Whether you’re buying your first commercial property or adding to your portfolio, the commercial real estate purchase process requires careful planning and strategic thinking. While each deal is unique, most follow a common structure. Knowing what to expect keeps you informed and in control throughout the process.
Here is a distilled overview of the major steps involved with buying commercial real estate in Colorado.
1. Pre-Contract Strategy and Negotiation.
- A. Setting Your Strategy. The first step is to define your investment goals. Are you buying to hold long-term and collect rent? Planning to redevelop or reposition the property? Looking for a 1031 exchange replacement? Your answers will narrow down your search pool. You’ll also want to assemble your transaction team, which may include attorney, commercial real estate broker, accountant, insurer broker, commercial property inspector, surveyor, and possibly a property manager or development consultant.
- B. Letter of Intent (LOI). Many commercial deals begin with the parties negotiating an LOI. The LOI is a non-binding document that outlines the basic terms of the deal — purchase price, deposit, inspection period, and closing timeline. It’s a roadmap for the formal purchase contract. While the LOI typically isn’t legally binding, or required, it’s your first chance to frame the negotiation and set expectations.
2. Purchase and Sale Agreement (PSA).
Following the negotiation – or decision to forego- an LOI, the next step is to negotiate the PSA. The PSA is the binding contract that governs the deal from start to finish. Amongst other topics, it will cover:
- Price & deposits
- Due diligence timeline
- Closing logistics
- Title & survey review
- Reps and warranties
- Other contingencies for other closing deliverables.
An experienced legal counsel can add tremendous value here. Small oversights here can lead to expensive issues later, especially around diligence, title, and other non-obvious risks.
3. Pre-Closing.
- A. Due Diligence. Once the PSA is signed, you must investigate the property through a process called ‘due diligence.’ The due diligence clock usually starts ticking upon complete execution of the PSA. Common aspects of due diligence include evaluation of physical condition, zoning and use, environmental risks, title and survey, and existing leases. Real estate attorneys can advise on relevant documents and prepare thorough check lists to ensure no stone is left unturned.
- B. Title Insurance and the Survey. In addition to a due diligence review, you must also understand the state of title to the property by examining the title insurance commitment and potentially, a survey. The title company will provide a commitment to issue title insurance to you to protect against unknown title claims or defects, including things like easements, covenants, or liens. You might also order a survey to verify the boundaries, improvements, and legal description of the land. A well-seasoned attorney can provide guidance on the risks presented by title to and a survey of the property.
- C. Financing (if applicable). If you’re using debt, your lender will likely run its own due diligence, including ordering an appraisal, environmental report, and legal review. Be ready to produce formation documents, rent rolls, and a signed PSA. Financing often dictates closing timeline, so coordinate closely with your lender and make sure their timeline aligns with the PSA. A communicative attorney can serve as a great conduit between you, your lender, and the title company.
4. Closing the Deal.
A day or two before closing, you’ll receive the final closing documents finalized by the attorneys. The purchase price wire should be initiated in advance of closing, and a proactive attorney will ensure that your corporate structure is properly organized and ready to operate through a designated business account.
5. Final Thoughts.
When purchasing commercial real estate, attention to detail is critical. Buyers should feel confident relying on their team of experienced professionals to navigate the unique complexities of each transaction.
If you need help evaluating or navigating a commercial deal, email me to discuss how we can support you.
