Introduction
A Letter of Intent (LOI) is an essential part of a commercial real estate transaction. It either paves the path towards a smooth transaction or creates obstacles that derail negotiations later on. Before lawyers draft detailed contracts, the LOI sets essential deal terms and shapes leverage dynamics. This guide will teach you how to identify the critical terms, potential risks, and negotiation opportunities with an LOI, ensuring you're equipped for informed decision-making.
Imagine it's late Friday afternoon, and an email pops into your inbox titled: "LOI—Please Sign by Monday." You've spent weeks negotiating to acquire this property, and now, you're faced with making a critical decision over the weekend. The price looks appealing, but important details like deposit timing, exclusivity clauses, and contingencies still need careful scrutiny.
Even though an LOI often states it's non-binding, several provisions such as confidentiality, exclusivity, and property access rights can become enforceable immediately upon signing. Overlooking these clauses might inadvertently give away your negotiating power or even invite litigation.
This guide helps you quickly understand and evaluate the terms of an LOI, preparing you for effective negotiation and smooth progression toward closing.
It is part of a series of guides on how to read CRE documents. You can find the other guides in the series below:
- How to Read a CRE Loan Document
- How to Read a CRE Pro Forma
- How to Read a CRE Offering Memorandum
- How to Read a CRE Purchase & Sale Agreement
- How to Read a CRE Letter of Intent
- How to Read a CRE Broker's Opinion of Value (BOV)
Note: Transactions vary by jurisdiction. Always consult with legal counsel for specific advice.
What Exactly is a Commercial Real Estate LOI?
A Commercial Real Estate Letter of Intent, sometimes called a term sheet or memorandum of understanding (MOU), outlines the basic terms agreed upon by parties before entering a formal contract. This document typically ranges from a concise one-page email to a comprehensive, ten-page outline. Commonly included details are parties involved, property specifics, financial terms (price or rental rates), critical timelines (deposits, due diligence, and closing dates), and conditions or contingencies.
Most terms in an LOI are non-binding, yet several clauses typically are legally enforceable immediately. These should be carefully reviewed and understood before signing.
Confidentiality: Ensures sensitive information remains private.
Exclusivity/No-Shop Clause: Stops the seller or landlord from entertaining other offers for a defined period.
Access & Indemnity: Permits inspections and usually requires the inspecting party to carry insurance and indemnify the owner.
Brokerage: Clearly defines who earns and pays commissions.
Though these terms await formalization in the definitive Purchase & Sale Agreement (PSA) or lease, the LOI is the first step in the transaction and significantly influences negotiation leverage.
Key Components of a CRE LOI
In any LOI, you are likely to find the following key components. If these are not present, you should confirm your understanding with the other party or broker.
Parties and Property Description
Accurately naming involved parties and precisely describing the property or space prevents legal issues down the line. For example, incorrectly naming an entity or omitting a suite number could lead to costly amendments and delays.
Price and Rent Terms
The proposed price or rent directly impacts property valuation, financing arrangements, and investment returns. Pay attention to potential escalations or adjustments, particularly in long-term leases.
Deposits
Earnest money or security deposits demonstrate commitment. Clarify deposit amounts, due dates, and circumstances under which these deposits become non-refundable ("hard"). For example, a deposit becoming non-refundable prematurely could cause unexpected financial loss if issues arise later.
Due Diligence Period
This period allows for property inspection and assessment without penalty. Clearly define when due diligence begins, its duration, and whether extensions are permissible.
Closing or Commencement Dates
These dates anchor all subsequent transactional tasks. A precise closing date or a well-defined trigger event ensures alignment among all stakeholders.
Contingencies
Contingencies provide escape routes from the deal under certain conditions, such as failed financing or unsatisfactory appraisal results. Clearly outline each contingency and associated timelines.
Exclusivity
Exclusivity prevents sellers from accepting competing offers while due diligence occurs. Be clear on the length of this period and conditions for extension.
Confidentiality
Managing sensitive transaction information prevents market disruptions or competitive disadvantages. Define permitted disclosures and specify how long confidentiality obligations persist.
