This document outlines the initial steps for successfully closing a commercial real estate purchase and sale transaction. It begins with selecting a broker and negotiating a brokerage agreement. The parties then determine objectives, draft a letter of intent, and conduct due diligence on the property. Due diligence involves requesting and reviewing documents related to title, zoning, leases, financials, and property condition. Finally, the parties negotiate and sign a purchase and sale agreement to finalize the transaction.

1. Purchasing and Selling Commercial Real Estate Checklist: Initial Steps
Resource type: Checklist Status: Maintained Jurisdiction: USA
This Checklist outlines important initial steps to successfully close a
commercial real estate purchase and sale transaction. This
Checklist starts at the beginning of the workflow process from the
initial stages of engaging a broker, and covers all the initial steps
through contract negotiation.
Practical Law Real Estate
Most commercial real estate purchase and sale transactions follow
the same workflow, however, every transaction has its own
nuances, and the driving forces of each transaction vary depending
on many factors, including:
Industry-specific considerations.
State, county and local laws.
Local customs.
Market trends, including lending market trends.
The purchaser's intended use of the property.
Whether the transaction involves one site or multiple sites.
The timing of the closing.
This Checklist does not address relevant state and local law. State
and local laws may require additional matters to be considered by
the purchaser and seller, and local counsel should be retained
where appropriate, but the information contained in this resource is
useful and relevant to both purchasers and sellers of commercial
real estate in every state. For state-specific guidance on real estate
ownership, see Real Estate Ownership: State Q&A Tool.
For further information relating to owning commercial real estate
property, see Practice Note, Multistate Real Estate Ownership:
Overview.
For a list of all resources relating to the purchase and sale of
commercial real estate, see Purchasing and Selling Commercial
Real Estate Toolkit.

2. General Concerns: Seller and Purchaser Objectives
Purchaser Objectives
Identify all the property included in the transaction, including:
land;
buildings;
personal property;
equipment; and
property agreements (for example, leases, contracts, permits and
licenses).
Determine necessary due diligence and arrange for performance of
due diligence.
Identify and arrange for necessary third-party approvals, such as:
zoning;
subdivision;
buildings department; or
other governmental authorities.
Negotiate the purchase and sale agreement to account for adequate
contingencies and address closing conditions.
Restrict the seller from modifying the property or taking action
regarding the property that would negatively affect the property, or
the purchaser's interest in the property, after the purchase and sale
agreement is executed.
Negotiate adequate remedies if the seller defaults under the
purchase and sale agreement.
Seller Objectives
Ensure that the property being sold does not include items of
personal or other property the seller wants to retain.
Caveat emptor; allocate risk to the purchaser and avoid giving
extensive representations and warranties.
Retain flexibility to operate the property as it wishes during the
contract period.

3. Minimize purchase contingencies and conditions to closing.
Limit post-closing liability.
Negotiate adequate remedies if the purchaser defaults under the
purchase and sale agreement.
Workflow: Initial Steps
The Real Estate Brokerage Agreement
Commercial real estate purchase and sale transactions typically arise
through one or more party's use of a real estate broker. Ensure that
involved real estate brokers possess critical information about:
The overall market in a given area.
Trends in the market.
Available properties.
Pricing.
Understand that the role of the broker is to:
Provide market information and comparable purchase and sale
information.
Introduce sellers to possible third-party purchasers.
Show purchasers available properties that fit within a list of provided
criteria.
Assist in negotiating the letter of intent and the purchase and sale
agreement.
Troubleshoot issues throughout the course of the entire transaction.
Select a Broker
Both purchasers and sellers should select a real estate broker:
Well-versed in the type of property and locale they are interested in
purchasing or selling.
With a proven history of completed transactions.
Licensed in the state and local jurisdiction where the property is located.
Determine the Type of Brokerage Relationship
Non-exclusive. In this scenario, the seller can use of any number of
brokers, but is only obligated to pay a commission to the broker who

