Once a business or investor identifies a potential property, one of the next steps may be submitting a commercial real estate LOI in Maryland.

LOI stands for Letter of Intent. In commercial real estate, an LOI is commonly used to outline proposed business terms before the parties spend additional time negotiating a detailed lease or purchase agreement.

Depending on the transaction, an LOI may address price, rent, lease term, financing, deposits, due diligence, tenant improvements, free rent, closing timelines and other important deal points.

What Is a Commercial Real Estate LOI?

A Letter of Intent is a document used to communicate the principal proposed terms of a transaction.

It may be used for:

• Commercial leases
• Commercial property purchases
• Industrial properties
• Office properties
• Retail properties
• Warehouse and flex properties
• Investment properties
• Commercial land

The LOI allows the parties to determine whether they can reach general agreement on important business points before proceeding to more extensive documentation.

Is an LOI the Same as a Contract?

No. An LOI and a final purchase agreement or lease are different documents.

Many commercial LOIs are drafted so that most proposed business terms are intended to be non-binding and subject to execution of a definitive agreement. However, whether an LOI or any provision within it is legally binding can depend on the language used, the parties’ conduct and applicable law.

Certain provisions may also be intentionally drafted to be binding even when the principal transaction terms are not.

Why Use an LOI?

Commercial transactions can contain many negotiable terms.

Without an LOI, the parties could spend considerable time and money preparing a detailed lease or purchase agreement only to discover that they disagree about a fundamental business issue.

An LOI can help establish preliminary agreement on matters such as:

• Price or rent
• Property or premises
• Lease term
• Rent increases
• Deposits
• Due diligence
• Financing
• Closing date
• Tenant improvements
• Free rent
• Renewal options

Purchase LOI vs. Lease LOI

The terms included in an LOI depend heavily on whether the transaction involves a purchase or a lease.

Commercial Purchase LOI: Important Terms

When proposing to purchase commercial property, the LOI may address a number of important business terms.

1. Property Identification

The LOI should clearly identify the property being considered.

Depending on the transaction, this might include:

• Street address
• Parcel information
• Approximate acreage
• Building size
• Included improvements

2. Purchase Price

The proposed purchase price is usually one of the central terms.

A buyer should determine the price after considering relevant factors such as:

• Comparable transactions
• Property condition
• Income and expenses
• Location
• Required improvements
• Financing
• Market conditions

For an investment property, price should also be evaluated in relation to the property’s income-producing ability.

3. Earnest Money Deposit

A purchase proposal may address the amount of earnest money the buyer intends to deposit after execution of a purchase agreement.

The definitive agreement should establish important matters such as:

• Amount of the deposit
• When it is due
• Who holds it
• Whether and when it becomes non-refundable
• Conditions allowing its return

4. Financing

If the acquisition depends on financing, the LOI may state that the proposed transaction is subject to the buyer obtaining acceptable financing.

Potential financing considerations include:

• Loan amount
• Loan-to-value requirements
• Appraisal
• Lender underwriting
• Property cash flow
• Borrower financial strength

5. Due Diligence Period

The buyer may request a defined period to investigate the property before becoming fully committed to the acquisition.

Depending on the transaction, due diligence may include:

• Property inspection
• Environmental investigation
• Title review
• Survey
• Zoning investigation
• Lease review
• Financial analysis
• Utility investigation
• Property records

6. Due Diligence Documents

The buyer may request that the seller provide available property information within a specified period.

Depending on the property, requested documents could include:

• Existing leases
• Rent roll
• Operating statements
• Surveys
• Environmental reports
• Service contracts
• Property tax information
• Plans or drawings
• Permits
• Other available property records

7. Property Condition

The LOI may indicate whether the property is proposed to be purchased in its existing condition or whether particular work or repairs are expected before closing.

The final purchase agreement should address these matters in greater detail.

8. Closing Date

The LOI may establish a proposed closing timeline.

The buyer should consider whether enough time is available for:

• Financing
• Appraisal
• Environmental review
• Survey
• Title work
• Inspections
• Legal review

An unrealistically short closing period can create unnecessary transaction risk.

9. Closing Costs

The LOI may identify how the parties propose to allocate certain transaction expenses, subject to the final agreement.

10. Exclusivity

In some transactions, a prospective buyer may seek a period during which the seller agrees not to negotiate a sale with another party.

Exclusivity provisions require particular care because the parties may intend them to create obligations even when other portions of an LOI are expressly non-binding.

Commercial Lease LOI: Important Terms

A lease LOI has a different focus because the tenant is negotiating the right to occupy the property rather than purchasing it.

1. Premises

Clearly identify the space the tenant proposes to lease.

This may include:

• Suite number
• Approximate rentable square footage
• Warehouse area
• Office area
• Exclusive-use areas
• Parking or outdoor areas

2. Permitted Use

The LOI should accurately describe the tenant’s proposed business use.

This is particularly important because the landlord’s approval does not necessarily mean the use complies with zoning, licensing, building or other government requirements.

3. Lease Term

The LOI may establish the proposed initial lease period.

The appropriate term can depend on:

• Business stability
• Location importance
• Buildout investment
• Expansion plans
• Landlord concessions
• Market conditions

4. Base Rent

The LOI should clearly state the proposed base rent and how it is calculated.

