Letter of Intent (LOI)

The LOI is a critical step in the commercial real estate acquisition process that sits between initial property evaluation and the formal purchase and sale agreement (PSA). It allows buyer and seller to agree on major business terms -- price, earnest money deposit, due diligence period length, financing contingency, closing date, and any special conditions -- before incurring the legal expense of drafting and negotiating a full contract. A well-crafted LOI saves both parties time and legal fees by identifying deal-breakers early.

LOIs are almost always non-binding with respect to the obligation to close the transaction, but they may contain binding provisions for exclusivity (preventing the seller from negotiating with other buyers for a specified period), confidentiality, and the allocation of transaction costs. The non-binding nature means either party can walk away without legal consequence, which is both a feature (flexibility) and a risk (uncertainty).

In competitive bidding situations, the quality and credibility of the LOI can determine whether a buyer gets selected to proceed. Sellers evaluate not just the offered price but also the certainty of close: proof of funds or financing capability, track record of the buyer, length of due diligence requested, and the number and nature of contingencies. A lower price with fewer contingencies and a shorter close timeline may win over a higher price with extensive contingencies and a longer timeline, particularly for motivated sellers.