A commercial real estate purchase checklist is an essential due diligence tool for any buyer acquiring office, industrial, life science or other commercial property. Unlike residential transactions, commercial real estate purchases carry fewer automatic consumer protections, making it critical for buyers to conduct thorough, independent due diligence before the close of escrow. Use this free checklist to help you track every step of the process, from reviewing the Purchase and Sale Agreement to verifying zoning compliance and securing the right insurance.
Note: The information below is provided to help guide you in the purchase process. It is not a substitute for hiring professional representation with your real estate transaction, as well as legal, tax and insurance issues.
Key Dates to Consider
- Purchase and Sale Agreement Effective Date
- Escrow Period
- Estimated Close of Escrow Date
- Due Diligence/Buyer’s Investigation Period
- Earnest Money Deposit Non-Refundable Date
Commercial Real Estate Purchase Checklist
| Item | Description |
|---|---|
| Fully Executed Purchase and Sale Agreement | The PSA in a commercial real estate transaction is rarely going to be a standardized form with consistent “key dates”. Be sure to review the document thoroughly to make sure the conditions of the agreement are satisfied in a timely manner or waived. |
| Disclosures | In a commercial real estate transaction, the buyer does not have many of the consumer protections afforded a purchaser in a residential transaction. You should not assume that seller disclosures are mandatory. Review the PSA to ensure the agreed upon disclosures have been provided. That said, most PSAs will include a list of seller-required disclosures. |
| Preliminary Title Report | The preliminary title report is typically ordered once escrow has been opened. It provides information about the property, such as how title is currently held and what kind of exceptions to title are currently of record (for example, easements, liens, and encumbrances). The preliminary title report then becomes the final title report, on which title insurance is based. |
| Zoning | Confirm the current use or the intended use is a permitted use under local zoning regulations. A non-conforming use can have severe consequences. Consider consulting a local land use attorney. |
| Natural Hazard Disclosure | The Natural Hazard Disclosure will indicate whether the property is located in a special flood hazard area, dam failure inundation area, earthquake fault zone, seismic hazard zone, high fire severity area or wild fire area. If the property is located in a designated Natural Hazard zone, very expensive insurance may be required. |
| Environmental Investigation | By taking title to the property, you expose yourself to potential environmental liability regardless of fault. That said, there is some defense for an “innocent purchaser” so long as they have conducted an appropriate investigation of the property. A Buyer should conduct a “Phase I” investigation and follow up with a “Phase II” where appropriate. These investigations are done by private companies. |
| Hazardous Material Survey | Hire a local environmental engineering/inspection company to inspect the building for building materials that may contain hazardous materials such as asbestos, lead and PCB. Hazardous material remediation can be costly. Cost may include inspection and supervision fees during renovations and demolition, and disposal fees. |
| Building Physical Inspection | A building physical inspection is a visual examination of the structure and building systems. You should have the building thoroughly inspected before the final purchase by an experienced and impartial professional inspector. |
| Survey | The ALTA survey is the standard survey for most real estate transactions. Typically, the title policy will provide coverage against problems not discovered in the ALTA survey. A survey should uncover issues regarding lot lines, easements, and setbacks. |
| Wells/Septic | Well and septic problems can be costly. If the property contains a well or septic system, consider having it inspected by a local company. |
| Termite | Order a termite inspection from a local pest inspection company. The report will typically contain two sections. Section 1 contains information regarding existing conditions, and Section 2 will contain issues that can lead to future problems. |
| Utilities | Understand which utilities service the property. Water, sewer, gas, electric, cable and telephone. |
| Appraisal | A private appraiser is hired to determine the fair market value of the property. Be sure to select a private appraiser whom the lender will accept. |
| FIRPTA Affidavit | The buyer needs to confirm that the seller is not a foreign person or entity. If the seller is foreign, the buyer is required to withhold proceeds from the purchase to pay for taxes; and, is liable for the withholding amount if they fail to withhold. The buyer is generally allowed to rely on the seller’s FIRPTA affidavit. |
| Bill of Sale | The bill of sale is the document evidencing the transfer of personal property between the buyer and seller. |
| UCC Search | If any personal property is involved in the transaction, the UCC search through the Secretary of State should uncover any encumbrances on the personal property. |
| Insurance | Contact your insurance broker and obtain property and liability insurance. Typically the lender will require that both are maintained throughout the loan term. |
| Closing Statement | The closing statement is a detailed breakdown of all of the costs involved and money transferred between the buyer and seller. |
| Agreements Assigned to Buyer or Terminated at the Close of Escrow | Most commercial buildings will be subject to existing service agreements for items such as janitorial, security, and maintenance. Such service agreements may be assigned to the buyer or terminated. Regardless, you should be aware of any and all agreements involving the property. |
| Tenant Estoppel Certificates | The certificates are obtained from current tenants to confirm the terms of the lease and that there are no active defaults under the lease. |
Construction and Renovations Checklist
If your acquisition involves construction or significant renovation, use this checklist alongside the purchase checklist. Establishing a clear budget and locking in contractor pricing before closing reduces cost risk and confirms your financing is sized correctly.
