How to Read a Commercial Real Estate (CRE) Purchase & Sale Agreement: A Comprehensive Guide for Investors and Developers

Introduction

The Purchase & Sale Agreement (PSA) is frequently described as the "master contract" because it defines the entire commercial real estate acquisition. Unlike residential contracts, CRE PSAs are detailed, extensive, and highly negotiable due to the complexities of commercial properties. Understanding a PSA is vital to effective negotiation and risk management.

This guide complements other key resources in our "How to Read" series, covering Loan Documents, Pro Formas, and Offering Memorandums, each providing valuable context and insight into the real estate investment process.

What Is a CRE Purchase & Sale Agreement?

A Commercial Real Estate Purchase & Sale Agreement is a legal contract outlining the terms for buying and selling commercial property. Positioned between the Letter of Intent (LOI) and the final closing, the PSA is critical because all other documents—such as title reports, surveys, and loan agreements—refer back to it for guidance. It is your primary source of protection, setting clear expectations and responsibilities between buyer and seller.

Key Components of a PSA

1. Parties & Property Description

The PSA begins by clearly identifying the buyer and seller, their entity structures, and the specific property being sold, including legal descriptions and any included or excluded fixtures. Accuracy here is essential because it precisely defines the scope of the transaction.

2. Purchase Price & Earnest-Money Structure

This section outlines the purchase price, the amount and conditions of the earnest-money deposit, and the timing of when funds become non-refundable ("hard") versus refundable ("soft"). Understanding this structure affects your negotiating leverage and determines the potential cost if you choose to withdraw.

3. Due-Diligence / Feasibility Period

During this period, the buyer is allowed to inspect the property, assess its suitability, and secure financing. Carefully consider the length of this period, access rights, and contingencies to avoid unforeseen liabilities or financial losses.

4. Title & Survey Review

This portion of the agreement details the buyer's right to review and object to any title and survey issues. Understanding permissible exceptions and cure periods helps avoid hidden problems such as undisclosed liens, easements, or encroachments.

5. Representations & Warranties

Representations and warranties address what the seller confirms about the property's condition, legal compliance, tenant leases, and litigation status. Negotiating these terms, including their survival periods and caps on liability, is crucial for managing unknown risks.

6. Closing Conditions & Deliverables

Closing conditions and required deliverables, such as entity documentation, tenant estoppels, and lien releases, function as a checklist ensuring that all necessary items are in place before the transaction is finalized. Missing or incomplete deliverables can cause significant delays or legal issues.

7. Prorations & Closing Adjustments

This section describes how property-related expenses and income such as taxes, rent, utilities, and security deposits will be allocated at closing. Proper management of prorations ensures the net price reflects the property's true financial state on the closing day.

8. Casualty, Condemnation & Risk of Loss

Provisions for handling unexpected events, such as damage from natural disasters or governmental takings, should be clearly outlined, including dollar thresholds and rights to insurance proceeds. This helps mitigate financial and operational risk should something unforeseen occur.

9. Default & Remedies

This part defines the consequences if either party breaches the agreement. It is important to examine the fairness of these remedies, such as refunds, reimbursement of costs, liquidated damages, and the possibility of compelling performance of the contract through court action.

10. Assignment & 1031 Exchange Rights

Assignment rights and provisions for tax-deferred exchanges (1031 exchanges) provide essential flexibility. These rights impact your ability to restructure ownership entities or facilitate tax-efficient strategies.

11. Exhibits & Schedules

Attachments like rent rolls, service agreements, environmental reports, and deed forms contain critical details that significantly impact the transaction. Thorough review of these documents can reveal crucial risks or opportunities.

How to Analyze a PSA Effectively

Begin by thoroughly reviewing basic details—such as legal descriptions, entity names, and signatures—to ensure correctness. Clearly document and manage key dates and deadlines, such as deposit schedules, due diligence periods, financing approvals, and the final closing date.

Assess contingencies realistically, making sure the feasibility and financing terms can be met comfortably. Closely scrutinize representations and warranties, watching for overly restrictive qualifiers or short survival periods that might increase buyer risks.

Using spreadsheets or financial models, calculate prorations and closing adjustments to ascertain the property's net effective purchase price. Pay particular attention to casualty provisions, title objections, and indemnities, negotiating these terms to align risk fairly between both parties.

Common Mistakes & Red Flags

Earnest money becoming non-refundable before title and survey issues are resolved. This scenario can trap the buyer into a transaction despite unresolved significant issues, increasing financial risk and potentially resulting in disputes or loss of deposit funds.

Overly broad "As-Is, Where-Is" language shifting significant risk onto the buyer. Such terms eliminate or significantly reduce seller accountability for undisclosed problems, particularly with respect to environmental issues or legal compliance. This places heavy due diligence burdens on the buyer.

One-sided default remedies disproportionately favoring sellers. Agreements should offer balanced protection for both parties. If default remedies are heavily biased toward the seller, the buyer could face harsh consequences, such as forfeiture of deposits without adequate recourse.

Long cure periods jeopardizing financing arrangements or critical tax deadlines. Extended cure periods can lead to unexpected delays, affecting critical timing for securing financing or meeting deadlines for tax-advantaged transactions, potentially leading to additional costs or lost opportunities.

Tools to Help You Manage and Understand PSAs Faster

Document Management Platforms: Advanced platforms like Litera or DocuSign CLM streamline document review, collaboration, redlining, and negotiation processes, ensuring efficient and accurate communication.

AI-Powered Document Review Tools: Platforms like Deco Base can automatically extract essential information such as critical deadlines, property details, representations, warranties, and notice clauses, substantially reducing manual review time and minimizing errors.

Conclusion

Effectively understanding and negotiating the Purchase & Sale Agreement provides you with a competitive advantage, reduces potential surprises at closing, and significantly protects your investment capital.

Explore other articles in our "How to Read" series to further strengthen your commercial real estate expertise and ensure comprehensive due diligence.