Now that you know what not to do, let's talk about what you should do. These are the insider tricks that brokers and experienced investors use to get better deals.
Always Ask for a Free Rent Period
In commercial leases, it's common to ask for a few months of free rent to cover your build-out time. This is called a "rent abatement." Landlords expect this request, so don't be shy. Even asking for 1-2 months can save you thousands of dollars.
Keep the LOI Short and Sweet
The longer the LOI, the more time it takes to review, and the more likely it is that disputes will arise. Try to keep it to two or three pages maximum. If you need to get into heavy details, save it for the lease negotiation.
Use the LOI to Test the Other Side
Pay attention to how the other party responds to your LOI. If they're quick to respond and reasonable in their counter-offers, that's a good sign. If they drag their feet or try to nickel-and-dime you on every minor point, you might want to reconsider whether you want to do business with them at all.
Get Your Broker Involved
If you don't have a commercial real estate broker, get one. They do this every day. They know what's standard in the market, and they can help you craft an LOI that gets you the best deal. Their commission is usually paid by the landlord or seller, so it won't cost you anything out of pocket.
Don't Forget the "Subject To" Language
Make sure your LOI states that the deal is subject to you obtaining financing, passing inspections, and getting lease approval from your attorney. These contingencies protect you if something goes wrong during due diligence.
Frequently Asked Questions
Is an LOI legally binding?
In most cases, no. The main body of the LOI is typically non-binding, meaning neither party is legally obligated to complete the deal. However, certain provisions—like confidentiality, exclusivity, and the "governing law" clause—are often binding. Always read the fine print to see which sections are enforceable. When in doubt, ask your attorney to review it ahead of you sign.
How long does it take to negotiate an LOI?
It depends on the complexity of the deal. A simple lease might take just a few days to negotiate. A large industrial purchase could take two to three weeks. An key is to be responsive and flexible. If you drag your feet, the other side might lose interest and move on to another prospect. Keep the momentum going.
What happens after the LOI is signed?
Once the LOI is signed, the real work begins. Your attorney will draft the formal lease or purchase agreement based on the terms outlined in the LOI. You'll then go through the due diligence process, which includes property inspections, title searches, and financial reviews. It's not uncommon for the final contract to be 50-100 pages long, so be prepared for a lengthy review process.
Here's the bottom line: the LOI is your chance to set the stage for a successful deal. It's not the most exciting part of commercial real estate, but it's one of the most key Take your time, be specific, and don't be afraid to negotiate. A little effort upfront can save you a whole lot of headaches later.
LOI Commercial Real Estate: Your Plain-English Guide to Letters of Intent
Let's be honest. When you're ready to lease space for your business or buy a commercial property, the last thing you want to deal with is a mountain of confusing paperwork. But here's the thing: before you ever see a formal lease or purchase agreement, you're going to run into something called a Letter of Intent—or LOI, as the pros call it.
If you've never dealt with one before, the LOI can feel a little intimidating. It's not legally binding (mostly), but it sets the entire tone for your deal. Think of it as the first date before the marriage. You're figuring out if you even like each other before you commit to the long haul.
So, what exactly is an LOI in commercial real estate, and how do you rely on one without getting burned? Let's break it all down in plain English.
Lease Structures: A Quick Comparison
Since LOIs for leases often hinge on the type of lease structure, here's a quick breakdown of the most common options you'll encounter.
Lease Type
What You Pay
What Landlord Pays
Typical Use
Full Service Gross
One flat rent amount
Taxes, insurance, and operating expenses
Office buildings
Triple Net (NNN)
Base rent + your share of taxes, insurance, and maintenance
Structural repairs only
Retail, industrial
Modified Gross
Base rent + some operating expenses (negotiable)
Remaining operating expenses
Flexible, often used for smaller spaces
Absolute Net
Base rent + ALL expenses
Nothing
Single-tenant buildings, investment properties
What You Need to Know About LOIs
A Letter of Intent is essentially a summary of the key terms you and the other party have agreed to in principle. It's a roadmap. It tells the landlord or seller, "Hey, here's what I'm thinking, and here's what I need to make this work." It's not the final contract, but it's a key step that can save you thousands of dollars in legal fees down the road.
