Commercial Real Estate LOI in Maryland: Buyer & Tenant Guide
Understand how a Letter of Intent can help buyers and tenants outline the business terms of a Maryland commercial real estate transaction before negotiating the final purchase agreement or lease.
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.
The wording matters. Buyers, sellers, landlords and tenants should have appropriate legal counsel review documents when legal rights or obligations are involved.
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.
| Purchase LOI | Lease LOI |
|---|---|
| Purchase price | Base rent |
| Earnest money deposit | Lease term |
| Financing | Rent commencement |
| Due diligence period | Annual rent increases |
| Closing date | Operating expenses / NNN |
| Property condition | Security deposit |
| Inspection rights | Tenant improvements |
| Title / survey | Free rent |
| Environmental review | Renewal options |
| Closing-cost allocation | Permitted use |
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.
Analyze the Investment Before Setting Your Price
Evaluate NOI, cap rate, DSCR, cash flow and other financial measures before determining what an income-producing property may be worth to you.
Read the Commercial Investment Analysis Guide3. 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
The timing of when earnest money becomes non-refundable can materially affect a buyer’s risk if financing, zoning, environmental or other issues arise.
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
Understand Commercial Financing
Read the Maryland Commercial Real Estate Financing Guide5. 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
Know What to Investigate
Read the Maryland Commercial Property Due Diligence Guide6. 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.
Budget Beyond the Purchase Price
Read the Maryland Commercial Closing Costs Guide10. 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.
A tenant should investigate whether the specific proposed operation can legally occupy the premises before making substantial lease or buildout commitments.
Check the Zoning
Read the Maryland Commercial Zoning Guide3. 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.
Estimate Your True Occupancy Cost
Use the NNN, rent and escalation calculators to compare commercial lease proposals before negotiating.
Explore Commercial Real Estate Calculators & Tools6. 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.
- Premises
- Permitted use
- Lease term
- Base rent
- Rent commencement
- Annual increases
- NNN / operating expenses
- Security deposit
- Free rent
- Tenant improvement allowance
- Landlord work
- Delivery condition
- Renewal options
- Assignment / subleasing
- Personal guaranty
- Signage
- Parking
- Outdoor storage, if applicable
Go Deeper Into Lease Negotiation
Our commercial lease negotiation guide explains the major lease provisions Maryland tenants should evaluate before signing.
Read Commercial Lease Negotiation: Terms Maryland Tenants Should NegotiateWhat 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:
- Negotiating the purchase agreement
- Depositing earnest money as required
- Beginning due diligence
- Completing financing
- Reviewing title and survey matters
- Completing inspections and environmental review
- Preparing for settlement
For a lease, the next stages may include:
- Landlord preparation of a lease draft
- Tenant and attorney review
- Negotiation of lease provisions
- Finalizing construction or tenant-improvement responsibilities
- Signing the lease
- Completing permitting and buildout
- 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
The final lease or purchase agreement should accurately reflect the negotiated business terms while addressing the many legal and operational issues that the LOI may not cover.
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
| Purchase LOI | Lease LOI |
|---|---|
| Property identification | Premises / square footage |
| Purchase price | Permitted use |
| Earnest money | Base rent |
| Financing | Lease term |
| Due diligence | Rent increases |
| Seller documents | Operating expenses |
| Inspection rights | Security deposit |
| Environmental review | Free rent |
| Title / survey | Tenant improvements |
| Closing timeline | Delivery condition |
| Closing costs | Renewal options |
| Exclusivity, if applicable | Guaranty / signage / parking |
Maryland Commercial LOI FAQs
What does LOI mean in commercial real estate?
LOI means Letter of Intent. It is commonly used to outline proposed business terms for a commercial real estate purchase or lease before the parties negotiate a more detailed definitive agreement.
Is a commercial real estate LOI legally binding in Maryland?
Do not assume an LOI is automatically binding or automatically non-binding. The legal effect can depend on its language, the provisions involved and the circumstances. Some LOIs expressly state that most business terms are non-binding while making specific provisions binding. Appropriate legal counsel should review the document when this issue is material.
What should be included in a commercial lease LOI?
Common terms include the premises, permitted use, lease term, base rent, operating expenses, rent increases, security deposit, free rent, tenant improvements, delivery condition, renewal options, parking and other important business terms.
What should be included in a commercial purchase LOI?
Common terms may include property identification, purchase price, earnest money, financing, due diligence, inspection rights, environmental review, title and survey matters, closing timeline and proposed allocation of certain transaction costs.
Can I negotiate an LOI?
Yes. An LOI is commonly part of the negotiation process. A seller or landlord may accept the proposal, reject it or respond with different terms.
Should a tenant negotiate free rent in the LOI?
If free rent is important to the economics of the transaction, it is generally better to address the requested concession during the business-term negotiations rather than simply assuming it can be negotiated later.
Should tenant improvements be included in the LOI?
If the landlord is expected to perform work or contribute financially toward the tenant’s buildout, the principal business terms should generally be addressed during the LOI negotiations and then documented more precisely in the lease.
What happens after a commercial LOI is signed?
The parties commonly move toward negotiating the definitive purchase agreement or lease. The next steps depend on the transaction and the terms of the LOI.
Maryland Courts explains that a contract of sale is a written agreement for the transfer of property and that the contract itself does not transfer legal ownership; the deed accomplishes the actual transfer.
Maryland Courts – Land Records & Real Property Information →
Found a Commercial Property You Want to Pursue?
I can help you evaluate the real estate business terms, communicate with the listing representative and negotiate the commercial real estate aspects of a proposed purchase or lease while you coordinate legal, financing, zoning and other professional review as appropriate.
Phone:
717-379-4210
Email:
sam@simoisili.com
Samuel Imoisili, Associate Broker, ABR®, CIPS®, REALTOR®
eXp Realty LLC
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.