Purchasing Commercial Property

Are you or your client new to the world of purchasing commercial property? Or perhaps need a quick refresher? What are some of the important points the buyer and the broker need to address when negotiating a term sheet/letter of intent or contract for purchase of a commercial property? Here are just a few questions and points to consider:

Who is drafting the purchase agreement? Typically, the buyer is tasked with preparing the initial draft of the agreement; many times, though, the seller wants to use its own form. As with most commercial transactions, the party initially drafting the agreement will have incorporated provisions advantageous to that party; accordingly, the agreement will need to be carefully reviewed and negotiated.

What is due diligence? Due diligence (sometimes called the study period) permits the buyer to physically investigate the property with experts (such as structural or mechanical engineers); review all documents and materials relating to the property and its operation; and obtaining and reviewing title work and a survey. In a typical purchase of a commercial property, much of the important legwork is front-loaded and should begin immediately after the execution of the agreement. Allowing adequate time for the study period is always important and the amount of time is always negotiated in the agreement. It is typically a certain number of days from the contract’s execution date: sometimes as short as a few days and often up to 60 to 90 days or longer on larger transactions. Two studies that may take longer and often cost the most are the survey and the environmental report, which are almost always required when the transaction is being financed. The latter two reports typically take 4 to 6 weeks from the date ordered but may take longer. Another key point regarding the due diligence period is that the buyer wants the absolute right to terminate the agreement for any reason prior to the expiration of the due diligence period and receive back its deposit if it is unwilling to continue with the purchase.

Is the purchase being financed? In the “old days”, the buyer’s obligation to settle was often contingent on obtaining financing. Today, a financing contingency is unusual in a commercial transaction, as most sellers won’t agree to tack on a financing contingency along with the due diligence contingency. Consequently, buyers should finalize their financing arrangements prior to the expiration of the study period with the idea that, if the financing falls through, they can still cancel the agreement without penalty. Since delays often occur while banks are reviewing and approving loans, it’s always a good idea for a potential buyer to have discussed the deal with a lender prior to the execution date of the agreement.

Once the contract is “hard” and the deposit is at risk (after the expiration of the due diligence period), other aspects of the agreement come into play in preparing to close, such as: when will Closing occur; what fees and expenses are paid by each party at Closing; and how those fees may be apportioned if it’s a continuing obligation (such as rents, operating expenses and taxes).

A host of other issues arise in the context of purchasing commercial properties, and this short note can only highlight a very few. If you're looking for experienced commercial real estate attorneys, give the lawyers at Oliveri & Tammadge, LLC a call.