How to Redline a Commercial Real Estate LOI: A Step-by-Step Guide

What an LOI is and why it matters more than the lease

A letter of intent is a non-binding outline of the business terms a landlord and tenant intend to put in a lease: rent, term, improvement allowance, operating expenses, and the key rights. It exists so both sides can agree on the money before either spends money on lawyers.

Non-binding is the legal status. The practical status is different. Once both parties sign, walking away from an agreed term creates friction and often kills the deal. Lease counsel will negotiate the legal provisions, but they rarely reopen the business terms settled in the LOI. The rent, the escalations, the TI and the CAM structure are decided here. That is why getting the LOI right matters more than most tenants, and some brokers, appreciate.

The clauses to focus on

Base rent and escalations. The headline rent gets the attention. The escalation structure determines the total cost. Fixed bumps of 2.5% to 3.5% a year are standard. CPI escalations move inflation risk to the tenant, and a tenant who agreed to uncapped CPI in 2021 paid 6% to 8% increases in 2022 and 2023. Fair market resets at renewal are dangerous without a defined arbitration process. Specify whether escalations apply to the base year rent or compound on the prior year. Over ten years the difference is real money.

Term and renewal options. The initial term drives TI amortization, rent economics and flexibility. A renewal option "at fair market value" with no determination mechanism is close to worthless. It means you negotiate again. Push for a fixed bump, a cap on fair market value, or a defined spread to market. The notice period, typically 9 to 12 months, goes on the calendar the day the lease is signed.

Tenant improvement allowance. The dollars per square foot are the start. Who manages construction. Whether unused allowance can be taken as rent credit. The deadline to submit for reimbursement. Whether excess cost is amortized into rent and at what rate. Shell condition versus warm shell versus turnkey delivery changes what any TI number is worth.

Operating expenses and CAM. In a triple net lease this is a large share of total cost. Confirm whether the lease is true NNN or modified gross. Get the CAM cap percentage and whether it is cumulative or non-cumulative, a distinction that costs tenants a great deal over a term. Get the list of exclusions: capital expenditures, ownership entity costs, leasing commissions. Get the administrative fee, usually 10% to 15% of CAM, and the gross-up provision for vacancy. Lose these in the LOI and you fight for them in the lease from a weaker position.

Exclusive use and co-tenancy. For retail tenants these clauses protect the business. An exclusive keeps the landlord from leasing to a direct competitor in the center. Be specific: "restaurant" is too broad, "fast-casual Mexican restaurant" holds up. Co-tenancy ties your obligations to the presence of anchors or a minimum occupancy, with remedies if the anchor goes dark: reduced rent, percentage rent only, or termination. Landlords resist broad co-tenancy because it creates cascading risk across the center.

Assignment and subletting. Even if you never plan to assign, these provisions define your exit. Consent should be "not unreasonably withheld, conditioned or delayed." Watch for recapture rights that let the landlord terminate your lease and deal directly with your proposed subtenant. Profit sharing on sublease income is common and the split is negotiable. Change-of-control language can treat a corporate transaction as an assignment.

The same clause from both sides

A landlord sees a 5% non-cumulative CAM cap as generous. It limits the tenant's exposure while preserving the pass-through of actual costs in an inflationary year. A tenant sees the same clause as a delayed bill: after five flat years the cap resets against actuals and the tenant can face a 15% to 20% single-year jump. The tenant wants cumulative. The landlord wants non-cumulative. Knowing both positions makes you better at negotiating either one.

Likewise, the landlord's standard "consent required for assignment" protects the building from bad tenants. Written too broadly, it gives the landlord a veto over the tenant's exit strategy. Sophisticated tenants define reasonableness with specific criteria, such as a net worth minimum and a same-use requirement, so the landlord's discretion is bounded.

The mistakes that cost the most

Accepting vague delivery language. "Landlord shall deliver the premises in good condition" means one thing to the landlord, another to the tenant, and a third to a judge. Specify broom-clean shell, building-standard finishes, or attach a work letter. Every undefined term in the LOI becomes a lease negotiation, and by then the tenant is negotiating from a weaker position.

No delivery trigger. LOIs state a commencement date and go silent on what happens if the landlord delivers late. Tie commencement to the earlier of a date or actual delivery, add a free-rent penalty for late delivery, and include a termination right if the delay passes 90 to 180 days.

Ignoring holdover. Nobody plans to stay past the term, and holdover rent at 150% to 200% of the final month's rent is the standard provision. Thirty extra days for a delayed move can cost a month's rent in penalties. Negotiate 125% for the first 60 days, escalating after.

Missing the continuous operation clause. Retail leases often require the tenant to stay open during set hours for the full term. Going dark while paying rent is not allowed. If your business model might change, or you might want to sublease, strike or narrow this clause in the LOI. Once it is in the lease it does not come out.

Where software fits

A thorough LOI review means reading every clause against market standards, spotting the ones that favor the other side, and drafting replacement language. Done by hand it takes hours, and the quality depends on who is doing it that day.

Our LOI redlining agent takes the pasted or uploaded LOI, a chosen negotiating posture (standard, aggressive, or landlord-favorable), and checks each clause against a 79-item institutional checklist. Each clause gets a risk score, an explanation of the exposure, and suggested revision language you can paste into the redline. It reads every word the same way every time, which is the one thing a tired reviewer at 6 p.m. cannot promise. The human review still happens. It starts from a complete first pass instead of a blank page.