What is a Letter of Intent in Commercial Real Estate?

Key Takeaways

A letter of intent is the first formal step in any commercial lease or purchase. What you agree to at this stage sets the foundation for everything that follows.

• An LOI is a short, mostly non-binding document that outlines the key terms of a proposed lease before a formal contract is drafted. It typically runs one to three pages but can easily exceed 15 pages in certain deals.
• Most terms in the document are non-binding, but exclusivity periods and confidentiality clauses can be legally enforceable. Read everything before you sign, not just the numbers.
• Every term you leave out is a term you will have to fight for later. TIA, TICAM caps, free rent, and renewal options all belong in the letter of intent.
• The tenant’s rep drafts the document in a lease transaction. The party who drafts it controls the framing. Going in without representation means responding to something written for the landlord.
• Most deals go sideways at this stage, not the lease stage. This is by design– so as not to waste the tenant’s, landlord’s, or brokers’ time. Rushing through it or treating it as a formality is one of the most expensive mistakes a business owner can make.

You toured a space. You like it. The broker says it is time to put together a letter of intent.

Most business owners nod along and assume it is just paperwork before the real negotiation starts. That assumption costs money.

This document is where the deal actually gets made. What you agree to here, and what you leave out, shapes everything that follows. By the time the lease arrives, the landlord’s attorney has already drafted around what the term sheet said.

Here is what goes into a letter of intent, what to push for, and what to watch before you sign.

What Is a Letter of Intent?

A letter of intent, also called an LOI or term sheet, is a short document that outlines the key terms of a proposed lease or purchase before a formal contract is drafted.

Think of it as a handshake put on paper. Both sides agree on the big picture before lawyers and lease drafting begin. That saves time and money for everyone.

It is usually one to three pages. The goal is not to cover every detail. The goal is to confirm both sides are aligned on the major points before anyone invests time in the full contract.

Letters of intent are sometimes called term sheets, letters of interest, or memoranda of understanding. In commercial real estate, LOI is the most common shorthand. They all refer to the same document.

Is a Letter of Intent Legally Binding?

The headline terms, including rent, lease length, TIA, and free rent, are generally non-binding. Either party can still walk away or negotiate before the formal lease is signed.

What Should Go Into a Commercial Lease LOI?

A well-written term sheet covers all the major business points so the lease can be drafted without starting from scratch on the basics.

Here is what every commercial lease letter of intent should include.

• Parties. Full legal names of the tenant and landlord, and who each broker represents.
• Property description. Building address, suite number, and square footage.
• Lease term and start date. How long the lease runs and when it begins.
• Base rent. Monthly or annual rent per square foot and how it escalates each year.
• TICAM estimate. Estimated annual TICAM charge and any agreed cap on yearly increases.
• Tenant improvement allowance. Dollar per square foot the landlord contributes toward the buildout.
• Free rent. Any period at the start of the lease where no rent is charged.
• Renewal options. Whether the tenant has the right to renew and at what terms.
• Personal guarantee. Whether one is required and any agreed limits on it.
• Exclusivity. A clause preventing the landlord from leasing to a direct competitor in the same property.
• Who drafts the lease. Typically the landlord’s attorney. This should be stated.

Two of the most negotiated line items at this stage are TICAM and the tenant improvement allowance. Both are covered in detail in TICAM Explained and What Is a Tenant Improvement Allowance?

Why Does This Stage Matter More Than Most Tenants Think?

The term sheet is the foundation of the deal, not a placeholder. Every term you leave out is a term you will have to fight for later, or give up entirely.

Most commercial real estate attorneys say more deals go wrong here than at any other point in the process. Tenants treat it as informal, sign without thinking it through, and then find themselves trying to add terms to a lease already drafted without them.

Free rent, TICAM caps, renewal options, exclusivity, personal guarantee limits. If a term is not in the letter of intent, do not assume it will show up in the lease.

Who Writes the Letter of Intent?

In a commercial lease, the tenant’s representative typically drafts the document and submits it to the landlord’s broker. The party who writes it first controls the framing of every term.

If the landlord sends you something to sign first, that version was written to reflect their interests. You can counter it, but you are starting from a weaker position than if you had submitted your own.

For a full look at why representation changes the outcome from the very first step, see 10 Reasons to Hire a Tenant Representative in Charlotte.

What Happens After the Letter of Intent Is Signed?

Once both sides sign, formal lease drafting begins. The agreed terms set the baseline for everything that follows.

• Lease drafting. The landlord’s attorney writes the lease based on the agreed terms. It is long, detailed, and written to protect the landlord.
• Tenant review. The tenant, ideally with a rep and an attorney, reviews the lease and pushes back on anything that does not match what was agreed.
• Negotiation of lease language. Both sides go back and forth on specific clauses until the lease reflects what was agreed.
• Final execution. Both parties sign. At this point the lease is fully binding.

Ambiguous language at the term sheet stage becomes a dispute during lease drafting. A term that was clear from the start is much easier to defend than one that was glossed over.

The full lease negotiation process, including which clauses to watch and what to push back on, is covered in How to Negotiate a Commercial Lease in Charlotte, NC.

What Is the Difference Between a Letter of Intent and a Lease?

The two documents serve different purposes and carry different weight. Here is a side-by-side comparison.

	Letter of Intent (LOI)	Commercial Lease
Length	1 to 3 pages	30 to 60+ pages
Binding?	Mostly non-binding	Fully binding
Purpose	Align on major terms before drafting	Lock in every detail legally
Who drafts it?	Tenant rep or buyer rep	Landlord attorney
When signed?	Before the lease is drafted	After LOI terms are agreed
What it covers	Rent, term, TIA, free rent, key provisions	Every clause, obligation, and right
Can you walk away?	Yes, mostly. Some reputational risk applies.	Only with legal consequences

The letter of intent is the map. The lease is the contract. Tenants who skip or rush through the map end up negotiating a contract that was already written without their input.

What Are the Most Common LOI Mistakes?

These are the missteps that cost tenants money, time, or both.

• Leaving TIA out. If buildout money is not agreed at this stage, it will not appear in the lease. Ask for it before you sign, not after.
• Signing the landlord’s version without countering. Their version is written in their favor. Submit your own or push back with your terms before agreeing to anything.
• Skipping the TICAM estimate. A term sheet that does not address operating expenses leaves the door open for unexpected charges. Get an estimate and a cap agreed upfront.
• Not reading the binding clauses. Exclusivity and confidentiality provisions are often enforceable even in a mostly non-binding document. Read everything.
• Moving too fast. A few extra days at this stage can save weeks of back-and-forth during lease drafting.
• Going in without representation. The landlord has a professional broker on their side. Without your own rep, you are negotiating against an expert alone.

For a broader look at the mistakes that cost tenants the most money, Avoid These Commercial Real Estate Mistakes is worth reading before you get too far into the process.

The Bottom Line

A letter of intent is two to three pages. Most business owners spend less than an hour on it.

But it sets the terms for a lease that could run five years or more. The rent, the buildout money, the renewal rights, the cost caps. All of it flows from what was agreed at this stage.

Getting it right from the start is one of the best things you can do for your business before you sign anything.

Frequently Asked Questions About Letters of Intent in Commercial Real Estate