip the expiration date. I've seen buyers leave offers open indefinitely, and it never works in their favor. Sellers will hold your LOI in their back pocket while they shop around for better offers. Give your offer a deadline and stick to it.
FAQs About Commercial Real Estate Letters of Intent
Is a letter of intent legally binding?
Generally, no. Your main deal terms in an LOI—like price, rent, and timeline—are non-binding and meant to serve as a starting point for negotiations. That said certain provisions are typically binding, such as confidentiality clauses, exclusivity agreements, and sometimes a "good faith" obligation to negotiate. Always read the fine print and understand which sections are enforceable before you start you sign.
How long should my due diligence period be?
It depends on the complexity of the transaction. For a simple commercial lease, 14 to 30 days might be sufficient. For a large office building or a realty with environmental concerns, you might need 60 to 90 days. The key is giving yourself enough time to complete all your inspections and reviews without feeling rushed. Remember, you can always request an extension, but it's better to start with enough time.
What happens following that both parties sign the LOI?
Once the LOI is signed, the real work begins. This seller or landlord will typically prepare the formal purchase agreement or lease based on the terms in the LOI. This document is much longer and more detailed, covering everything from default provisions to maintenance responsibilities. Your attorney will review it carefully, and you'll go through a period of back-and-forth revisions before you start finalizing the deal.
The Bottom Line
The letter of intent is your chance to set the stage for a successful commercial real estate transaction. It's where you establish your credibility, communicate your priorities, and start building a working relationship with the other party.
Don't overthink it. Don't treat it like a binding contract. And definitely don't skip it just because it seems like extra paperwork. The LOI is your best tool for getting everyone on the same page prior to the expensive, complicated legal work begins.
Whether you're buying your first investment property or leasing space for your growing business, a well-crafted LOI puts you in control. Take your time, be clear about what you want, and remember—this is just the beginning of the conversation. The real negotiation starts here.