What does LOI Stand For? [Commercial Real Estate]

LOI is an abbreviation that can mean different things depending in the industry in which it is used. In commercial real estate “LOI” stands for “Letter of Intent”.

LOIs or Letters of Intent are negotiation instruments used during the initial stages of a commercial real estate transaction to reach an agreement on the terms of the lease or sale of a property. The transaction can be a purchase or a lease of a property or space.

An LOI is a non-binding proposal, offer or agreement between the Buyer and Seller or Tenant and Landlord of a commercial property. The LOI is the 1st formal step between the property owner and tenant (or buyer) to negotiate the terms of a commercial real estate transaction.

Letters of Intent need to be as detailed as possible and lay out the key points important to the party submitting the LOI. To be certain the LOI is in fact non-binding, you should include a section that explicitly states it is not a binding contract. Neither party can rely on the LOI to create any kind of legal obligation. The LOI describes the niceties of a real estate transaction before it is finalized. It is an agreement that states the desire to enter into a real estate transaction, such as a sale or lease. It outlines the crucial terms before the purchase contract or lease is signed. Any party involved in the transaction can draft an LOI and ultimately communicates that the Tenant or Landlord is serious about their desire to commit to a purchase or lease agreement — and ready to move forward.

The LOI is a great tool to see if a subject property can fulfill the demands of a Tenant or Buyer. LOIs flush out properties that will not work and determine how serious the Tenant, Buyer or Property Owner is.

The following is a list of common subjects or themes that should be presented in a LOI

Names the parties involved in the transaction Buyer/Seller or Tenant/Landlord. Example: such as tenant’s name or DBA name
Stipulates a time frame for approval and terminate at a specific date and time
States that the LOI is “Non-Binding”
Includes language stating that the LOI will be succeeded by a signed lease or purchase agreement
Is contingent on approval of the proposed type of use
States key matters such as subject property, suite number, floor number, a description of the space, term (length of lease), lease commencement, sale price, rental rate, rental increases, type of rent structure (Triple Net, Modified Gross, Full Service Gross), any restrictions or exclusivity and who is responsible for specific expenses.

Letters of Intent save the parties a lot of time and money when compared to the extensive documents that come about in a commercial real estate transaction. When using an LOI, the expectation is to come to an agreement on all main deal topics in advance so all the monotonous paperwork that comes along with the transaction can be signed and closed quickly. The LOI helps convey concerns of a party at the beginning of a transaction so that no time is wasted by any of the parties involved.

It’s suggested that every transaction start with an LOI. Before a commercial real estate broker (or agent) can submit an LOI, he or she will send it to the buyer/tenant for review and approval. After the Letter of Intent is approved, the agent (or broker) will send it to the seller/landlord broker to jumpstart negotiations.

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