Letter of Intent (LOI)
Letter of Intent (LOI), in short
A letter of intent (LOI) is a short document that records the headline terms of a proposed commercial real estate purchase or lease, such as price, deposit, diligence period and closing date, before the formal contract is written. The deal terms are usually non-binding, but confidentiality and exclusivity clauses are often binding. It is not a loan approval, and lenders typically want the signed contract.
Also called LOIletter of intent to purchasenon-binding offer letter
How a letter of intent works
A letter of intent is the first piece of paper in most commercial real estate deals. Before a buyer and seller spend money on attorneys, appraisals and reports, they write down the headline terms they think they can agree on. If the two sides cannot agree on those basics, there is no reason to draft a full contract. If they can, the LOI becomes the outline that the lawyers turn into the purchase and sale agreement (PSA).
The term is used in three common settings:
- Buying a property. The buyer offers a price, a deposit, a diligence period and a closing date. This is the setting that matters most to a borrower, because the loan has to fit inside what the LOI promises.
- Leasing space. A tenant and landlord record rent, term, allowances and options before the lease is drafted.
- Buying a business. An acquirer proposes a price and structure for a company, often with its real estate. The loan for the purchase may be an owner-occupied or SBA loan.
The rest of this entry focuses on the purchase LOI, since that is where financing comes in.
Binding or non-binding
Most of an LOI is meant to be non-binding. The price, the deposit and the closing date are proposals: either side can renegotiate or walk away until a PSA is signed. Many LOIs say so in a sentence near the end, for example that no party is bound until a definitive agreement is signed.
Parts of the document are commonly drafted to bind both sides at signing:
- Confidentiality. Neither side discloses the deal or the other side’s information.
- Exclusivity, or a “no-shop.” The seller agrees not to market the property or negotiate with other buyers for a stated period. Practitioner guides (for example Bean Kinney & Korman’s) advise that this clause be specific, with dates, and labeled as binding.
- Costs. Who pays for expenses incurred while the deal is being negotiated.
- Governing law. Which state’s law applies if there is a dispute.
Whether a particular LOI binds anyone depends on its wording and on state law. A courtroom looks at the whole document and at how the parties behaved after signing. A document that says “non-binding” at the top but also says you “shall” pay a fee or hold a price can be read as binding on those points. One well-known example is a Delaware case, SIGA Technologies v. PharmAthene (Del. 2013), where the Delaware Supreme Court held that a contractual promise to negotiate in good faith, built around a term sheet labeled non-binding, was enforceable and could support expectation damages. That case involved a merger agreement rather than a property purchase, and each state treats such promises differently, but it shows why the label alone should not reassure you. Before you sign, circle every sentence that says a party will do something and ask your attorney whether it is meant to bind you.
What goes in a purchase LOI
| Section | What it settles | Why a lender cares |
|---|---|---|
| Parties and property | Who is buying, through what entity, and exactly what is being sold | The lender lends to the entity that will own the property, and the entity affects guaranty and recourse terms |
| Price and payment | Purchase price, and whether any of it is seller financing or assumed debt | Sets the base for loan-to-value and the equity you must bring |
| Earnest money | Deposit amount, where it is held, when it becomes non-refundable | Shows the buyer has money at risk; counts toward your down payment |
| Due diligence | Length of the review period and what the seller must deliver (leases, rent roll, operating statements, reports) | The same documents feed the lender’s underwriting |
| Financing contingency | Whether the buyer can cancel if the loan does not close, and by what date | Protects you if the lender sizes the loan lower than you expected |
| Closing date and costs | Target closing, extension rights, who pays transfer taxes and fees | Must be long enough for the loan to close |
| Exclusivity and confidentiality | No-shop period and secrecy | Keeps the property off the market while you line up financing |
| Binding-provisions statement | Which sections bind and which do not | Avoids a dispute over what was promised |
Worked example: fitting the loan inside the LOI
You plan to buy an investment property for $2,000,000 with a $1,400,000 loan, which is 70% loan-to-value ($1,400,000 ÷ $2,000,000). You need $600,000 of your own money for the purchase, before closing costs. The deposit and day counts below are assumptions for illustration, not market norms.
