What Is an LOI in Real Estate?
A letter of intent (LOI)—often written as a one to three-page letter—is a practical roadmap for a potential transaction in commercial real estate. It captures the intent of the two parties to move forward on agreed key terms without yet creating a full binding contract. In practice, an LOI sits between informal talks and formal negotiations, translating conversations into a structured document that identifies the property, the parties involved (buyer/seller or landlord/tenant), and the proposed terms.
In commercial real estate transactions, an LOI typically precedes either:
A purchase and sale agreement (also called a sale agreement) for an acquisition of commercial property, or
A lease agreement for office space or other commercial space.
Most LOIs clearly state they are a non binding agreement—except for certain provisions such as confidentiality, exclusivity/no-shop, access for the diligence period, and sometimes dispute-resolution clauses. Those carve-outs can be legally binding, even when the rest of the letter is not. This hybrid structure lets the parties move quickly on the deal while preserving flexibility to negotiate the fine details in the formal contract.
Why an LOI helps (loi helps):
It aligns expectations on basic terms (like purchase price, rent, security deposit, tenant improvement allowance, and closing conditions) so both sides invest in the next steps with confidence.
It narrows further negotiations to a shorter list of unresolved deal terms, saving time and legal fees.
It provides a framework for the diligence process and sets a working timeline toward the closing date.
How an LOI Fits Into the Commercial Deal Flow
Think of the LOI as the checkpoint between handshake and contract. Here’s the typical sequence for a commercial real estate transaction:
Initial outreach and brokered discussion
A commercial real estate broker circulates or responds to interest. The broker helps the parties involved outline key terms and major points such as purchase price or base rent, length of lease, concessions (e.g., tenant improvement allowance), due diligence access, and timing. In competitive situations with multiple offers, a crisp LOI can differentiate a buyer or tenant as organized and serious.Drafting and signing the LOI
The LOI memorializes the proposed transaction in writing. It defines the property description, parties, basic terms, and whether it’s non binding overall with selective binding provisions (e.g., exclusivity clauses). Both parties agree to proceed in good faith toward a formal agreement.Diligence and formal document preparation
After signing the LOI, the diligence period (also called the due diligence period) begins. The buyer or tenant inspects the property, reviews important documents (title, surveys, leases, environmental reports, zoning), and lines up financing. Lawyers draft the purchase and sale agreement or formal contract lease with the agreed key deal points and any negotiated adjustments.Execution of the formal agreement and closing
Parties sign the binding agreement (now a binding contract) and satisfy closing conditions (e.g., permits, lender approval). The earnest money deposit may become nonrefundable at specified milestones, and funds are scheduled for the closing date.
Where the LOI adds the most value: it front-loads clarity on deal terms and responsibilities (e.g., who is tenant responsible for certain build-outs or operating costs), so the formal negotiations don’t unravel over misunderstandings that could have been surfaced earlier.
What an LOI Typically Covers (Key Deal Points & Basic Terms)
While every real estate deal is unique, most LOIs for commercial property or commercial space touch the same core categories. Here’s a practical, non-exhaustive checklist that integrates the keyword bank while staying natural:
Parties & Property
Parties involved: legal names and contact info for buyer and seller, or landlord and tenant (and often their commercial real estate broker).
Property description: address, suite/parcel, approximate square footage for office space or retail/industrial areas; include exhibits if needed.
Economics & Term
Purchase price (for acquisitions) or base rent and escalations (for leases).
Tenant improvement allowance (if leasing), and how it’s disbursed.
Security deposit (lease) or earnest money deposit (purchase), with timelines for deposit, increases, and refundability triggers.
Initial lease terms (e.g., 5 years with options) or acquisition timing to reach closing date.
Due Diligence & Access
Length of the diligence period (due diligence period) and permitted inspections (structural, environmental, mechanical, title/survey).
Scope of the diligence process: which important documents must be provided (existing leases, service contracts, financials, plans).
Rights to enter the property and coordinate with on-site teams; confidentiality around findings.
Conditions & Contingencies
Financing contingencies (time to secure financing commitment).
Key closing conditions (zoning confirmations, permits, estoppels, SNDA, third-party consents).
Allocation of responsibilities (what the tenant responsible for, vs. landlord obligations; seller repairs or credits).
Legal Character & Binding Provisions
Statement that the LOI is a non binding agreement and preliminary agreement—except certain provisions (e.g., exclusivity clauses, confidentiality, brokerage).
