Buying commercial real estate

Commercial real estate (CRE) encompasses properties used for business purposes, including office buildings, retail centers, industrial facilities, multifamily housing (5+ units), and special-purpose properties. Unlike residential real estate, CRE transactions are larger, more complex, and driven primarily by income potential rather than comparable home sales.

59 steps across 12 sections

1. Define Investment Goals and Criteria

  • Target return (cash-on-cash, IRR, cap rate)
  • Property type and size
  • Geographic market
  • Risk tolerance (core, value-add, opportunistic)
  • Timeline and hold period
  • Active management vs. passive (NNN)

2. Assemble Your Team

  • Commercial Real Estate Broker: Specializing in your target property type and market
  • Real Estate Attorney: Experienced in commercial transactions (not residential)
  • CPA/Tax Advisor: For entity structuring, depreciation strategy, 1031 exchange planning
  • Commercial Lender/Mortgage Broker: Pre-qualification and financing structuring
  • Property Inspector/Engineer: For Property Condition Assessment
  • Environmental Consultant: For Phase I/II ESA
  • Insurance Broker: Commercial property and liability coverage
  • Property Manager (if not self-managing)

3. Secure Financing Pre-Approval

  • Gather financial documentation (personal financial statement, tax returns, business financials)
  • Understand your purchasing power and lending terms
  • Get pre-qualified with 1-2 lenders
  • Determine down payment and reserve requirements

4. Identify and Evaluate Properties

  • Search through brokers, LoopNet, CoStar, Crexi, and off-market channels
  • Analyze listings against investment criteria
  • Perform preliminary financial analysis (back-of-napkin NOI and cap rate)
  • Tour top candidates and assess location, condition, and tenant quality

5. Submit Letter of Intent (LOI)

  • Non-binding offer outlining purchase price, earnest money, due diligence period, financing contingency, and closing timeline
  • Negotiate key business terms before incurring legal costs

6. Execute Purchase and Sale Agreement (PSA)

  • Attorney-drafted binding contract
  • Key provisions: purchase price, earnest money deposit (typically 1-3%), due diligence period (30-90 days), financing contingency, closing date, representations and warranties, default remedies
  • Deposit earnest money into escrow

7. Conduct Due Diligence (30-90 Days)

  • Execute the full due diligence checklist (see above)
  • Order Phase I ESA, PCA, ALTA survey, title search
  • Review all leases, financials, and contracts
  • Negotiate any post-inspection credits or repairs
  • Decision point: proceed, renegotiate, or terminate within contingency period

8. Finalize Financing

  • Complete loan application with chosen lender
  • Provide all required documentation
  • Lender orders appraisal (MAI appraiser for commercial)
  • Receive and review loan commitment letter
  • Satisfy all lender conditions (insurance, entity docs, environmental clearance)

9. Close the Transaction

  • Final walk-through of property
  • Review and sign closing documents (deed, mortgage, title insurance, tenant notices)
  • Wire funds (down payment + closing costs)
  • Record deed and mortgage
  • Receive keys and take possession

10. Post-Closing Transition

  • Notify tenants of ownership change and new payment instructions
  • Transfer utility accounts
  • Transition service contracts or rebid
  • Implement property management plan
  • Set up accounting/bookkeeping systems
  • File any required local business registrations

11. Office

  • Class A: Newer or fully renovated, amenity-rich buildings in prime locations; institutional-quality finishes, LEED-certified, supporting hybrid work and wellness trends.
  • Class B: Older but functional buildings in good locations; moderate rents; common value-add opportunity through renovation.
  • Class C: Aging buildings in less desirable areas; lowest rents; highest vacancy risk but potential for significant upside if repositioned.
  • Subtypes: Traditional office, medical office, dental office, co-working/flex space.
  • Trend (2025-2026): Distinct flight to Class A amenity-rich space; older Class B/C assets face elevated vacancies due to hybrid/remote work shifts.

12. Retail

  • Strip Centers: Small open-air centers with 3-15 tenants, often anchored by a service tenant (dry cleaner, restaurant).
  • Neighborhood Centers: Anchored by a grocery store or pharmacy; 30,000-150,000 sq ft.
  • Community/Power Centers: Big-box anchored (Target, Home Depot); 100,000-500,000 sq ft.
  • Regional Malls: Enclosed, department-store-anchored; 400,000+ sq ft (high risk category due to e-commerce disruption).
  • Single-Tenant Net Lease (STNL): Freestanding buildings leased to one tenant (e.g., Walgreens, Dollar General); popular for passive income.
  • Trend: Grocery-anchored centers remain the most resilient retail asset class.

Common Mistakes

  • Skipping or rushing due diligence:
  • Overestimating NOI:
  • Underestimating capital expenditures:
  • Ignoring lease quality:
  • Not understanding the cap rate:

Pro Tips

  • Start with the lease, not the building:
  • Negotiate the due diligence period aggressively:
  • Always get a Phase I ESA, no exceptions:
  • Use a 1031 exchange to defer capital gains:
  • Understand your DSCR before making offers:

Sources

Related Checklists