| Item | LOI term | Arithmetic |
|---|---|---|
| Purchase price | $2,000,000 | |
| Loan amount | $1,400,000 | 70% of price |
| Cash needed for the purchase | $600,000 | $2,000,000 − $1,400,000 |
| Earnest money deposit | $40,000 | 2% of price, paid when the PSA is signed |
| Balance of cash at closing | $560,000 | $600,000 − $40,000, plus closing costs |
| Exclusivity | 60 days from signing | Binding no-shop |
Now check the schedule against the lender. Suppose the LOI is signed on day 0, the PSA is signed by day 10, and the diligence period runs 30 days from the PSA, ending on day 40. Our typical terms show closing in 30–45 days for a conventional bank loan (see investment property loans). If you apply on day 10, a 45-day closing lands on day 55. That fits inside 60 days, but with only five days to spare. An SBA 504 loan closes in 60–90 days (see SBA 504 loans), which would not fit a 60-day exclusivity period at all.
That mismatch is the main way an LOI hurts a borrower: the buyer agrees to a closing date first and asks the lender second. The fix is to ask for the lender’s realistic timeline before you sign, or to write in a closing extension right, for example two 15-day extensions for a stated fee.
LOI vs. term sheet vs. purchase contract
| Letter of intent | Term sheet | Purchase and sale agreement | |
|---|---|---|---|
| Who sends it | Buyer to seller | Lender to borrower | Both sides sign |
| What it covers | Price, deposit, diligence, closing | Loan amount, rate, term, fees, recourse | Full purchase contract |
| Binding? | Mostly no; some clauses yes | Mostly no; some clauses yes | Yes |
| Proves you can finance? | No | Weakly; the lender has not approved | Needed to apply; financing contingency may apply |
The term sheet entry covers the lender side and how it differs from a commitment letter. Lenders do not use the title consistently, so ask which provisions bind rather than relying on the name.
Why lenders care
A lender does not underwrite your LOI. It underwrites the property, the borrower and the signed contract. But the LOI shapes what the lender will see, in three ways.
- The price sets the ceiling. Loan size is the lower of the amount that fits the lender’s LTV limit and what the property’s income supports. A price that is high relative to net operating income can leave a gap that you fill with equity. Run both limits in the maximum loan calculator before you agree to a price.
- The timeline sets the pressure. A tight closing date pushes lenders to rush appraisals and reports, which cuts the chance to negotiate or switch lenders.
- The diligence package is the loan package. The leases, rent roll and operating statements the seller delivers in diligence are the documents the lender will ask for, as described in our guide to what lenders look at. Make sure the LOI obliges the seller to deliver them early.
What to watch for and how to negotiate
- Get a financing contingency, with a date. If your loan fails, you want to get the deposit back. A contingency with no date, or one that ends before the lender’s timeline, protects very little.
- Make exclusivity long enough for the loan. Compare it with the lender’s closing time, not the seller’s preferred date. Sellers may want a larger deposit or a faster diligence period in return.
- Do not let the LOI bind you to the price before you have seen the numbers. Include an express right to adjust the price, or to terminate, if diligence finds that income or expenses differ from what the seller represented.
- Keep the deposit small and refundable until the end of diligence. The date earnest money goes hard is a key negotiated point.
- Avoid open-ended “good faith” promises unless you want them enforced. They can create obligations nobody meant to include.
- Do not drop contingencies because a lender sent a term sheet. It is not a commitment, as explained in the term sheet entry.
- Confirm who is signing and what happens if a binding clause is broken. Make sure the signer can bind the seller’s entity, state the remedy for breaching a binding clause, and address broker commissions and your right to assign the deal to an affiliate or new entity.