Clarify binding vs. non binding sentences to avoid ambiguity about a binding agreement.
Dispute-resolution approach during the LOI phase (optional but helpful).
Timelines & Next Steps
Target dates to circulate the formal contract (purchase and sale agreement or lease agreement), complete due diligence, finalize negotiations, and sign the formal agreement.
Outline the sequence for further negotiations if new issues surface from diligence.
Broker & Commission
Identify any commercial real estate broker involved and the commission structure (customary in industry standard forms).
This structure keeps both sides aligned on the same page and reduces surprises as you transition from LOI to the fully drafted agreement or contract.
Binding vs. Non-Binding: How “Legally Binding” Works in an LOI
The most common confusion around LOIs is whether they create a binding contract. The short answer: they generally don’t—unless drafted to be binding or they include certain provisions that are expressly legally binding. Here’s how to navigate the nuance:
Most LOIs are non-binding overall
The document should say clearly that the proposed terms are intended for guidance and that no binding agreement exists until the formal contract (the purchase and sale agreement or lease agreement) is signed by the two parties.
This preserves flexibility to negotiate as new facts appear during due diligence.
Carve-outs that often are binding
Exclusivity clauses (no-shop) preventing the seller or landlord from entertaining multiple offers for a defined period, so the buyer or tenant can invest in diligence and financing with reasonable certainty.
Confidentiality: protecting important documents and sensitive information exchanged during the process.
Access rights during the diligence period (e.g., entry to the property), sometimes coupled with indemnity and insurance conditions.
Occasionally, cost-sharing or break-fee language—less common but seen in complex commercial real estate transactions.
Be explicit
Use plain wording to label sections binding or non binding. Vague phrasing can accidentally create a binding contract around key terms such as purchase price or rent if a court believes the parties intended to be bound.
Confirm in writing that only a signed formal agreement will constitute the binding contract, and that the LOI is a preliminary agreement to proceed in good faith toward that goal.
Practical tip with brokers and counsel
Coordinate with your commercial real estate broker and counsel to select industry standard language. They’ll ensure the LOI captures the major points needed to unlock lender review and legal drafting—without boxing you into deal terms you still need to verify during due diligence.
Insert this one-sentence interlink (uses the in-article keyword “real estate” as the anchor):
If you’re planning to move to Western New York, or if you’re already a local resident, understanding what an LOI means in real estate is just one part of your decision-making—explore more homeowner insights at real estate.Step-by-Step Timeline: From LOI to Formal Agreement and Closing
A practical LOI doesn’t just list key terms—it sets a repeatable process that keeps both sides on the same page. Here’s a standard sequence many commercial real estate transactions follow, from first draft to closing date:
Draft & Align (Days 1–7)
The commercial real estate broker coordinates a concise LOI draft capturing basic terms: purchase price (or base rent), lease terms, tenant improvement allowance, security deposit or earnest money deposit, due diligence period, and targeted closing conditions.
The parties involved (the two parties—buyer and seller, or tenant and landlord) confirm the proposed terms that reflect their specific needs.
Negotiate & Sign (Days 7–14)
Formal negotiations refine deal terms and provisions (e.g., exclusivity clauses, access rights during the diligence period, and confidentiality).
The LOI states whether it’s a non binding agreement overall and identifies any legally binding sections. Once the parties agree, they sign the document to proceed in good faith.
Open Diligence & Draft the Formal Contract (Days 15–45+)
The buyer/tenant kicks off inspections and reviews important documents (title, survey, leases, estoppels, service contracts, environmental reports).
Lawyers prepare the formal contract—either the purchase and sale agreement (a sale agreement) or the lease agreement. The draft imports the LOI’s key deal points and fills in the details discovered during the diligence process.
Financing & Confirmations (Parallel Track)
Debt or equity financing proceeds based on the LOI’s economics. Lenders often request the LOI and preliminary materials to underwrite the proposed transaction.
Parties work through closing conditions: approvals, permits, estoppels/SNDAs, insurance, and any certain provisions required by lender or ownership.
Execute Binding Agreement & Close (Days 45–90+)
When the formal agreement is finalized, the binding contract is signed.
The earnest money deposit may “go hard” (become nonrefundable) upon waiver of contingencies or at a defined date.
Funds, deeds, and possession exchange on the closing date per the agreement.
Why this timeline works: It preserves flexibility early (via a preliminary agreement) while clearly mapping the road to a binding agreement. That combination helps avoid drift, especially when multiple offers or complex approvals are in play.