Here's the thing about commercial real property it's not like buying a house. In residential deals, you make an offer, sign a contract, and you're basically done. Commercial deals are more complex. There are operating expenses, tenant improvements, escalation clauses, and a dozen other things that need to be negotiated. The LOI is where you hammer out all those big-picture items before you ask your attorney to draft the 50-page lease.
Honestly, the LOI is your best friend if you use it right. It forces both sides to put their cards on the table early. If you and the landlord can't agree on the basics in the LOI, you definitely won't agree on the details in the lease. It's a filter that saves everyone time and money.
But keep in mind, not all LOIs are created equal. Some are very detailed, running several pages long. Others are just a single page with bullet points. The complexity usually depends on the size of the deal. A 2,000-square-foot retail space might have a simple one-page LOI, while a 50,000-square-foot industrial building might have a five-page document with all sorts of financial attachments.
Common Mistakes to Avoid
Let's be real: people mess up LOIs all the time. Here are the biggest mistakes I see, and you should avoid them at all costs.
Treating the LOI as a Binding Contract
This is the most common error. Unless the LOI specifically states that certain provisions are binding (like confidentiality or exclusivity), the whole document is usually non-binding. Some people think they have a deal locked up when they sign the LOI, and then they get blindsided when the other side walks away. Keep your guard up until the final contract is signed.
Being Too Vague
If you write "reasonable rent increase" in the LOI, you're asking for trouble. What does "reasonable" mean? To you, it might mean 2%. To the landlord, it might mean 10%. Be specific. Put numbers on everything. Ambiguity in an LOI leads to arguments later.
Skipping the Exclusivity Clause
If you're a tenant who's spending weeks negotiating a lease, you don't want the landlord to keep showing the space to other people. Include an exclusivity or "no-shop" clause that says the landlord will stop marketing the property for a certain period (usually 30-60 days) while you negotiate.
Ignoring the Operating Expenses
This is a big one, especially for leases. You might negotiate a great base rent of $25 per square foot, but if you're also on the hook for triple net expenses (taxes, insurance, maintenance), your actual cost could be $35 per square foot. Make sure you understand exactly what expenses you're responsible for prior to you sign anything.
Step-by-Step: How to Handle an LOI Like a Pro
Ready to get into the nitty-gritty? Here's how to approach the LOI process from start to finish, whether you're the tenant, the buyer, or the landlord.
Get Your Financials in Order First
Before you even think about writing an LOI, you need to know what you can afford. This sounds obvious, but you'd be surprised how many people skip this step. For a lease, you should know your maximum monthly rent, including your share of operating expenses. For a purchase, you need to know your down bill your financing options, and your cap rate expectations. If you walk into negotiations without these numbers, you're going to get eaten alive.
Identify the Critical Terms
Sit down and make a list of the non-negotiables. What do you absolutely need? Maybe it's a specific move-in date, or maybe it's a tenant improvement allowance of $30 per square foot. Write these down. Then, make a second list of things you're flexible on. This will help you prioritize when the other side pushes back.
Draft the Initial LOI
You can have your broker draft this, or you can do it yourself. Most commercial brokers have a standard LOI template they use. The key sections you need to include are:
Parties involved (who's who)
Property address and description
Lease term or purchase price
Rent or purchase terms
Security deposit
Operating expenses (NNN, gross, modified gross)
Tenant improvements (for leases)
Contingencies (financing, inspections)
Target closing or move-in date
Don't overthink the draft. Just get your terms down on paper in a clear, organized way.
Send It and Wait
Here's where you need to practice patience. Once you send the LOI, you'll likely have to wait a few days for a response. The other side might come back with a counter-offer. That's normal. Don't get frustrated if they don't accept everything you asked for. Negotiation is all about give and take.
Revise and Finalize
Once you and the other party agree on the terms, you'll sign the LOI. Remember, this is a letter of intent, not the final contract. It's meant to show good faith. After it's signed, the real work begins—your attorney will draft the actual lease or purchase agreement based on the terms in the LOI.