What Is an LOI in Commercial Real Estate and Why It Matters

When negotiating a commercial real estate deal, one of the first and most crucial steps is the Letter of Intent (LOI). Whether you’re a tenant, landlord, or investor, understanding how an LOI works can set the stage for a smooth transaction — or prevent costly misunderstandings down the line.

In this guide, we’ll break down what an LOI is, how it functions in commercial real estate, and why it’s an essential part of any serious lease or purchase negotiation.

What Is an LOI (Letter of Intent)?

A Letter of Intent (LOI) in commercial real estate is a non-binding document that outlines the key terms of a proposed transaction — such as a lease, purchase, or sale — before a formal contract is drafted.

Think of it as a roadmap that ensures both parties are aligned on the deal’s core elements before lawyers, brokers, and consultants get involved in the details.

In short, the LOI helps answer:

“Are we on the same page before spending time and money drafting legal documents?”

What Does an LOI Include?

While the exact structure of an LOI can vary depending on the deal type (lease or sale), most include:

• Identification of the parties – The buyer and seller, or tenant and landlord.
• Property description – The address and specific space or parcel involved.
• Transaction type – Lease, sublease, or purchase.
• Price or rent terms – Proposed base rent, escalation clauses, or purchase price.
• Term length – Lease duration or anticipated closing timeline.
• Deposit or earnest money – Amount, timing, and conditions for refund.
• Contingencies – Due diligence, financing, inspections, or zoning approvals.
• Confidentiality clause – Ensuring terms aren’t shared publicly.
• Exclusivity period – A window during which the seller or landlord won’t negotiate with others.

While an LOI doesn’t create a binding obligation to complete the deal, certain provisions—like confidentiality or exclusivity—may be legally enforceable depending on the language used (source: Sands Anderson).

Why an LOI Matters in Commercial Real Estate

1. It Sets Clear Expectations Early

An LOI allows both sides to confirm they agree on fundamental deal terms — such as price, size, and timing — before drafting lengthy contracts. This minimizes the risk of disputes later.

2. It Saves Time and Legal Costs

By resolving major points upfront, parties avoid wasting time (and legal fees) on deals that might otherwise fall apart during the contract stage.

3. It Strengthens Negotiating Leverage

An LOI serves as a negotiation tool. For example, a tenant might use one to request build-out allowances or rent concessions before moving to the lease stage.

4. It Builds Confidence and Commitment

Even though it’s typically non-binding, an LOI signals serious intent to move forward. This can reassure landlords or sellers that the other party is credible and capable of closing.

Is an LOI Legally Binding?

In most cases, an LOI is not legally binding — but the details matter. Courts often look at the wording to determine intent.

According to Feldman Equities, the inclusion of phrases like “subject to execution of a formal lease” or “non-binding” helps clarify that neither side is legally required to complete the transaction.

However, specific sections—such as confidentiality, exclusivity, or good-faith negotiation—can be binding if written that way. That’s why reviewing an LOI with a broker or attorney before signing is essential.

LOI in Real Estate vs. a Formal Contract

In essence, the LOI bridges the gap between informal discussions and formal commitments.

Best Practices for Writing an Effective LOI

If you’re preparing or reviewing a Letter of Intent, consider the following:

• Be clear and concise. Ambiguity can lead to misunderstandings later.
• Include all major deal terms. Especially rent, lease term, and contingencies.
• Use non-binding language. Add phrases like “for discussion purposes only” to clarify intent.
• Consult professionals. A commercial real estate broker and attorney can help ensure your LOI aligns with your goals.
• Respect confidentiality. Avoid sharing deal terms publicly before signing formal agreements.

Final Thoughts: Why the LOI Is a Crucial Step

An LOI is more than just a formality — it’s the foundation of every commercial real estate transaction. It captures the intent, tone, and trust between both parties before the legal details come into play.

By defining expectations early and reducing ambiguity, the Letter of Intent helps ensure that deals progress efficiently — and successfully.