What is a Letter of Intent in Commercial Real Estate?

You’ve found the perfect space for your business—maybe an office with room to grow or a retail location in a bustling part of town. Just as you’re ready to make a move, your broker says you need to submit a “Letter of Intent.”

Suddenly, the process feels daunting. What does this document really mean for you, and can you use it to your advantage?

In this article, you’ll learn all about a Letter of Intent (LOI) in commercial real estate (CRE)—what it is, why it matters and how you can confidently navigate this crucial step with the help of a trusted professional.

What is a Letter of Intent?

A Letter of Intent, often called an LOI, is a preliminary agreement between two parties—usually a buyer and seller, or a tenant and landlord—in a commercial real estate transaction.

Think of it as a roadmap that outlines the basic terms of a proposed deal, setting the stage for more formal contracts and negotiations down the line. Whether it’s to lease, purchase or sell a property, the LOI typically outlines the basic terms of a proposed CRE deal. It is an important step in working toward a formal agreement.

LOIs help both parties agree on major points—like price, timing and contingencies—before committing to a full contract. They save time, clarify expectations and reduce the risk of misunderstandings later.

How Legally Binding Is a LOI?

It depends on the details. While they may be viewed as non-binding agreements by some, LOIs can in fact be treated as binding. Both parties’ conduct will determine the extent to which an LOI may be enforceable as a binding agreement, per the presumption of good faith.

The presumption of whether an LOI is binding or non-binding is also based, at least in part, on the two types of provisions typically presented in an LOI: enforceable and non-enforceable.

Enforceable Provisions

Enforceable provisions are generally those meant to protect both parties’ interests in reaching a fair deal. For instance, exclusivity periods are meant to ensure a competing offer can’t swoop in and render the current deal obsolete. And confidentiality provisions protect both parties’ personal information.

Non-enforceable Provisions

The non-enforceable provisions typically include the proposed terms and are used as the jumping-off point for negotiations. These terms may include price, rent, timing, requested deposits and more.

Additional Key Components of an LOI

A strong LOI typically covers the following elements:

• Price or Rent Terms
• Deposit Requirements
• Timing and Contingencies (such as financing or due diligence periods)
• Confidentiality and Exclusivity Clauses
• Proposed Closing Dates or Lease Start Dates
• Conditions for Termination
• Other Deal-Specific Terms

When is a Letter of Intent Used?

These one- or two-page letters are submitted by a serious prospective tenant, buyer or representing CRE broker as an initial communication to the landlord or seller. They are used as the basis to begin negotiations. Oftentimes, they are passed back and forth and revised by both parties, respectively, until final terms are, at least initially, agreed upon.

After the prospective tenant or buyer has delivered the LOI, and both parties have amended the document according to their needs, due diligence efforts typically begin. Depending on the results of the due diligence process, the parties will then proceed into formal negotiations.

How LOIs Fit Into the CRE Transaction Process

In a typical commercial real estate deal, the LOI negotiations occur fairly early on in the following order:

1. Initial Offer/Interest. Buyer or tenant expresses serious interest in a property.
2. LOI Negotiation. Parties draft and negotiate the LOI, outlining key deal points.
3. Due Diligence. After both sides agree to the LOI, due diligence (like inspections, appraisals or financing checks) begins.
4. Final Contract. If everything checks out, the parties move forward with a binding purchase or lease agreement.

LOIs are usually exchanged after initial interest is established, but before any formal contract is drafted.

Why Letters of Intent Matter in CRE

For buyers, sellers, landlords and tenants, the LOI serves as a strategic tool. Here’s why:

• Streamlines Negotiations – By setting clear terms upfront, the LOI helps everyone stay on the same page.
• Clarifies Expectations – Both parties know what’s expected before investing more time and money.
• Reduces Surprises – Surprises in a contract can be costly; an LOI minimizes the risk.
• Industry Standard – According to leading CRE associations like NAIOP and SIOR, LOIs are considered best practice in modern transactions because they serve as a roadmap for fair, efficient negotiations.

Whether you’re a prospective tenant or a building owner, clearly defined LOIs can protect your interests and help to guide an equitable and transparent final negotiation process. And with fair conduct acted out in good faith toward reaching the outlined deal, both buyer and seller are more fully assured a positive experience.

The CRE world can truly be intimidating and confusing. Whether you’re looking to buy, rent or sell, Chris Falk has the specialized experience you can rely on to help navigate these complex negotiations. Contact him for any of your CRE questions or needs at (801) 416-1024 or chris.falk@ngkf.com.