Commercial real estate in California operates under an almost opposite set of assumptions from residential. There is no Transfer Disclosure Statement, no Natural Hazard Disclosure Statement, and no statutory list of things a seller must tell you. The parties are presumed to be sophisticated, the contract is presumed to be negotiated, and the buyer’s protection is not a disclosure form — it is due diligence.
That shifts the entire burden. What a residential buyer receives automatically, a commercial buyer must go find, within a negotiated window, before a deposit becomes non-refundable. Miss an environmental condition, a zoning nonconformity, an unrecorded easement, or a below-market lease with three option terms, and the loss is the buyer’s.
The Holmes Law represents California buyers of commercial and investment property on letters of intent, purchase and sale agreements, due diligence, title and survey review, lease and estoppel analysis, entity structuring, and closing.
Letter of Intent
Most California commercial transactions begin with a letter of intent setting out price, deposit structure, the length of the due diligence period, the closing date, and how the property will be delivered. It is ordinarily non-binding as to the deal itself, with a few provisions expressly made binding — confidentiality, an exclusivity or no-shop period, allocation of costs, and governing law.
Say which provisions bind. An LOI that is silent invites an argument that a binding agreement was formed, or that a party breached an implied duty to negotiate in good faith. The exclusivity period is worth real money to a buyer about to spend tens of thousands of dollars on consultants, and it is the term most often left out.
The Purchase and Sale Agreement
California commercial transactions commonly use AIR CRE forms or a custom-drafted agreement. Either way, the terms that decide outcomes are:
- Deposit structure. An initial deposit refundable during due diligence, then an additional deposit that “goes hard” — non-refundable — at the end of the period. When the money goes hard, and what conditions still protect it, is the single most negotiated point in the contract.
- Due diligence period. Length, what it covers, whether the buyer may terminate for any reason or no reason, and what extension rights exist. Buyers should negotiate an extension mechanism tied to the seller’s delivery of documents, so a slow seller does not consume the buyer’s window.
- Seller deliverables. A dated list of what the seller must produce and when — leases and amendments, rent roll, operating statements, service contracts, permits, plans, warranties, environmental reports, tax bills, insurance loss runs. Tie the due diligence clock to delivery.
- Representations and warranties and, critically, their survival period and any cap or basket on claims. A representation that expires at closing is close to worthless.
- Closing conditions — estoppel certificates, title, financing where the buyer can negotiate it, entitlements, tenant deliveries.
- Casualty and condemnation — what happens if the building burns or is partially taken between contract and closing.
- Remedies. Note that California treats commercial liquidated damages differently from residential: under Civil Code section 1671(b), a liquidated damages provision in a non-consumer contract is presumed valid unless the party challenging it proves it was unreasonable under the circumstances existing when the contract was made — the reverse of the residential presumption. Buyers should also secure specific performance as a remedy where the property is unique, which commercially it usually is.
Title and Survey
Order the preliminary title report immediately, and order copies of every underlying document it lists. The preliminary report names the exceptions; it does not tell you what they say. Easements, CC&Rs, reciprocal easement agreements, parking agreements, and access rights are where commercial problems live, and reading them is not optional.
Order an ALTA/NSPS survey. It locates improvements, encroachments, easements, access, setbacks, parking counts, and flood zone designation on the ground, and it is what converts the recorded exceptions into a picture of the actual site. A survey routinely reveals that the building encroaches on a neighbor, or that the parking the pro forma depends on sits partly on someone else’s parcel.
Buy an extended ALTA owner’s policy with the endorsements the transaction warrants — zoning, access, contiguity, survey, encroachment, subdivision, and, where relevant, a comprehensive endorsement covering violations of restrictive covenants. On a leased investment property, consider endorsements addressing the leases themselves.
Environmental Due Diligence
Environmental liability under CERCLA and California law attaches to owners regardless of fault. A buyer who acquires a contaminated site can become responsible for cleanup costs that dwarf the purchase price.
The protection is a Phase I Environmental Site Assessment performed to the current ASTM standard by a qualified environmental professional. A conforming Phase I satisfies the “all appropriate inquiries” requirement, which is a prerequisite to the innocent landowner and bona fide prospective purchaser defenses. The Phase I must be current — it has a limited shelf life — and it must be performed for, or properly assigned to, the buyer, or the defenses may not be available.
Where the Phase I identifies a recognized environmental condition, a Phase II involving sampling follows, and it requires the seller’s access agreement — which should be negotiated into the purchase agreement rather than requested later.
Two California-specific points. The state maintains the Cortese List of hazardous waste and substances sites under Government Code section 65962.5, which should be checked. And under Health and Safety Code section 25359.7, an owner of nonresidential real property who knows of a release of a hazardous substance on or beneath the property must give written notice to the buyer before the sale — a statutory disclosure duty in an otherwise disclosure-light context, with real consequences for failing it.
Certain uses deserve extra scrutiny: former dry cleaners, gas stations, auto repair, machine shops, printing, agricultural properties, and anything with underground storage tanks or a history of them.
Zoning, Entitlements, and Physical Condition
Confirm the zoning independently — do not rely on the seller or the broker. Verify the permitted use, whether the current use is conforming or a legal nonconforming use, and what happens to a nonconforming use if the building is damaged or the use is discontinued. Check parking ratios, setbacks, height and floor area limits, signage rules, and whether any conditional use permit or variance runs with the land or is personal to the current operator.
Obtain the certificate of occupancy, permit history, and any open code enforcement or building department violations. Unpermitted improvements are common and become the buyer’s problem at the next permit application or sale.