Commercial rent may be quoted:

• Per square foot per year
• As a monthly amount
• Using another negotiated structure

Make sure the parties understand the same rent calculation.

5. Additional Rent and Operating Expenses

Base rent may represent only part of the tenant’s total occupancy cost.

Depending on the lease structure, the tenant may also pay or reimburse:

• Property taxes
• Building insurance
• Common area maintenance
• Utilities
• Other operating expenses

The LOI should identify the intended expense structure as clearly as practical.

6. Annual Rent Escalations

Many commercial leases provide for rent increases during the lease term.

The LOI may specify:

• Fixed percentage increases
• Fixed dollar increases
• Another agreed escalation structure

Even a seemingly modest annual increase can materially change the total rent paid over a long lease.

7. Security Deposit

The parties may negotiate the amount of the security deposit based on factors such as:

• Tenant financial strength
• Lease term
• Landlord investment
• Tenant improvements
• Credit history
• Business history

8. Free Rent

A tenant may request a rent-abatement period to help with moving, construction or opening the business.

The LOI should make clear what is actually being abated.

For example, a landlord might agree to waive base rent while requiring the tenant to continue paying operating expenses during the same period.

9. Tenant Improvement Allowance

Depending on the property and market, the landlord may agree to contribute toward improvements to prepare the premises for the tenant.

The LOI may address:

• Allowance amount
• Eligible improvements
• Construction responsibility
• Approval process
• Payment or reimbursement process

10. Delivery Condition

The parties should understand the condition in which the landlord is expected to deliver the premises.

Depending on the transaction, this could involve:

• As-is delivery
• Broom-clean condition
• Completed landlord work
• Operating building systems
• Specific improvements

11. Rent Commencement

The lease commencement date and rent commencement date are not necessarily the same.

For example, a tenant might receive access to construct improvements before the obligation to pay base rent begins.

The LOI should make the intended timing clear.

12. Renewal Options

A tenant planning to remain at a location for many years may seek one or more renewal options.

Important issues can include:

• Length of renewal term
• Notice deadline
• Renewal rent
• Conditions for exercising the option

13. Assignment and Subleasing

Businesses change. A tenant may later sell the company, reorganize, relocate, downsize or need to sublease unused space.

The lease ultimately determines the tenant’s assignment and subleasing rights, but material flexibility requirements can be raised during the LOI stage.

14. Personal Guaranty

A landlord may request a personal guaranty, particularly from a new business or an entity with limited operating history.

The parties may negotiate matters such as:

• Whether a guaranty is required
• Who provides it
• Its duration
• Whether it reduces or expires after satisfactory performance

Because a guaranty can create significant personal legal exposure, tenants should obtain appropriate legal advice before agreeing to one.

15. Signage and Parking

If signage or parking is important to the business, address it early rather than assuming it will be available later.

Potential issues include:

• Building signage
• Monument signage
• Reserved parking
• Customer parking
• Truck parking
• Trailer parking
• Outdoor storage

LOI Terms Worth Negotiating Before the Lease

The LOI stage can be particularly valuable because major economic terms are often easier to negotiate before the parties have invested significant time drafting the final lease.

What Happens After the LOI Is Accepted?

Acceptance of the business terms in an LOI typically moves the transaction toward preparation and negotiation of more detailed documents.

For a purchase, the next stages may include:

1. Negotiating the purchase agreement
2. Depositing earnest money as required
3. Beginning due diligence
4. Completing financing
5. Reviewing title and survey matters
6. Completing inspections and environmental review
7. Preparing for settlement

For a lease, the next stages may include:

1. Landlord preparation of a lease draft
2. Tenant and attorney review
3. Negotiation of lease provisions
4. Finalizing construction or tenant-improvement responsibilities
5. Signing the lease
6. Completing permitting and buildout
7. Taking possession

Do Not Treat the LOI as the Final Deal

One of the biggest mistakes in commercial real estate is assuming that an accepted LOI means every issue has been resolved.

A detailed lease or purchase agreement can contain dozens of provisions that were never addressed in the LOI.

For example, a commercial lease may still need to address:

• Default
• Indemnification
• Insurance
• Repairs
• Maintenance
• Casualty
• Condemnation
• Relocation
• Assignment
• Subleasing
• Operating expenses
• Holdover
• Remedies

Common LOI Mistakes

• Focusing only on price or rent.
• Assuming an LOI can never be binding.
• Using vague language for the proposed business use.
• Ignoring additional rent and NNN expenses.
• Failing to address annual rent increases.
• Not allowing enough time for purchase due diligence.
• Failing to address financing when financing is essential.
• Ignoring the tenant improvement allowance.
• Failing to clarify rent commencement.
• Waiting until the final lease to negotiate important economic terms.
• Assuming landlord approval means zoning approval.
• Signing without understanding which provisions are intended to be binding.

Commercial LOI Checklist

Maryland Commercial LOI FAQs

This article is provided for general informational and educational purposes only and does not constitute legal advice or create an attorney-client relationship. Letters of intent, leases, purchase agreements and other commercial real estate documents can create legal rights and obligations depending on their wording and circumstances. Buyers, sellers, landlords and tenants should consult qualified Maryland legal counsel regarding the legal effect and appropriate drafting of transaction documents.