Closing Costs and Prorations
Expenses related to closing can significantly impact financial outcomes. Clarify who pays for title insurance, transfer taxes, and escrow fees.
Brokerage Commissions
Clearly outline who is responsible for brokerage fees to avoid disputes or surprise expenses later.
How to Analyze an LOI Effectively
Next, we will cover a few steps on how to analyze an LOI effectively. The following steps are meant to ensure you have a full understanding of the LOI and you are prepared for the negotiation process.
1. Summarize Key Terms
Quickly document critical information like price, deposit amounts, due diligence timeframes, closing dates, and exclusivity periods. Having a concise summary facilitates clear communication and quick referencing throughout the negotiation process.
2. Verify Parties and Property Details
Cross-reference entity names against official registration documents and verify property descriptions, suite numbers, and parcel identifiers. Accurate identification prevents confusion and administrative complications later.
3. Highlight Binding Clauses
Carefully identify and highlight clauses that become legally binding immediately upon signing, such as confidentiality and exclusivity provisions. Understand their scope and implications to avoid inadvertent commitments.
4. Conduct Financial Modeling
Develop a quick financial model or pro-forma to assess the immediate and long-term financial impacts. Include key elements such as deposit timings, rental offsets, tenant improvement allowances, loan assumptions, and projected cash flows. For instance, evaluating how a non-refundable deposit affects your liquidity can inform negotiation strategy.
5. Assess Realistic Timelines
Ensure timelines set forth in the LOI are practical. Evaluate if allotted timeframes for lender underwriting, appraisal processes, and internal approvals are achievable. For example, if a lender typically requires 45 days for underwriting, agreeing to a 30-day window could jeopardize financing.
6. Prioritize Negotiation Points
Identify issues that have substantial financial or operational impacts for your position but minimal cost implications for the counterparty. Prioritize these points during negotiations for effective outcomes.
7. Evaluate Risk Allocation
Clearly understand which party bears risks related to environmental assessments, title defects, zoning changes, or financing shortfalls. Assess whether the allocation aligns with your organization's risk tolerance and strategy.
8. Plan Due Diligence Activities
Outline a detailed plan for due diligence activities, including necessary documentation, scheduling inspections, and ordering reports. Request seller documentation immediately upon LOI acceptance to ensure timely completion of diligence tasks.
9. Align Stakeholders
Engage key stakeholders early, including investors, lenders, and legal advisors. Transparent communication ensures all parties are aligned and reduces the risk of unforeseen hurdles.
10. Track Important Dates and Milestones
Use comprehensive calendar tools to set reminders for critical deadlines such as deposit due dates, diligence periods, financing commitments, and exclusivity expiration. This proactive approach minimizes the risk of missed deadlines and associated penalties.
Tools and Templates to Support Your LOI Review
Excel Models
Spreadsheets remain one of the most versatile tools for LOI analysis. A well-structured Excel model can help you project cash flows, model sensitivity scenarios around deposit timing and closing costs, and track key milestones. You can also create templates to benchmark different LOIs across deals, flagging terms that fall outside your standard underwriting assumptions.
Purpose-built Software
Purpose-built software like Deco Base streamlines LOI workflows by automatically extracting key terms from uploaded documents, syncing deadlines with your calendar, and flagging missing or non-standard clauses. It integrates with your underwriting models and internal project records, creating a centralized deal file accessible to all stakeholders. This reduces manual tracking and prevents critical terms from falling through the cracks.
Market Data
Accurate comps and market benchmarks are essential for evaluating whether an LOI’s proposed price, rent, or deposit terms are reasonable. Tools like Costar, Crexi, and LoopNet can help you validate assumptions, uncover recent sale prices, lease comps, and track how similar assets are being marketed. These insights can strengthen your negotiation position and help justify counterproposals.
Conclusion
An LOI is the first step in the transaction and fundamentally shapes the economics and negotiation leverage for your transaction. Carefully reading, modeling financial implications, and rigorously managing deadlines ensures clarity and preparedness. By mastering these elements, that Friday afternoon LOI email becomes an opportunity rather than a source of stress, positioning you for confident and successful negotiations through closing.
