Five Questions to Consider When Purchasing Commercial Real Estate
Commercial real estate transactions are complex and usually involve lenders, brokers, inspectors, title/escrow, and local agencies. With so many moving parts, there’s plenty of room for miscommunication, delays, or legal issues if the deal isn’t actively managed. To keep surprises to a minimum, here are 5 things you should ask your lawyer before you buy commercial property:
1. Are there any hidden risks with this property?
Even if a property looks great on the surface, it’s important to ask about risks that might not be obvious during a walk-through. Title defects are a frequent issue in commercial deals. A title defect is any problem in the recorded ownership history that clouds or impairs your title, such as unreleased liens, errors in public records, breaks in the chain of title, easement or access problems, or past ownership disputes. Your lawyer can review the title commitment and related exceptions, explain what they mean, and recommend steps to address them, often by requiring the seller to cure issues before closing and/or by obtaining title insurance to protect your ownership.
Additional critical issues - such as unpaid taxes, serious lease conflicts, boundary or encroachment disputes, unrecorded easements, building or fire code violations, open permits, environmental concerns, or threatened lawsuits - can affect value and operations. Your lawyer will coordinate due diligence to identify problems early by reviewing leases and rent rolls, ordering a current survey, confirming utilities and legal access, checking for litigation and UCC filings, and negotiating seller disclosures. Early detection gives you options to resolve issues, negotiate price credits, or walk away before you commit.
One of the most critical aspects of this type of deal is knowing what the property is worth and what it will cost to own and operate. Your lawyer can help coordinate reliable third-party diligence - such as an appraisal or broker opinion of value, a property condition assessment, and, where appropriate, a Phase I environmental site assessment - to spot undisclosed problems and estimate repair or remediation costs. This gives you a clearer picture of the investment and leverage to negotiate price, repairs, or closing credits.
2. What does the contract actually say?
Your lawyer will read the purchase contract, any related leases or loan documents, and all exhibits and addenda to help you avoid contract traps. Automatic renewal clauses are common in leases and service contracts; purchase agreements may instead include automatic extensions or “deemed waivers” if you miss a notice deadline. Either way, if notice must be given within a specific timeframe (and by a specific method), your lawyer will calendar those dates and confirm the required delivery method so you don’t find yourself bound to terms you didn’t intend.
Real estate contracts sometimes include one-sided terms that heavily favor the seller or landlord. Examples include “as-is” and disclaimer-of-reliance language, very limited seller representations, broad buyer indemnities, caps on damages or exclusive-remedy clauses, waiver of jury trial or mandatory arbitration, and restrictions on assignment. These provisions can limit your rights, shift responsibilities unfairly, or restrict your ability to negotiate. Because they are often buried in fine print or phrased in confusing ways, your lawyer will help you spot, understand, and, where appropriate, negotiate them.
Clarity is essential. Your lawyer will ensure the contract captures the essentials: clear contingencies (financing, inspection, title/zoning), realistic timelines with any extension rights, access rights to inspect the property before closing, the earnest money amount and when it is refundable, insurance requirements and risk of loss before closing, required closing deliverables (such as tenant estoppels, subordination, non-disturbance, and attornment agreements (SNDAs), and keys), prorations and closing costs, default and remedies, dispute-resolution procedures, and confidentiality/public-statement rules. Well-drafted terms keep the process on track and hold everyone accountable.
3. Is the property zoned for my desired use?
Zoning and land-use rules determine how a property may be used. Cities and counties divide areas into districts - residential, commercial, industrial, agricultural, and special overlays - and set standards for setbacks, height, parking, signage, and density. It is crucial to confirm that your intended use is permitted as-of-right under the current zoning, or whether a conditional use permit, variance, or site-plan approval is required. Your lawyer can help you verify the property’s zoning designation, request a zoning verification letter, and identify any nonconforming uses or prior approvals that affect operations. They can also flag related compliance items (certificate of occupancy, building and fire codes, accessibility/ADA, environmental or wetlands constraints). If the current zoning doesn’t fit your plans, your options may include seeking a variance or special permit, pursuing a rezoning, or updating the plan, so that your use isn’t “nonconforming” in a way that becomes non-performing. Because rules change over time, staying proactive helps you remain informed and compliant.
4. Should I buy this property through an LLC?
Purchasing commercial property through a limited liability company (LLC) can offer meaningful benefits. Chief among them is limited personal liability, which helps protect your personal assets from property-level debts and claims. An LLC also makes it easier for multiple investors to set ownership percentages and management rights in an operating agreement, and it can simplify bookkeeping and privacy. There are trade-offs: forming and maintaining an LLC costs money (filings, registered agent, annual reports), lenders often require personal guarantees from the owners, and some require the LLC to be a single-purpose entity. Moving an existing property into a new LLC can trigger transfer or documentary taxes, due-on-sale clauses in loan documents, and, in some jurisdictions, property-tax reassessment. Tax treatment varies by state and by your circumstances, so coordinate with a CPA on structure (single-member vs. multi-member, etc.), allocations, and elections. Bottom line: LLCs are useful tools, but they aren’t one-size-fits-all.
5. What happens during closing?
Before you close, ask your lawyer to walk you through the steps and timeline so there are no surprises. Typical closings involve a title company or escrow agent (or, in some states, an attorney) coordinating documents and funds. Make sure you understand what you’re signing; the deed type, bill of sale for any personal property, assignment and assumption of leases and contracts, loan documents if you are financing, tax forms, and the final closing statement showing prorations and fees. Confirm how funds will be sent and beware of wire-fraud scams; always verify wire instructions by a known phone number before sending money. Your lawyer will also confirm that all closing conditions are satisfied: title issues cured, required estoppels and SNDAs delivered, lien payoffs arranged, and insurance bound. After closing, know when you’ll get possession and keys, how utilities will be transferred, what to record, when the title policy will issue, and how to calendar property-tax and reporting deadlines. If you’re buying through an LLC, your lawyer can help with any organizational resolutions and post-closing filings. Knowing this in advance helps you feel ready and confident from signature to keys.
Phocus Law advises clients in a wide variety of commercial real estate transactions. If we can ever be of assistance, please do not hesitate to reach out at Mick@PhocusCompanies.com or by phone at (602)457-2191.