Letter of Intent in Commercial Real Estate: What It Covers and Why It Matters
A letter of intent — commonly called an LOI — is one of the most important documents in a commercial real estate transaction. It comes before the lease, before the attorneys get involved, and before most of the negotiation budget gets spent. Yet many tenants and landlords treat it as a formality rather than a strategic tool.
In Portland’s commercial real estate market, where deal terms vary widely by property type, submarket, and building class, the LOI is where the economics of a deal take shape. Getting it right sets the trajectory for everything that follows. Getting it wrong means renegotiating terms that should have been locked down early — or worse, walking into a lease with unfavorable conditions that could have been avoided.
What Is a Letter of Intent in Commercial Real Estate?
An LOI is a written proposal that outlines the key business terms of a commercial lease or purchase before a formal agreement is drafted. It is typically non-binding, meaning neither party is legally obligated to complete the transaction based on the LOI alone. However, certain provisions — like confidentiality or exclusivity — may be binding even in a non-binding LOI.
Think of it as a term sheet. It captures the deal points both sides need to agree on before spending time and money on legal drafts, due diligence, and build-out planning. For tenants searching for commercial space in Portland, the LOI is the first real commitment of intent — and the first opportunity to shape the deal.
What Does an LOI Typically Include?
While every deal is different, a well-drafted commercial real estate LOI covers a consistent set of terms. These are the items that matter most.
Premises and Term
The specific space being leased (suite number, square footage, building address) and the lease duration. Most Portland commercial leases run 3-10 years depending on the property type and tenant’s needs. Include any renewal options here.
Rental Rate and Escalations
The base rent, how it is quoted (per square foot per year or per month), and annual escalation structure. In Portland, industrial leases are typically quoted as monthly NNN, while office leases may be full service or modified gross. The LOI should specify the lease structure clearly — see NNN vs full service leases for a breakdown of how these compare.
Operating Expenses
How common area maintenance, property taxes, insurance, and other operating costs are handled. In NNN leases, these are passed through to the tenant. In full service leases, they are included in the base rent up to a base year stop. The LOI should define the expense structure and any caps or exclusions.
Tenant Improvement Allowance
The dollar amount the landlord will contribute toward build-out of the space. This is one of the most negotiated items in any commercial lease. The tenant improvement allowance amount depends on the lease term, creditworthiness of the tenant, market conditions, and how much work the space needs.
Free Rent or Concessions
Any rent abatement periods, moving allowances, or other concessions. In softer market conditions — like portions of Portland’s office market in recent years — landlords may offer several months of free rent to attract tenants. The LOI is where these concessions are proposed and negotiated.
Permitted Use
What the tenant is allowed to do in the space. This matters more than most tenants realize, especially in retail and mixed-use properties where landlords manage tenant mix carefully.
Contingencies
Conditions that must be met before the deal moves forward — such as board approval, financing, or satisfactory due diligence on the property.
Why the LOI Matters More Than Most People Think
The LOI sets the negotiation framework for the entire transaction. Once both parties sign it, the deal moves into lease drafting — and at that point, the business terms are largely set. Reopening LOI-level items during lease negotiation creates friction, delays closing, and can kill deals.
Three reasons the LOI deserves serious attention.
It establishes leverage. The party that drafts the LOI typically controls the initial framing of the deal. A well-structured LOI submitted by a tenant (or their broker) puts specific numbers and terms on the table that the landlord must respond to — rather than leaving the landlord to set the starting point.
It saves time and legal costs. Attorneys draft leases based on the LOI terms. If the LOI is vague or incomplete, the lease draft becomes a second round of business negotiation disguised as legal review. That costs both sides money and delays occupancy.
It surfaces deal-breakers early. If the landlord cannot meet a critical term — say, the TI allowance needed to make the space functional — it is far better to know that at the LOI stage than after weeks of lease negotiation.
Common Mistakes in Commercial Real Estate LOIs
Being too vague on economics. An LOI that says “market rate rent” or “TI to be determined” is not doing its job. Specific numbers force both sides to engage with the real deal terms.
Ignoring operating expenses. Tenants often focus on base rent and overlook the total occupancy cost. The LOI should specify the estimated operating expense pass-throughs, base year, or expense cap so the tenant knows the full cost picture.
Skipping the timeline. Without a proposed lease commencement date and a timeline for lease execution, deals drift. Good LOIs include target dates for lease delivery, tenant build-out, and occupancy.
Not including renewal terms. If the tenant wants renewal options, those need to be in the LOI. Adding them later — after the landlord has agreed to economics — is significantly harder.
How the LOI Fits Into the Portland Leasing Process
In Portland’s commercial real estate market, the typical leasing process follows a predictable sequence.
Market search and site selection — identify target spaces and tour properties. LOI submission — draft and submit an LOI on the preferred space. LOI negotiation — landlord counters and terms go back and forth, usually 1-3 rounds. LOI execution — both parties sign the agreed terms. Lease drafting — attorneys prepare the formal lease based on LOI terms. Lease negotiation — legal review and final adjustments. Lease execution — both parties sign the lease. Build-out and occupancy — TI work begins and the tenant moves in.
The LOI phase typically takes 1-3 weeks depending on deal complexity and how motivated both parties are. For tenants working with a broker who handles tenant representation, the LOI is drafted and submitted on the tenant’s behalf — which means the broker’s market knowledge directly shapes the terms being proposed.
For landlords evaluating offers on vacant space, the LOI is the first filter for tenant quality and deal viability. A clean, well-organized LOI signals a serious tenant — and a broker who knows how to get deals done. Landlords working with a broker on landlord representation benefit from having someone who can evaluate incoming LOIs against current market comps and comparable deals.
What Makes a Strong LOI in Today’s Portland Market
Portland’s commercial market conditions vary by property type. Industrial vacancy remains tight in corridors like Airport Way and Columbia Corridor and Swan Island, giving landlords more leverage. Office and retail markets have more availability, which tilts negotiating power toward tenants in many submarkets.
A strong LOI reflects current market reality.
In tight markets such as industrial, competitive rent, fewer concession asks, and a clear timeline signal seriousness and reduce the risk of losing the space to another tenant. In softer markets such as office and some retail, larger TI requests, free rent periods, and favorable renewal terms are reasonable and expected — but they need to be structured intelligently to avoid overreaching. In any market, specific numbers, a clear timeline, and a professional presentation make the LOI more likely to be accepted or countered productively.
When to Walk Away From an LOI
Not every LOI negotiation ends in a deal — and that is fine. If the landlord’s counter-offer does not meet the tenant’s core requirements after reasonable negotiation, walking away at the LOI stage is far less costly than doing so after lease drafting begins.
Key signals that it may be time to move on include when the economics do not work after two rounds of counters, the landlord is unwilling to provide a reasonable TI allowance for necessary improvements, the permitted use restrictions are too narrow for the tenant’s business, or the timeline for occupancy cannot be met.
A lease renewal strategy often includes LOI submissions on alternative spaces as leverage — even when the tenant’s primary intent is to renew in place. This is standard practice and gives the tenant data and options during renewal negotiations.
Next Steps
The LOI is where commercial real estate deals are won or lost. The terms set here carry through the lease, the build-out, and the entire occupancy period. Treating it as a strategic document — not a formality — is the difference between a good deal and a great one.
If you are evaluating space, preparing to negotiate a lease, or building leverage for a renewal, start with a clear picture of market conditions and deal economics. A well-researched LOI backed by current comps and submarket data puts you in the strongest possible position.