Before diving into a formal 30-60 page lease agreement, commercial real estate professionals typically start with a Letter of Intent (LOI) or Proposal to Lease. This intermediate step serves several crucial purposes in the leasing process.
Why Agents Start with LOIs Rather Than Formal Leases:
1. Efficiency in Negotiating Key Terms
- LOIs focus on the fundamental business points (rent, term, allowances) without getting bogged down in legal language
- Major deal points can be quickly addressed and revised without attorney fees
- Allows both parties to determine if there’s enough common ground to proceed
2. Cost and Time Savings
- Full lease drafting costs $2,000-$5,000+ in legal fees
- Preparing a comprehensive lease takes 1-2 weeks versus 1-2 days for an LOI
- Neither party wastes resources on deals that may never reach agreement on basic terms
3. Non-Binding Framework with Reasonable Commitment
- Most LOIs explicitly state they’re non-binding except for specific provisions
- Creates “good faith” expectations without full legal commitment
- Binding provisions typically limited to confidentiality and exclusivity periods
4. Creates an Agreed Blueprint for the Lease
- Serves as clear instructions for attorneys drafting the formal lease
- Prevents “scope creep” where previously agreed terms get renegotiated
- Provides reference document when lease terms seem to contradict initial understanding
5. Division of Professional Responsibilities
- Brokers and agents handle LOI negotiations (business terms)
- Attorneys handle lease drafting and negotiation (legal terms)
- Each professional operates in their area of expertise
Key Components of an Effective LOI:
- Parties’ names and property address
- Proposed lease term and commencement date
- Rental rate and escalation structure
- Tenant improvement allowances
- Rights and options (renewal, expansion, termination)
- Security deposit and guaranty requirements
- Due diligence period and timeline to lease execution
- Clarity on whether the LOI is binding or non-binding
- Exclusivity period during which the landlord won’t negotiate with others
Strategic Benefits of the LOI Process:
For tenants, an LOI allows you to test the landlord’s flexibility on key terms before investing in legal costs. You can also shop multiple properties with different LOIs to compare landlord responses.
For landlords, LOIs quickly filter serious prospects from casual inquiries and establish important leverage points for later negotiations.
A well-crafted LOI can reduce the formal lease negotiation period from months to weeks by establishing clear expectations upfront and resolving major sticking points before attorneys get involved.
Leasing 101: Essential Terms
Leasing 102: The Pitch Deck
Leasing 103: Letters of Intent
Leasing 104: What To Expect From Landlords
Leasing 105: From Lease Signing to Renewal
