How-To: Write a Letter of Intent (LOI) to Lease Commercial Property: Step-by-Step Guide
Published At: Tue, 12/01/2020 - 12:11
What Is a Letter of Intent (LOI)?
In this guide, I will show you how to create a letter of intent (LOI) for a commercial real estate lease. We will discuss:
- the purpose of a letter of intent
- planning your letter for the most effective negotiation
- how to write each section of your letter, step-by-step
- if letters of intent are really non-binding
You will also find a sample of an LOI that I use as a template in my own practice as a real estate agent specializing in commercial rentals and leases of retail space, offices, and other properties.
The Purpose of a Letter of Intent
A Letter of Intent, most commonly called an LOI, is a formal letter that’s usually just a few pages long. In general, it's purpose is simply to state interest in leasing a specific commercial real estate property. You can think of it as a starting point for negotiations before arriving to the more official contractual commercial lease agreement. LOIs are useful in the sense that they hash out broad details before the fine print is drafted and considered. Basically, it summarizes the basic terms of the offer without the extensive legal terms and conditions that you'll find in an actual real estate contract.
Prospective tenants can use LOIs to their advantage if done properly and with the right considerations. It's safe to say that this is the perfect time for tenants to really consider and dictate the important terms that they would want to be included in a lease agreement. While submitting an LOI can seem daunting, it’s actually an important, yet very simple part of the commercial leasing process that is in place to protect all parties involved. With the right amount of consideration and due diligence during this phase, you can bet on a swift and transparent commercial real estate leasing process.
Before Writing: Identify Your Points of Negotiation
LOIs give a landlord a concise request of terms in a real estate lease. It’s important to note that negotiations and formal due diligence begin after the LOI has been submitted, and before a formal lease agreement is drafted and agreed upon. It's also not uncommon for LOIs to be submitted and later have the terms change or withdrawn altogether. Be that as it may, while it is always a good idea to consult an attorney for specific language stating the nonbinding nature of an LOI, rest assured that most communications revolving around an LOI are considered not legally binding unless explicitly stated.
But if an LOI is nonbinding, why is it a such a crucial step in the leasing process? As a prospective tenant, it should always be a priority to hash out details prior to executing a lease agreement. Once a lease agreement is executed, the chances of renegotiating any terms become difficult and could be costly. This step of the leasing process is where you want to consider all customized items or issues that you would like addressed and agreed upon.
For instance, if you are looking to lease commercial retail space, signage visibility, parking availability, and hours of operation/accessibility should be disclosed, discussed, and confirmed. Other things that could be considered are the inclusion or deletion of existing fixtures, duration of the lease term, and even the measurement of space that you actually get to use.
Many of the items in your LOI can be leveraged by things like the length of your term and the size and function of the space. Typically, the longer the lease and or the larger the space, the more a landlord may be willing to meet requested items stated in an LOI. Things like rent abatement (free rent), Tenant Improvement contributions, and parking assignments can all be negotiated upon. Shorter lease terms or smaller spaces may allow their advantages as well. Since every commercial property and its landlord are unique in nature, there are no wrong terms to consider.
Your commercial real estate broker is able to gather information, coach you, and help you determine what the best approach is. They are usually well-versed in offering insight on various parts of an LOI, which will save you time and money in the long run.
How to Write a Letter of Intent for a Commercial Lease: Step-by-Step Guide
An LOI is based on basic preliminary information that was provided by the leasing broker or landlord. It is typically prepared by your commercial real estate broker who will be representing you in your lease transaction. While LOIs can take many shapes and forms, there is some key information that should always be included. Below is a breakdown of the various sections that are usually present in a standard LOI:
An introduction paragraph with a brief statement about the letter’s purpose should include a sentence or two about how neither party is under any express or implied obligation to negotiate the terms of the agreement and may terminate any negotiation at any time
A property description should include the complete address and possibly the legal description of the space. This should include the square footage and specific unit number or floor
It should also state the legal owner of property, who the prospective tenant is, and what the specific use of the space will be –whether it will be used as an office space, a restaurant, a manufacturing space, etc
The length of the proposed lease term with any included options for extensions and the lease commencement date should also be stated
The base rent will disclose the amount of rent per square foot and or per month, along with the type of lease term (NNN, MG, FSG) and any inclusion of annual increases
A renewal option may be stated to disclose any available renewal options for the premises
Base rent abatement (free rent) will state any adapted months within the lease term
Operating expenses and taxes should be disclosed
Parking assignments will state the number of dedicated parking spaces to be used exclusively by the tenant
Specific accessibility ought to state what the tenant is allowed –this includes general access to the building and hours of operation
Subleasing and assignment terms will state if the tenant is able to exercise either
The security deposit will state the amount that the tenant is responsible for depositing –this could be anything from a couple of months' worth of rent to a separate dollar figure
A disclosure of brokers involved, and the disbursement of commissions should also be clearly stated
Other terms and conditions should be disclosed
A confidentiality clause should state that the tenant and landlord are to keep all discussions confidential and include any specific
Is a Letter of Intent Really Nonbinding?
While there will be some instances where specific language in an LOI will imply a certain legal obligation, most LOIs are nonbinding. Its purpose is simply accepted as a document that states a lessee's intent to lease a particular piece of commercial real estate. Of course, the basic preliminary information present in an LOI are subject to verification, agreement, and further due diligence by all parties involved. It can be amended or withdrawn at any time prior to its execution.
LOIs can be generally recursive in nature. This means that many iterations and drafts can take place before reaching an agreement. One party may present an LOI, to which the other party may counter with specific changes or reject outright. At any point during this process, a new version can be drafted altogether or either party may terminate their interest without any legal repercussions.
Because some clauses in an LOI may incur legal enforceability, such as confidentiality clauses, it is always best to draft an LOI with the consultation of your representing broker or an attorney. LOIs are here to protect all parties and make the leasing process transparent.
Free Templates of a Letter of Intent for a Commercial Lease
Although LOIs may follow different formats, check out our photos for an example of the generic information that should be included!