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Commercial Real Estate Purchase Agreement

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A commercial real estate purchase agreement allows a buyer and seller to make a mutually benefiting contract for the purchase of a commercial property. For traditional purchases where the buyer is paying cash or needs financing, a window of 30 to 180 days can be requested for inspections and general contingencies.

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Table of Contents

What is a Commerical Purchase Agreement?

A commercial purchase agreement allows for a seller to make a deal with an eligible buyer to transfer ownership of their real estate in exchange for cash or other trade. The buyer will commonly be required to deposit earnest money, known as “consideration”, in order for the contract to be valid. The earnest money is usually between 2% to 5% of the purchase price and is refundable only if there are problems found with the property during an inspection or while performing other due diligence.

Types of Commercial Property

  • Apartments (more than 4 units)
  • Hotel
  • Industrial
  • Office
  • Land
  • Retail (shop, restaurant, etc.)

How to Buy Commercial Property

As the buyer, the art of purchasing commercial property is about finding the investment that suits your needs. The purchase price is usually a reflection of the current market conditions and the revenue it’s generating if there are tenants on the property.

Step 1 – Requirements for Buyer

It is imperative that the buyer checks their personal credit, and if an entity is purchasing, the credit profile of the business. This will determine initially if the buyer is confident they should be able to get financing from a traditional lender.

For traditional transactions, the requirements are:

  • Good credit (680+); and
  • 20% to 25% of the purchase price as the downpayment.

Check Your Credit (free)

  • Your Credit Card – Most credit card companies offer their clients to view their credit report for free.
  • CreditKarma – Best website to check someone’s personal credit score.
  • Dun & Bradstreet – Best website to check a business’s credit score (1 per email).

Step 2 – Finding Property Listed for Sale

No matter if the buyer is looking with a real estate broker or without, the seller traditionally pays the brokerage fee. Therefore, it’s in the best interest of the buyer to hire an agent that has experience in the industry and will have a fiduciary duty to act in the buyer’s best interest.

Use the following websites to find properties for sale:

Step 3 – Getting Pre-Approved for Financing

Getting pre-approved for financing is required before most sellers will begin negotiations for the purchase of a property. Depending on the seller, a pre-qualification letter or pre-approval letter will suffice.

Pre-Qualification Letter

Non-binding letter from a financial institution stating the buyer’s overall creditworthiness. The letter will give a financial overview including income, investments, debts, and any other assets or liabilities. This is a quick snapshot of the owner’s financial capability and not a letter certifying a loan.

Pre-Approval Letter

Binding letter from a financial institution that states the credibility of the buyer by mentioning the maximum approved loan amount, interest rate, and downpayment percentage. There is often an extensive overview of the individual’s and/or business’s credit which may involve other records of the buyer such as tax statements, verification of income, investment certificates, and any other financial authentication.

Step 4 – Negotiating with the Seller

When the buyer finds a property that matches their business or investment strategy, it’s time to begin negotiations with the owner. It’s best to approach the owner at a price that matches the current market conditions while at the same time not being an insultingly low offer.

Earnest Money Deposit

An earnest money deposit is commonly is in the form of a check that is attached to a purchase agreement that symbolizes the buyer’s seriousness in purchasing the property. The earnest money will commonly be equal to 1% to 5% of the purchase price and is only refundable depending on any contingencies in the agreement.

Adding Contingencies

A contingency is simply saying “this contract is only void if..” which usually is contingent on the buyer getting financing, that the property is in good condition, and any other due diligence by the buyer. If the property does not complete due to a contingency, the agreement is terminated and the earnest money is returned to the buyer.

  • Financing Contingency – Simple clause in the agreement that states if the buyer, for any reason, is not able to get financing that the purchase agreement is void.
  • Inspection Contingency – The agreement remains valid barring any new liabilities found in the structure of the property such as the roof, foundation, electrical, plumbing, or any other repairs needed.
  • Environmental Contingency – More common for retail properties, soil and environmental testing will need to be completed (known as a “Phase 1 Environmental Assessment”).
  • Zoning Contingency – If the buyer needs permitting before purchasing the property. For example, the buyer needs to get approval to put a restaurant on the property before it can purchase.

The buyer may enter any type of contingency to accommodate their needs and with the consent of the seller.

