September 12, 2025
By:
Lee T. Poteracki
What’s Different About Buying Commercial Real Estate?
Robbins DiMonte regularly represents clients buying office, industrial, or apartment buildings for their business or investment purposes. Sometimes the target real estate is being sold together with the current owner’s business operating at that location, but more often the property is unoccupied. In either event, the legal principles applicable to the commercial real estate transaction are very different from those that apply to a residential real estate transaction.
1. Who prepares the contract?
Rather than fill in the blanks on a residential contract form, brokers typically help their commercial Buyer client to prepare a Letter of Intent (“LOI”) to advise the Seller of the proposed price, earnest money amount, and timing for closing of their proposal. The LOI is never binding at this point but sets the stage for arriving at a binding agreement. When the parties tentatively agree on the LOI terms, the Buyer’s attorney typically prepares a comprehensive draft contract containing the LOI terms for review by the Seller’s attorney. The contract is then finalized as a binding agreement.
2. Due Diligence Period.
As with residential deals, Buyers must typically arrange financing to close the purchase. However, in commercial deals, lenders need more than an appraisal and Buyer’s good credit history to convince the commercial lender to approve the loan. During the “Due Diligence” period, which can last from 45 days to several months, the Buyer will have the property thoroughly inspected to determine its physical condition and will have its attorney review applicable ordinances to be certain the property has the correct zoning for the Buyer’s intended use.
3. Environmental Due Diligence.
Most critically, during Due Diligence, the Buyer must hire an environmental engineer (approved by the lender) to check for potential environmental issues on the property or close enough to have possibly polluted the property that is being purchased. The buyer pays for this “Phase 1 Report. If the report is clean, the lender will provide the loan, having “clean” collateral for its mortgage. If potential issues (such as underground fuel tanks or asbestos-wrapped pipes) are identified, then the Seller must pay for a “Phase 2 Report” to remove the environmental condition or convince the Buyer and lender that the environmental issues do not affect the property.
4. Environmental Liability.
If the Buyer does not get this cleared up by the Seller prior to closing the purchase, the Buyer will be held responsible under federal environmental laws to pay for the clean-up. However, once the licensed environmental contractor certifies that the property is free from environmental pollution, the lender will be willing to accept the property as collateral and the Buyer will be deemed an “Innocent Purchaser” and the EPA’s Superfund will be available for the clean-up. Without a clean Phase-1 and, if needed, a completed Phase-2 remediation, Buyer will be on the hook for the clean-up cost.
This “Buyer Beware” environmental caution is the key legal difference between residential and commercial real estate transactions. Protection against this liability is not purchased with an insurance policy, but rather by strict compliance with Federal Environmental statutes. Whether you are investing in your first commercial property or expanding your portfolio, our attorneys are here to help you navigate each step with confidence.