What Is a Letter of Intent in Commercial Real Estate? A Developer's Guide
LOIs are non-binding but deal-defining. What you include -- and what you leave out -- shapes the entire transaction that follows.
A letter of intent is one of the most consequential documents in a commercial real estate transaction. It comes before the purchase and sale agreement, before due diligence opens, and before lawyers bill their first hour on the deal. Get it right and you move fast. Get it wrong and you spend weeks renegotiating terms that should have been locked down at the start.
This guide covers what an LOI is, what it should contain, where deals go sideways, and how AI is changing the way development teams handle LOI analysis and drafting at scale.
What a Letter of Intent Is
A letter of intent is a short-form document that outlines the key economic and structural terms of a proposed real estate transaction before the formal agreement is drafted. In most jurisdictions it is non-binding on the substantive deal terms, though specific provisions -- most often exclusivity and confidentiality -- are typically made binding.
LOIs appear across several deal types:
Acquisition LOIs: buyer proposes terms to purchase land or an existing asset
Lease LOIs: tenant or landlord proposes a framework for a new lease
JV LOIs: two parties outline the structure of a joint venture before negotiating the full JV agreement
Disposition LOIs: sellers in a marketed process collect LOIs from prospective buyers before selecting who to engage
The purpose is to reach agreement on economics before spending time and money on the longer-form contract. A signed LOI is not a done deal. It is a handshake on the headline terms and a signal that both parties are serious enough to proceed.
What Goes in an Acquisition LOI
A well-drafted acquisition LOI for commercial real estate covers the following categories:
Price and Structure
The proposed purchase price and how it is structured. For development sites this often includes a base price plus potential earnout tied to entitlement milestones. For existing assets it is typically a fixed price with a cap rate reference.
Due Diligence Period
The length of time the buyer has to inspect the property and review documents. Standard range is 30 to 60 days depending on asset complexity. Data center and industrial sites with power constraints often require 60 to 90 days given the technical analysis required.
Earnest Money
The initial deposit amount, whether it is refundable during due diligence, when it goes hard, and at what increments. For competitive processes sellers often push for hard deposits at signing or early in due diligence.
Exclusivity
The time period during which the seller agrees not to negotiate with other buyers. Binding exclusivity is the norm. Length varies from 30 to 120 days depending on deal complexity and seller leverage.
Title and Survey
Which party is responsible for ordering title and ALTA survey, and who pays. Custom for commercial deals is that the buyer orders and pays.
Closing Conditions
Material conditions to closing -- financing contingencies, entitlement sign-offs, environmental clearance, board approval. The fewer conditions in the LOI, the cleaner the deal looks to the seller.
Closing Timeline
Target closing date, with or without extension options.
Lease LOIs: What Changes
In a lease LOI the mechanics shift. The key terms are:
Base rent (per SF, per year) and escalation schedule
Lease term and any renewal options
Tenant improvement allowance (TI) -- how much the landlord contributes to buildout
Free rent -- the number of months of abatement at commencement
Permitted use -- what the tenant is allowed to operate at the premises
Operating expense structure -- full gross, modified gross, or triple net
Commencement date and buildout access
In build-to-suit transactions, the lease LOI often triggers design development and preconstruction work. Getting the TI and rent structure locked in the LOI is critical before that spend begins.
Common Mistakes in LOI Drafting
Leaving price too vague. An LOI that says "price to be determined based on due diligence findings" is not an LOI -- it is a non-compete agreement. If the economics are not settled, the document provides false comfort.
Omitting earnest money timing. LOIs that describe earnest money without specifying when it goes hard create renegotiation risk after due diligence begins.
Thin exclusivity provisions. A binding exclusivity clause requires clear start date, end date, carve-outs (if any), and what happens on breach. Ambiguity here costs time.
Ignoring representation carve-outs. Sellers routinely push for LOIs that acknowledge "as-is" condition. Accepting this language without carve-outs for undisclosed conditions creates problems in due diligence.
Confusing non-binding intent with deal commitment. Development teams sometimes treat a signed LOI as a committed deal and start spending before the PSA is executed. LOIs fall apart.
Where AI Fits in LOI Workflows
LOI review and extraction. For development teams running multiple transactions, AI can extract key terms from incoming LOIs -- price, due diligence period, earnest money, exclusivity -- and populate a deal tracking table in seconds. What used to take an associate 30 minutes per deal can run across 20 LOIs simultaneously.
Market benchmarking. AI can compare an incoming LOI against a database of prior transactions to flag terms that deviate from market: earnest money percentages below average, exclusivity periods outside the norm, TI allowances inconsistent with the submarket.
Deviation flagging. Where a team has standard LOI templates, AI can compare an incoming document against the template and flag substantive departures. Clause by clause, with explanations of the risk.
Drafting support. AI can produce a first-draft LOI from a deal brief -- price, structure, timeline, special conditions -- that a transaction team then reviews and adjusts. Useful for high-volume processes where the same team is handling multiple simultaneous deals.
What AI does not replace: judgment on price negotiation, relationship management with sellers and brokers, and the read on when to push and when to concede.
The LOI as Deal Architecture
The LOI is not a formality. The terms set in the LOI cascade through the PSA, the due diligence process, and often into the final financing structure. Development teams that treat LOIs as a box to check before the real negotiation begins tend to find themselves relitigating economics that should have been settled weeks earlier.
The best development teams treat the LOI as the first and most leveraged negotiation in the deal. Get the frame right and the rest of the transaction flows.