  • Environmental Contingency – More common for retail properties, soil and environmental testing will need to be completed (known as a “Phase 1 Environmental Assessment”).

Step 5 – The Closing

The closing is when the parties meet and the financial transaction is completed. This is commonly done at a lawyer’s office or title company that handles the required documents and verifies the funds have been sent and received while administering the new deed. If there are any real estate agents, they will be owed their commission as written in their listing agreement.

After the closing, the seller will have been paid-in-full, with the buyer receiving the title that will be filed by the buyer or handed off to their attorney to be filed with the Registry of Deeds.

  • Environmental Contingency – More common for retail properties, soil and environmental testing will need to be completed (known as a “Phase 1 Environmental Assessment”).

Step 6 – Filing the Deed

If the property is in a registered county, there should be a recorder or registry of deeds office where all the local property records are located. If you choose to file the deed there may be a transfer or sales tax (should have been administered during the closing) along with the buyer being required to sign the deed in the presence of a notary. After the deed has been filed and accepted the property is in the name of the buyer.

What is a 1031 Exchange?

A 1031 exchange specifically refers to the Internal Revenue Code (IRC) Section 1031 that allows an owner of real estate to sell their property and not pay any tax if they purchase a “like-kind” property after the closing.

What does “Like-Kind” mean?

According to IRC 1.1031(a)-1(b) “like-kind” is more of the “nature” and “character” of the property than its grade or quality. For example, if the property sold is a 4-unit apartment building then most likely under a 1031 exchange the seller will be required to buy residential housing. The two (2) properties must have generic similarities.

Required Time Periods (After the Closing Date)

  • 45 Days – The seller must identify the property they want to purchase.
  • 180 Days – The seller must have completed the purchase of the property.

IRS Definition

26 CFR § 1.1031(a)-1

Section 1031(a)(1) provides an exception from the general rule requiring the recognition of gain or loss upon the sale or exchange of property. Under section 1031(a)(1), no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment. Under section 1031(a)(1), property held for productive use in a trade or business may be exchanged for property held for investment. Similarly, under section 1031(a)(1), property held for investment may be exchanged for property held for productive use in a trade or business.

Samples

Use the samples below that are modified agreements from online resources such as State real estate commissions and agency websites.

Sample 1

Download: Adobe PDF

Sample 2

Download: Adobe PDF

Sample 3

Download: Adobe PDF

How to Write

Download: Adobe PDF, Microsoft Word (.docx), Open Document Text (.odt)

Section I. The Parties

(1) Agreement Date. This will be a common reference point defining when both Parties formally agree to proceed with the commercial real estate purchase.

(2) Seller. The full name and business address of the Party (Person or Entity) selling the commercial real estate

(3) Buyer. The full name of the Person or Business Entity intent on purchasing the concerned real estate.

Section II. Legal Description

(4)  Classification. A complete description of the real estate being sold will require that it is categorized properly. Select the checkbox that best describes the real estate to be sold. Make sure to supply any additional information when appropriate.

(5) Street Address. Documentation of the physical location for the commercial real estate must be included.

(6) Tax Parcel Information. The commercial real estate tax parcel information can be found by reviewing its property deed or, if unavailable, from the County Recorder Office where the concerned real estate is located.

(7) Other Description. 

Section III. Personal Property

(8)  Personal Property. An inventory of any of the Seller’s personal property (i.e. a prepaid service subscription or advertising displays) that will be included with the purchase of the commercial real estate will solidify what the Buyer will receive in exchange for payment.

Section IV. Purchase Price

(9) Purchase Price.  The exact price of the commercial real estate will open this discussion. Document this amount, then continue to choose one of the three choices that follow to define how the Buyer will meet the purchase price required for the concerned property.

(10) All Cash Offer. Mark this checkbox only if the Buyer is making an offer entirely independent of any financing. The calendar date and time when proof that the Buyer has the funds must be received by the Seller should be defined.

(11) Bank Financing. Only select this checkbox if the Buyer has obtained financing from a bank or financial institution. The due date for the Seller’s receipt of the proof that the Buyer has access to such funds or credit should be recorded. Additionally, the number of days past the due date that entitles the Seller to cancel this agreement in the face of the Buyer’s failure to show proof should be defined.

