Playbook: Letter of Intent (LOI)

Why the LOI Matters

For many small businesses and nonprofits, the Letter of Intent (LOI) is the first major milestone in the leasing process. It’s often the first formal step where tenant and landlord align on key business and financial terms before attorneys draft the full lease.

The LOI is not always legally binding, but it sets the tone and framework for your lease negotiations. A poorly structured LOI can lock you into unfavorable economics, reduce your leverage later, or leave critical issues unresolved.

Think of it as your blueprint for the deal. If you get the LOI right, the lease negotiation that follows becomes far smoother. If you skip details or rush through, you may be fighting uphill battles later with limited room to maneuver.

This playbook walks you through how LOIs work, what to include, negotiation strategies, and practical steps so you can approach this stage with confidence.

Step 1: Understanding the Role of the LOI

• Purpose: The LOI captures the key economic and business terms of the deal in plain language.
• Binding vs. Non-Binding: Most LOIs are explicitly “non-binding” except for certain clauses (confidentiality, exclusivity, or brokerage commission agreements).
• Leverage Point: Because it’s early, you often have the most leverage here. Landlords want to get a tenant committed, so you can negotiate important protections before legal drafting starts.

Pro Tip: If a landlord downplays the LOI as “just a formality,” don’t take the bait. What’s written here almost always becomes the default in the final lease.

Step 2: Key Elements Every LOI Should Cover

Here are the main sections that belong in a commercial LOI:

1. Parties – Names of landlord and tenant (including your entity name, not your personal name).
2. Premises – Exact space, square footage, floor or suite number, and parking rights if applicable.
3. Term – Length of the lease, start date, renewal or extension rights.
4. Base Rent – Rent schedule (monthly/annual), free rent or concessions, and whether stated as “gross” or “net.”
5. Escalations – How rent increases (fixed %, CPI-based, or step-ups).
6. Operating Expenses – Tenant’s share of common area maintenance (CAM), property taxes, insurance.
7. Tenant Improvements (TI) – Allowance from landlord, who manages the build-out, and approval process.
8. Use Clause – What business activities are permitted.
9. Exclusivity – Prevents landlord from leasing to a direct competitor.
10. Renewal/Termination Rights – Options to extend or exit under certain conditions.
11. Assignment/Subletting – Flexibility to transfer the lease if your business changes.
12. Brokerage – Who represents whom and how commissions are handled.
13. Confidentiality – Restricts sharing deal terms.
14. Binding Clauses – Specify which parts are binding (usually confidentiality and broker provisions).

Step 3: Negotiation Strategies for Tenants

• Get Specific Early: Vague LOIs create risk. Spell out rent numbers, escalation method, and TI allowances clearly.
• Prioritize Flexibility: Push for renewal options, sublease rights, and early termination if possible.
• Balance Term Length: Longer terms often win better economics, but don’t overcommit if your business outlook is uncertain.
• Push for Concessions Now: Free rent, moving allowances, or landlord-paid improvements are far easier to negotiate at the LOI stage.
• Don’t Forget Hidden Costs: Clarify how CAM charges, utilities, and maintenance are handled.

Rule of Thumb: If it will impact your monthly cost or your ability to operate, get it into the LOI.

Step 4: Checklist Before Signing an LOI

Here’s a practical checklist to run through:

• Confirm entity name and guarantor obligations.
• Verify square footage and how it’s measured (usable vs. rentable).
• Review rent schedule and escalation math.
• Clarify operating expense pass-throughs.
• Nail down TI allowance and construction responsibilities.
• Ensure exclusivity language (if critical to your business).
• Review renewal options and termination rights.
• Confirm sublease/assignment language is tenant-friendly.
• Identify which clauses are binding vs. non-binding.
• Send to your broker or attorney for a quick review before execution.

Step 5: How This Plays Out in Real Life

Case Example:

A nonprofit signed an LOI for a community center space that listed “market rate escalations” without specifics. When the lease came, the landlord inserted 5% annual increases—well above market norms. Because the LOI hadn’t defined escalations, the nonprofit had little leverage to push back and ended up paying $150,000 more over the lease term.

Takeaway: Nail down numbers, not vague phrases.

Step 6: Moving From LOI to Lease

• Timing: After LOI execution, the landlord’s attorney drafts the lease. Expect 2–4 weeks of back-and-forth.
• Consistency Check: Use the LOI as your reference sheet when reviewing the lease. If something appears inconsistent, push back immediately.
• Next Negotiation Stage: While the LOI is business-driven, the lease is legal-driven. Make sure your attorney or broker keeps the spirit of the LOI intact.

Conclusion: Your Blueprint for Success

The LOI is more than a handshake. It is your chance to shape the financial and operational framework of your lease before legal language muddies the waters.

Key takeaways:

• Treat the LOI as your blueprint.
• Spell out financial and operational terms clearly.
• Protect your flexibility with renewal, assignment, and termination rights.
• Don’t sign until you’ve checked every major cost and responsibility box.

Ask yourself:

• Can I afford the true monthly cost (rent + expenses + escalations)?
• Do I have flexibility if my business grows, shrinks, or pivots?
• Does this LOI protect me against foreseeable risks (competition, rising costs, landlord obligations)?

Handled properly, the LOI sets you up for a smooth lease negotiation and protects your business from costly surprises.