- Say what happens at expiry. Many LOIs lapse after a set number of days. Write what each side may do after that date.
Common mistakes
- Treating the LOI as a financing approval. It is an offer to the seller, not a decision by a lender.
- Using words like “offer” and “accept.” In a document that is supposed to be non-binding, language of acceptance can suggest a contract.
- Skipping the lawyer. The cost of a review is small next to a deposit or a lost deal. Enforceability varies by state, and this entry is general information, not legal advice.
- Writing a closing date from the seller’s calendar. Work backward from the lender’s timeline instead.
- Ignoring the lease LOI. A tenant’s LOI can fix rent and term, which affect the debt service coverage a lender sees on a new building or a re-leased space.
What it means for you
An LOI is a negotiating tool, and the time to make it work for your financing is before you sign it. Get the lender’s realistic closing time, size the loan against the price, and write the exclusivity period, deposit and contingencies to match. If you are weighing a purchase and want to know how much a lender would advance and how long it would take, send us your property and numbers, and read the guide to buying a commercial building for the steps that follow the LOI.
Sources: published commercial real estate law-firm and broker guidance on letters of intent (Troutman Pepper, “Letters of Intent in Commercial Real Estate Leases”; Jaburg Wilk, “Letter of Intent”; Bean Kinney & Korman, “Letters of Intent Explained”); SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013), on enforcing a promise to negotiate in good faith. Deposit size, day counts, loan amounts and the 70% LTV are assumptions for illustration; arithmetic is simple division and subtraction. Closing times come from this site’s loan-terms data. Terms vary by lender, state and deal.
Frequently asked
Is a letter of intent legally binding?
Usually the business terms are not, but some clauses can be. Most LOIs say the price, deposit, diligence period and closing date are proposals that become binding only in a signed purchase and sale agreement. Confidentiality and exclusivity (a “no-shop”) are commonly written to bind both sides on signing. Courts look at the wording of the whole document and at what the parties did afterward, so the label “non-binding” is not a guarantee. Have an attorney read it before you sign.
What is the difference between an LOI and a purchase and sale agreement?
An LOI is a short outline of proposed terms that lets both sides test whether a deal is worth the legal cost. A purchase and sale agreement (PSA) is the full contract that creates the enforceable obligations: the price, the deposit and when it goes hard, the representations each side makes, the contingencies and the closing. Lenders ask for the signed PSA, or at least an LOI, when you apply for a purchase loan.
What is the difference between an LOI and a term sheet?
Both are non-binding outlines, but they come from different sides. A buyer sends an LOI to a seller to propose the terms of the purchase. A lender issues a term sheet to a borrower to propose the terms of the loan. A purchase deal often has both: the LOI sets the price and timeline, and the term sheet sets the financing that has to fit inside that timeline.
What should a commercial real estate LOI include?
At a minimum: the parties and the property, the purchase price and how it is paid, the earnest money deposit and when it becomes non-refundable, the due diligence period and what the seller must deliver, any financing contingency, the target closing date and who pays which closing costs, and a clear statement of which sections are binding. If you want the property taken off the market while you work, the exclusivity period should be specific and stated as binding.
Does a lender need to see my LOI?
For a purchase loan the lender will ask for the signed purchase contract. Our loan document checklist lists the “signed purchase and sale agreement (or LOI)”, because an LOI at least shows the price and basic terms while the contract is still being drafted. An LOI is not proof that a lender will lend, and the loan amount is sized on the property’s income and value, not on the LOI.
How long should exclusivity last in an LOI?
There is no standard length; it is negotiated. Set it so it covers the time you actually need to finish diligence and have the lender close, with the dates written out. If your loan product closes in 30–45 days (bank CRE) or 60–90 days (SBA 504), an exclusivity period shorter than that leaves you unprotected while you wait on the lender. Longer periods cost the seller flexibility, so sellers often ask for something in return.