In high-stakes commercial real estate, jumping straight into a forty-page legal contract is a bit like getting married on a first date—it’s expensive, time-consuming, and carries a high risk of immediate regret. To avoid this, savvy investors and developers use an LOI, or Letter of Intent. An LOI is a preliminary, usually non-binding document that outlines the “broad strokes” of a potential deal. It allows both parties to see if they are on the same page regarding price, timelines, and basic terms before they spend thousands of dollars on attorneys to draft a formal PSA (Purchase and Sale Agreement).
While the word “non-binding” might make the LOI sound trivial, it is actually the most critical stage of negotiation. It acts as the blueprint for the entire transaction. If a term isn’t in the LOI, it can be incredibly difficult (and awkward) to try to insert it into the contract later. Whether you are leasing a 10,000-square-foot office space or purchasing a multi-family parcel, the LOI is where the “real” deal is struck.
The Purpose of a Letter of Intent
The primary goal of an LOI is efficiency. It serves several vital functions in a professional real estate transaction:
- Identifying Deal Breakers: If the buyer wants a 90-day due diligence period and the seller only wants 30 days, the LOI stage reveals this conflict early.
- Securing Financing: Many lenders will use a signed LOI to begin the preliminary “vetting” of a loan, even before the property is officially under contract.
- Exclusivity: Often, an LOI includes a “no-shop” clause. This means the seller agrees to stop talking to other buyers for a set period (usually 15–30 days) while the parties negotiate the formal contract.
- Establishing a Timeline: It sets the pace for the title search, the appraisal, and the final closing.
Anatomy of a Strong LOI: What Must Be Included?
Because the LOI is the foundation for the final settlement statement, it needs to be specific enough to be useful but flexible enough to allow for negotiation. A standard LOI for a commercial parcel typically includes:
| Section | Description |
|---|---|
| Purchase Price | The offered amount, often based on recent comps. |
| Earnest Money | The amount of EMD the buyer will put into escrow. |
| Due Diligence | The timeframe for the buyer to inspect the books and the building. |
| Financing Period | How long the buyer has to secure their mortgage. |
| Closing Date | The target date for the final transfer of title. |
[Image: A professional-looking Letter of Intent (LOI) document on a desk next to a calculator and a pair of glasses]
The Binding vs. Non-Binding Debate
Most LOIs explicitly state that they are non-binding, meaning neither party can sue the other for “walking away” from the deal. However, certain sections—like the confidentiality clause and the exclusivity period—are almost always legally binding. If you sign an LOI with a “no-shop” clause and then sell the property to someone else two days later, you could be facing a major lawsuit for breach of contract.
In commercial deals involving a T12 in real estate (the trailing 12 months of financials), the buyer will use the LOI stage to verify the income claims. If the T12 shows lower revenue than advertised, the buyer can use the non-binding nature of the LOI to walk away or “re-trade” (renegotiate) the price based on the new data.
LOI in the Context of Commercial Leasing
When leasing space, an LOI is even more common. It will cover critical details like the “Base Rent,” the “Common Area Maintenance (CAM)” fees, and the TI (Tenant Improvements) allowance. TI is the money the landlord provides to the tenant to build out the space. If you don’t secure a high enough TI allowance in the LOI, you may find yourself stuck with a massive construction bill later. The LOI also addresses “options to renew,” which can significantly affect the long-term net absorption of the building.
Common Mistakes to Avoid
One of the biggest errors investors make is being too “loose” with the LOI. They assume “we’ll fix it in the contract.” However, if you agree to a price based on comps in the LOI but later find a latent defect, the seller will be much more resistant to a price drop if the LOI didn’t include a provision for “unforeseen physical conditions.”
Another mistake is skipping the legal review. Even though it is a “preliminary” document, an poorly worded LOI can unintentionally become a binding contract in some jurisdictions. Always have your attorney review the “Binding vs. Non-Binding” language to ensure you aren’t accidentally committing to a $10 million purchase prematurely.
Conclusion
The LOI (Letter of Intent) is the essential bridge between a casual conversation and a legally binding commitment. It allows for the “dance” of negotiation to happen in a safe, structured environment. By mastering the LOI, you can vet more deals, protect your EMD, and ensure that when you finally get under contract, there are no surprises waiting for you.
Ready to move from an LOI to a full deal? Make sure you check the real estate comps to verify your offer price. If you are moving toward a commercial purchase, be sure to request the T12 in real estate early in the process. And as always, keep a close watch on your settlement statement to ensure every term from your original LOI is reflected in the final numbers.