(12) Seller Financing. Indicate if the Buyer has obtained financing for this purchase from the commercial real estate’s Seller. Several additional pieces of information concerning the Seller’s expectations should be delivered, specifically, the loan amount, down payment, yearly interest rate, number of months or years the Seller allows to satisfy the loan amount. Additionally, the deadlines for the Seller’s receipt of the Buyer’s proof of ability as well as the Seller’s approval date of such documents must be documented.

Section V. Earnest Money Deposit

(13) Earnest Money Deposit. The amount of money expected by the Seller to prove the Buyer’s intention of completing this sale.

(14) Earnest Money Deadline.

(15) Escrow Decision. Indicate if the earnest money will be held in escrow.

(16) Escrow Agent. The Entity that shall hold the earnest money until the sale is complete or has been definitively terminated.

Section VI. Inspection Period

(17) Inspection Result Decision. The deadline for the Buyer’s decision to proceed with this purchase based on the inspection results of the commercial real estate property should be documented. 

Section VII. Seller’s Disclosure

(18) Disclosure Deadline. 

Section VIII. Title

(19) Title. Record the type of deed transferring ownership of the title (i.e. general warranty, special warranty, etc.).

(20) Title Insurance. Indicate if the insurance expense(s) for the title falls under the exclusive responsibility of the Seller, the Buyer, or if both will share this obligation.

(21) Termination Deadline. The deadline imposed upon the Buyer to deliver a decision regarding this purchase after reviewing the title commitment should be solidified as a number of calendar days from the Buyer’s formal receipt date of the title commitment.

Section IX. Survey

(22) Survey. If a new survey is requested, then document whether only the Buyer or only the Seller will pay for it or if both will share the responsibility of the survey costs.

Section X. Cure Period

(23)  Deadline To Effect A Cure 

Section XI. Closing

(24) Closing Date. 

(25) Closing Costs. Define the Party who shall pay all costs needed for closing or completing this purchase agreement.

Section XII. Sale Of Buyer’s Property

(26) Sale Contingency. Report if the Buyer’s ability to purchase the commercial real estate is dependent upon his or her ability to sell his or her property.  If this is the case, then the address of the Buyer’s real estate must be presented. 

Section XIII. Assignability

(27) Assignable Business Rights. Indicate if any business rights will be transferred as a result of this document. If so, then the deadline when the Seller can expect the assignability agreement delivered should be solidified.

Section XIV Notices

(28) Notices. Record the specific manner by which the Buyer and Seller intend to send and receive legal notices concerning this agreement.

(29) Buyer Notices. If the Buyer requires notices to be sent to an address other than the one discussed in the first section of this agreement, then make sure this destination is properly documented.

(30) Seller Notices. The Seller should indicate if he or she wishes notices sent to a specific address or destination other than the mailing address defined in the first section.

Section XXX. Disclosures

(31) Disclosures. Include a list of all legally required documents (i.e. evaluation, descriptions, status, etc.) that will be attached by the time of signing for the review of both Parties.

Section XXXIII. Governing Law

(32) Jurisdiction. Identify the State enforcing the conditions and terms of this agreement as well as the behavior of the Parties involved.

Section XXXIV. Offer Expiration

(33) Execution Deadline. Determine then report this offer’s final date of signing. If this date passes and both Parties have not entered this agreement by signature, then this document and its contents will become void and subject to its own terms of revocation.

Section XXXVI.  Additional Terms And Conditions

(34) Additional Provisions. Document all conditions that will be applied to this document but have not been discussed so far. You may attach a document with this information if more room is required but make sure to title it then cite it accordingly.

Seller’s Signature

(35) Seller’s Signature.  The Commercial Real Estate Seller must sign this agreement to enter it. Two signature areas are presented for the Seller in case more than one Seller is participating in this agreement. If not, then only the first signature area should be tended to by the Seller.

(36) Seller’s Date Of Signature.

(37) Seller’s Printed Name.

Buyer’s Signature

(38) Buyer’s Signature. Every Buyer intent on purchasing this property and participating in this agreement must produce his or her signature. This will have a binding effect on the Buyer compelling him or her to act according to the contents of this paperwork.

(39) Buyer’s Date Of Signature.

(40) Buyer’s Printed Name.

Agent’s Signature

(41) Agent’s Signature. Every Agent responsible for organizing, or effecting this agreement as a participant must complete the signature area provided to be included.

(42) Agent’s Date Of Signature.

(43) Agent’s Printed Name. 


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