4. finds the purchaser who ultimately closes on the property.
Exclusive agency. In this scenario, the seller agrees to exclusivity
during the term of the agreement, but the broker does not earn a
commission unless it finds a purchaser acceptable to the seller, and
the purchaser ultimately closes on the property. If the seller finds
the purchaser on its own, the broker would not earn a commission.
Exclusive right to sell. In this scenario, the broker would earn a
commission regardless of whether the broker directly procured the
purchaser.
Negotiate the Brokerage Agreement
Most brokerage agreements are prepared by the brokerage agency
and are very favorable to the broker.
Both purchasers and sellers should carefully negotiate the
brokerage agreement to ensure it includes the following provisions:
A detailed description of the property, including any personal or
other property excluded from the sale.
The term of the agreement, including any exclusivity period.
A detailed description of the broker's duties and responsibilities.
A key broker or key individual clause, if applicable.
The broker's compensation and when it is earned (only after the
closing occurs).
The broker's rights if the property is sold to a prospect after the term
of the brokerage agreement has expired.
The terms and conditions governing whether the broker may enter
into a co-brokerage agreement.
Representations and warranties, including that the broker is
licensed in the state where the property is located.
Reporting requirements.
Advertising restrictions and requirements.
Defaults by either party.
Each party's remedies if the other defaults in its obligations under
the agreement.
Dual representation.
Confidentiality.

5. Determine Who Pays the Broker
Generally governed by state and local custom.
The purchaser should ensure it receives a receipt marked "paid"
from the broker at closing to avoid any ambiguity if an issue arises
post-closing (regardless of which party pays the broker).
For a form of a brokerage agreement with helpful drafting notes
and explanations, see Standard Document, Exclusive Right to Sell
Listing Agreement (Commercial Sale).
The Letter of Intent
A letter of intent (LOI) or term sheet is a preliminary, non-binding
agreement memorializing the specific transaction terms. For more
information relating to drafting and negotiating LOIs, see Practice
Note, Purchase and Sale Agreements (Commercial Real Estate):
Key Provisions: Term Sheets or Letters of Intent and Standard
Document, Letter of Intent (Commercial Real Estate Purchase and
Sale).
At this stage, the parties should:
Determine if they will use:
an executed LOI; or
a basic term sheet.
Negotiate whether the instrument is:
binding; or
non-binding.
Negotiate material terms included in the LOI, such as:
a description of all property involved in the transaction;
the purchase price;
the earnest money deposit;
timing considerations and closing conditions;
pro-rations and apportionments;
whether the seller may continue to market the property before a
purchase and sale agreement is executed; and
a confidentiality clause.

6. Due Diligence
Purchaser's Action Items
Access due diligence materials. Before conducting its due
diligence review, the purchaser should:
ensure that it has access to all information relating to the property
and the seller;
submit a comprehensive due diligence request list to the seller to
ensure that the seller delivers all documents and information in its
possession or under its control requested by the purchaser (see
Standard Document, Due Diligence Request List (Commercial
Real Estate));
require the seller to instruct its management company to deliver
any documents in the management company's possession
requested by the purchaser;
coordinate property visits with the seller; and
arrange a time to review hard copies of the seller's property files at
the seller's or management company's office if the documents are
too numerous to be copied or uploaded to an electronic data room.
Determine the type of work product the purchaser's attorney
should produce after reviewing due diligence materials. The
purchaser and its counsel should decide what type of work product
the purchaser requires. If the purchaser has a long due diligence
period, then its counsel typically produces formal summaries and
abstracts of each pertinent document and report it reviews. If the
purchaser only has a limited time frame to review due diligence
materials, however, it may instruct its counsel to send e-mail
correspondence summarizing its findings on a rolling basis as each
set of documents is reviewed. Due diligence work product will
typically be in the form of any or a combination of the following:
a summary or abstract of each important agreement;
a memo summarizing the diligence review; or
a chart listing all the diligence materials reviewed.

7. Determine the scope of the due diligence review, including the party
responsible for review. A purchaser should determine the scope of
its due diligence review depending on:
the timing of the due diligence period;
budgetary limitations; and
the type of property involved in the transaction.
(See Due Diligence List.)
Conduct due diligence. The purchaser's due diligence review occurs
either:
before submitting an offer to purchase the real estate and during the
negotiation of the purchase and sale agreement; or
after the parties sign the purchase and sale agreement during a
negotiated due diligence period.
Consider deal structure and begin necessary entity formation. The
purchaser should begin to consider how it intends to take fee title to
the property and how it will structure the deal. Often purchasers
execute purchase and sale agreements using a contract vendee
entity because they do not want to form unnecessary entities which
may not ultimately be used. A purchaser may use the due diligence
period to consult with its tax counsel, employee benefits counsel
and corporate counsel to determine in what type of entity the
purchaser should take title, and the benefits and drawbacks of each
type of corporate structuring. If the purchaser is obtaining financing,
a lender may also require a certain type of corporate structure. The
most common corporate structures in commercial real estate
transactions are:
limited liability companies;
limited partnerships;
tenancies-in-common; and
corporations.
(See Practice Note, Real Estate Investment Vehicles: Overview and
Choosing an Entity Comparison Chart.)
Seller's Action Items
Notify the property management company of the impending sale.