Commission a property condition assessment covering structure, roof, envelope, mechanical, electrical, plumbing, fire and life safety, and accessibility, with a capital expenditure forecast. In California, add seismic review — an Alquist-Priolo earthquake fault zone determination, and for older concrete and soft-story buildings, a seismic evaluation, since a number of California cities have mandatory retrofit ordinances with deadlines that transfer to the new owner.
Accessibility is a distinct California risk. Federal ADA and California’s own access statutes expose owners of public accommodations to litigation, and California is among the most active jurisdictions in the country for access claims. A Certified Access Specialist (CASp) inspection is worth obtaining; California law provides specific procedural benefits to a defendant whose property has been CASp-inspected, and the inspection status must be disclosed in commercial leases under Civil Code section 55.53.
Where the plan requires new entitlements, factor in CEQA review, which can add substantial time and cost and is a common source of delay and litigation in California.
Leases: What You Are Really Buying
On an income property, the leases are the asset. Abstract every one: term, options to extend, rent and escalations, expense structure and CAM reconciliation methodology, base year, caps and exclusions, security deposits, tenant improvement obligations, exclusive use and co-tenancy provisions, assignment and subletting rights, early termination rights, purchase options and rights of first refusal, and any unrecorded side letters.
Then verify it with the tenants. Estoppel certificates confirm the lease terms, that no defaults exist, the amount of the deposit, and what landlord obligations remain outstanding — and they bind the tenant to those statements. Make delivery of estoppels from major tenants a closing condition, with a specified form attached to the purchase agreement. Where there is a lender, subordination, non-disturbance and attornment agreements will be required as well.
Review the rent roll against the actual leases and the bank deposits. Discrepancies among those three are common and are the fastest way to find a problem.
Entity Structure and California Tax Consequences
Commercial property is usually acquired through an entity, most often a California or Delaware LLC, for liability separation and financing reasons. Multiple investors need an operating agreement addressing capital calls, distributions, management authority, transfer restrictions, deadlock, and exit — the document that prevents a partition-style dispute five years in.
California tax consequences deserve attention before the structure is fixed:
- Proposition 13 reassessment. A purchase resets the base year value to the purchase price, and a supplemental tax bill follows. Budget for it — on commercial property the increase can be large.
- Change in ownership of a legal entity. Under Revenue and Taxation Code section 64, transfers of entity interests can trigger reassessment of the entity’s California real property — most notably where one person or entity obtains more than 50% control, or where cumulative transfers of original co-owner interests exceed 50%. Entity-level transfers are reportable to the State Board of Equalization, and the reporting deadlines carry penalties. Structuring an acquisition as a purchase of membership interests does not reliably avoid reassessment.
- Documentary transfer tax applies at recording, and California courts have held it can reach entity transfers that constitute a change in ownership even without a recorded deed. Several California cities also impose significant additional transfer taxes on higher-value commercial sales.
- 1031 exchange. Where the buyer is completing an exchange, the 45-day identification and 180-day closing deadlines are absolute, the qualified intermediary must be engaged before the relinquished property closes, and the purchase agreement should include cooperation language.
Financing and Closing
Commercial lenders impose their own diligence — appraisal, environmental, survey, seismic in California, and often a probable maximum loss study — and their timelines drive the closing date. Understand the recourse structure and the non-recourse carve-out guaranty, which is where a “non-recourse” loan becomes personal. Where an existing loan is being assumed, the lender’s consent process should start immediately.
Closing is handled through escrow. Confirm the deed and its vesting, the assignment of leases with an assumption of landlord obligations, transfer of security deposits, assignment of service contracts with the right to terminate those the buyer does not want, assignment of warranties and permits, tenant notification letters, prorations including CAM and tax reconciliations, and any required bulk sale compliance where business assets are included.
Frequently Asked Questions
Does a commercial seller in California have to disclose defects?
There is no Transfer Disclosure Statement for commercial property, and the burden sits with the buyer’s due diligence. A seller still cannot commit fraud or actively conceal, and Health and Safety Code section 25359.7 requires written notice of a known hazardous substance release on nonresidential property.
Is a Phase I environmental assessment really necessary?
For nearly every commercial acquisition, yes. Owner liability attaches without fault, and a conforming Phase I is what preserves the innocent landowner and bona fide prospective purchaser defenses. Lenders generally require one as well.
Can I avoid property tax reassessment by buying the LLC instead of the property?
Usually not. Revenue and Taxation Code section 64 treats acquiring more than 50% control of an entity, and certain cumulative transfers, as a change in ownership triggering reassessment, with reporting obligations and penalties. The structure should be analyzed in advance, not assumed.
What is an estoppel certificate and why does it matter?
A signed statement from a tenant confirming the lease terms, rent, deposit, and absence of defaults. It verifies what you are buying and binds the tenant to those statements. Estoppels from major tenants should be a closing condition.
When does my deposit become non-refundable?
Whenever the agreement says — typically at the end of the due diligence period. Unlike residential contracts, commercial liquidated damages are presumed valid under Civil Code section 1671(b), so the amount at risk should be negotiated deliberately.
Speak With a California Commercial Real Estate Attorney
The Holmes Law represents California buyers of commercial, industrial, retail, and multifamily property on letters of intent, purchase and sale agreements, due diligence coordination, title and survey review, lease abstraction and estoppels, entity formation and operating agreements, 1031 exchanges, and closing.
To discuss a commercial acquisition, contact the office. You may also want to review our pages on California real estate law, CA commercial sales, and CA residential purchase.