| Item | Description |
|---|---|
| Construction Budget | Establishing a construction budget is essential in determining the amount of the loan required to complete the project. The budget should include both the cost of design and construction. |
| Architect | Lock in a fixed price to design the building/renovations. |
| General Contractor | Lock in a fixed price for construction of renovations, and confirm the building can be completed within the loan limits established. |
| Construction Plans & Specs | Review the construction drawings to confirm that the design and materials match with project expectations. Also consider value engineering to shave cost. |
| Building Permits | Ensure that governmental regulations are being complied with. |
| Certificate of Substantial Completion | Confirm the building has been constructed consistent with the plans and specs. |
| Certificate of Occupancy | Issued by the building inspector confirming the building has been built to code and may be occupied. |
Frequently Asked Questions About Commercial Real Estate Due Diligence
Due diligence in commercial real estate is the buyer’s investigation period. It’s the window between an executed Purchase and Sale Agreement and the close of escrow during which the buyer and its retained experts independently verify the condition, title, legal compliance and financial performance of the property. It typically includes physical inspections, environmental assessments, title review, zoning confirmation and financial analysis. The scope and timeline are defined in the PSA.
A commercial real estate due diligence checklist covers the Purchase and Sale Agreement, seller disclosures, preliminary title report, zoning confirmation, environmental investigation (Phase I/II), hazardous material survey, building physical inspection, ALTA survey, utility review, appraisal, FIRPTA affidavit, UCC search, insurance, closing statement, service agreement review and tenant estoppel certificates. If construction is involved, it also includes budget, architect and contractor agreements, permits and certificates of occupancy.
The due diligence period in a commercial real estate transaction is negotiated between the buyer and seller and defined in the Purchase and Sale Agreement. It typically ranges from 30 to 90 days, though complex transactions, particularly those involving environmental issues, major renovations, or multiple tenants, may require longer periods. Buyers should negotiate sufficient time to complete all investigations before the earnest money deposit becomes non-refundable.
A Phase I Environmental Site Assessment (ESA) is a standard environmental review conducted by a qualified environmental professional before a commercial real estate purchase. It evaluates the property’s history, surrounding land uses and visible conditions to identify recognized environmental conditions (RECs), situations suggesting potential contamination. If Phase I findings are concerning, a Phase II assessment involving soil and groundwater sampling is typically recommended.
A preliminary title report is a document prepared by a title company that identifies how title to the property is currently held and lists any exceptions, including easements, liens, encumbrances, deed restrictions and other matters of record. It is typically ordered once escrow is opened and forms the basis of the final title insurance policy issued at closing.
An ALTA/NSPS Land Title Survey is the most comprehensive form of land survey used in commercial real estate transactions. It identifies property boundaries, easements, encroachments, setbacks and other physical conditions that could affect use or value. Most lenders require an ALTA survey as a condition of financing, and title insurance policies typically exclude matters that a current survey would reveal, making it an essential component of due diligence.
FIRPTA (the Foreign Investment in Real Property Tax Act) requires buyers to withhold a portion of the purchase price if the seller is a foreign person or entity, and remit it to the IRS to cover potential tax liability. The seller provides a FIRPTA affidavit certifying their non-foreign status, which the buyer is generally permitted to rely upon. Buyers who fail to withhold when required are personally liable for the withholding amount.
A tenant estoppel certificate is a signed document obtained from a tenant that certifies the current terms of their lease, including rent amounts, lease expiration date, any options and whether any defaults exist. Buyers use estoppel certificates to verify that lease representations made by the seller are accurate, and lenders typically require them as a condition of financing on income-producing properties.
A Phase I Environmental Site Assessment is a non-invasive review of historical records, site conditions and surrounding land uses to identify recognized environmental conditions. A Phase II assessment goes further. It involves physical sampling of soil, groundwater or building materials to confirm or rule out contamination identified during Phase I. Phase II is only conducted when Phase I findings indicate a reasonable basis for concern.
While not legally required in all states, retaining an attorney experienced in commercial real estate transactions is strongly recommended. Commercial purchase agreements are complex documents drafted by seller’s counsel, and the default terms typically favor the seller. An attorney can review the PSA, negotiate protective provisions, identify risky clauses, such as unfavorable FIRPTA, indemnification or representation and warranty terms, and help ensure the transaction closes on terms that protect the buyer.