WHAT IS AN LOI? | WHAT DOES LETTER OF INTENT MEAN?
An LOI stands for Letter of Intent. In commercial real estate, a Letter of Intent is a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller. The LOI or Letter of Intent states the primary economics and deal points with proposed terms. They are intended to outline the most important items that both parties can evaluate in order to decide if each wants to proceed to an official contract.
The Letter of Intent is typically intended to be a non-binding negotiation, prior to moving to an official contract. However, a Letter of Intent can be binding depending on how it is drafted and should include disclaimers if it is not intended to be binding.
In a Letter of Intent to lease commercial space, some of the most important terms discussed and / or negotiated are the lease rate, lease term or length of lease, annual increases, tenant improvement allowance, free rent, assignability and guarantees.
Letters of Intent may be submitted informally through emails or on official letterhead. Some landlords require both the landlord and tenant to sign the Letter of Intent once it is mutually agreed upon prior to proceeding to a formal agreement or contract, even though the LOI is non-binding, as a good-faith acknowledgment that both parties have agreed to move forward.
An agreed upon Letter of Intent is used to indicate that both parties have agreed to move forward to lease or sell a specific property, building or space. However, many landlords or sellers will continue to advertise their properties with the goal of receiving back-up offers or other interested parties in the event the original tenant or buyer backs out or can’t perform.
Many landlords will also require a tenant to submit their corporate or personal financial statements to the landlord prior to signing an LOI or immediately afterwards, so the landlord can verify the tenant is in a healthy position to proceed and / or that the landlord is comfortable with the tenant’s financial strength.
A Letter of Intent may only be a single page document or up to several pages depending on the amount of details mentioned and negotiated.