8. Organize all property related information, excluding or redacting
confidential attorney-client correspondence or work product.
Instruct the property management company to do the same.
In a competitive bidding situation, set up an electronic data room and
provide access information to all interested bidders.
Timely respond to additional requests for diligence materials from the
purchaser or parties bidding on the property.
Due Diligence List
The purchaser should send the seller a complete list of all items the
purchaser requires as part of its due diligence review as soon as possible
after the purchaser and seller agree to enter into the transaction (see
Standard Document, Due Diligence Request List (Commercial Real
Estate)).
The type of due diligence materials the purchaser reviews is typically
governed by the type of property involved in the transaction. The
purchaser should request any of the following materials:
Document due diligence. The purchaser's attorney typically reviews these
items, which may include:
joint venture agreements;
corporate entity documents (including formation documents, good
standing certificates and consents);
loan documents (including any guaranties);
third-party property agreements (including property management,
brokerage, leasing, development and asset management agreements);
leases;
occupancy agreements;
tenant estoppels;
licenses; and
service contracts.
Financial information. Both the purchaser and the purchaser's counsel
typically review these items, which may include:
appraisals;

9. financial statements (relating to the property, the seller, and any
credit-entity guaranteeing the seller's performance under the
purchase and sale agreement);
budgets;
tax bills;
tax returns; and
assessment notices.
Title and survey. The purchaser's attorney typically reviews these
items, which may include:
title search or title commitment;
underlying title documents; and
most recent survey prepared for the seller.
Zoning, land use and compliance with laws information. The
purchaser may retain special land use counsel or the purchaser's
real estate counsel may review these items.
Permits and licenses. The purchaser's counsel typically reviews
these items, including:
certificates of occupancy;
building permits; and
liquor licenses.
Physical due diligence. The purchaser's counsel, the purchaser and
any special counsel retained by the purchaser (such as
environmental counsel or consultants) review these items, which
may include:
complete property inspection report;
environmental reports; and
code compliance reports.
For further discussion and explanation relating to the due diligence
review process, see Practice Notes, Purchaser Due Diligence in
Commercial Real Estate Acquisitions and Purchase and Sale
Agreements (Commercial Real Estate): Key Provisions: Due
Diligence Process and Contingencies.

10. The Purchase and Sale Agreement
The seller should prepare the first draft of the purchase and sale
agreement, including provisions pertaining to:
basic terms of the transaction;
pre-closing items (such as pre-closing conditions and covenants,
due diligence, and closing deliveries);
post-closing items (such as escrows, holdbacks and post-closing
adjustments); and
allocation of risk (which includes representations and warranties
and risk of loss).
Both the purchaser and the seller should consider other items, such
as:
retaining local counsel to review the purchase and sale agreement
for enforceability in the local jurisdiction;
checking all schedules attached to the purchase and sale
agreement to confirm accuracy;
attaching forms of all closing documents as exhibits to the purchase
and sale agreement;
establishing an escrow account with the escrow agent;
delivering a W-9 tax form to the escrow agent;
setting the closing date (for example, purchasers should consider
the date its loan commitment expires and sellers should consider
the payment dates and maturity date of any outstanding loan
financing);
determining whether a mortgage assignment or mortgage
assumption is appropriate; and
determining whether a 1031 exchange is available.
For additional information relating to drafting and negotiating
purchase and sale agreements, see:
Practice Note, Purchase and Sale Agreements (Commercial Real
Estate): Key Provisions.
Practice Note, Representations and Warranties in Commercial Real
Estate Purchase and Sale Agreements.

11. Standard Document, Purchase and Sale Agreement (Commercial
Real Estate) (Pro-Seller Long Form).
Standard Document, Purchase and Sale Agreement (Commercial
Real Estate) (Pro-purchaser Long Form).
Standard Clauses, Common Seller Representations and Warranties
in a Commercial Real Estate Purchase Agreement (Pro-purchaser).
Purchasing and Selling Commercial Real Estate Toolkit.