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Commercial real estate acquisition (the transfer of rights to a commercial property between two parties) is key when dealing with commercial real estate. This type of real estate is a major investment asset class, making the buying, owning, managing, and selling of it leveraged to generate a return on investment. Commercial real estate investors, brokers, lenders, property managers, and so on need to have a thorough understanding of how the acquisition process works if they want to succeed in the field—here’s a basic rundown of the process.

Discovery

The process first starts when a property is discovered that fits your investment strategy. You’ll have to see if the property fits your investment criteria (property type, location, purchase price, etc.); hiring a commercial real estate (CRE) broker will help with this immensely. Market research will help you learn more about each property and qualify or disqualify properties through in-depth analysis. 

Evaluation

Once you’ve discovered a property you’re interested in, you need to evaluate it. This is done through underwriting, which is an in-depth financial analysis of the property that looks at occupancy, rental income, property taxes and utilities, and anything else that would be of interest. Why is this property being sold? How many people want this property? How relevant will this property be in the future? What are your expected investment returns? All of these answers should ultimately align with your investment strategy return expectations.

Making an Offer

After you decide to make an offer on the property, you should immediately go into the preliminary due diligence process. This will let you further leverage resources beyond what underwriting could do to let you evaluate the property quickly without significant hard costs. You must be well-informed on the property you’re putting an offer on so you can submit the best initial bid. This initial bid is critical since it reflects how interested you are in the property and the quality of your preliminary due diligence. 

Your initial bid will be submitted through a letter of intent (LOI), a non-binding agreement that documents your preliminary understandings between the buyer and the seller. Any points of concern should be addressed in this letter so they can be negotiated over before the final Purchase and Sale Agreement (PSA). It’s recommended that your legal counsel either drafts or reviews your LOI before submission so that your interests are protected from a legal standpoint.

Due Diligence

Unlike preliminary due diligence, this stage of the process is required and a formal part of the process. Any key concerns and relevant information about the property will be addressed in this stage, from the rights that come with the acquisition to development options. This stage also lets you identify any known and unknown issues related to the property, any restrictions that might affect its use, etc. 

Pre-Closing and Closing

After due diligence, you’ll enter the pre-closing stage of the acquisition process. The seller eliminates most buyers at this point in the process, and those not eliminated will be informed they are among the final candidates so they can make final impressions on the seller. Understand the seller’s motivations and desired outcomes when you make it to this stage and any other influential factors before making your final bid. A buyer interview will let the seller determine information about each buyer, and eventually, the winner of this process will submit a PSA contract to acknowledge all relevant information. 

Once closed, all parties should hire an escrow (third-party) agent to hold deposits and all other funds in a neutral account until any and all conditions are met. Once proof of signing power is ensured on both sides, the buyer and seller will complete the transaction and due diligence will come to a close.