Why Commercial Real Estate Deals Take So Long to Come Together

One of the biggest differences between residential and commercial real estate is how long it takes to actually put a deal together. In a typical residential transaction, a conditional period might only be five to ten business days. In commercial real estate, 45 to 90 days of due diligence is not unusual, and depending on the property and what is uncovered along the way, it can take considerably longer.

Why Residential Can Move So Quickly

For most residential purchases, the due diligence process is relatively straightforward. A buyer will typically arrange a home inspection, confirm financing, and make sure they can obtain satisfactory insurance.

A home inspection can generally be arranged within a few days. Insurance can often be confirmed relatively quickly, and if a buyer is already pre-approved and the property meets the lender’s requirements, financing can sometimes be finalized within a matter of days.

Assuming nothing unexpected comes up, a buyer can often become firm within a week or two of having an accepted offer.

Commercial real estate is a very different process.

Commercial Financing Takes Time

Financing alone can dictate the length of a commercial conditional period. Unlike a residential mortgage, where a lender is dealing with a relatively standardized property and loan, commercial lenders need to understand both the property and the business case behind the investment.

They may review leases, income and expenses, the borrower’s financial position, property condition, environmental information, an appraisal and other supporting documentation before approving the mortgage.

Even when everything is moving smoothly, a commercial mortgage approval can take several weeks. A six-week financing process is not unusual, which is one of the reasons we commonly see commercial transactions structured with conditional periods of 45 days or longer.

Environmental Due Diligence

Environmental investigation can add another layer of complexity. Depending on the property, its historical uses and the lender’s requirements, a buyer may need to complete a Phase I Environmental Site Assessment.

A Phase I ESA generally involves reviewing the history of the property and surrounding properties, records, historical uses and other information to identify potential environmental concerns. The important distinction is that a Phase I typically does not involve drilling or collecting soil samples.

If the Phase I identifies potential environmental concerns, a Phase II ESA may be recommended or required. This is where the process can become significantly more involved. A Phase II can include boreholes, soil sampling, groundwater testing and laboratory analysis to determine whether contamination is actually present.

These investigations can add weeks or even months to a transaction. If contamination is discovered, additional investigation, risk assessment or remediation may be necessary. Depending on the nature and extent of the contamination, remediation can become extremely expensive and potentially involve removing contaminated soil, treating affected areas or completing other environmental work.

At that point, what started as a relatively straightforward purchase can become a much more complicated negotiation.

Appraisals and Inspections Aren’t Simple Either

Commercial appraisals are also considerably different from residential appraisals. Commercial properties can be extremely unique, so determining value may involve analyzing comparable sales, rental rates, leases, operating expenses, capitalization rates and the income-producing ability of the property.

The same applies to inspections. Depending on the asset, a commercial building inspection may involve roofing, HVAC systems, electrical, plumbing, structural components, fire and life-safety systems and other major building components. These inspections are generally more involved and more expensive than a typical residential home inspection.

There can also be zoning reviews, title searches, surveys, lease reviews, financial statement reviews and legal due diligence happening at the same time.

The Deal Can Change Throughout Due Diligence

This is where commercial real estate becomes particularly interesting.

Residential real estate can certainly involve difficult negotiations, but there is often an emotional component to the purchase. Someone walks into a house, loves it and can picture themselves living there.

Commercial real estate is generally much more of a numbers game.

A buyer may initially make an offer based on the information available at the time. Then an inspection identifies a roof that needs replacement. An appraisal comes in differently than expected. An environmental report raises a concern. A lease contains a clause that wasn’t anticipated. Financing terms change the projected return.

Every new piece of information can change the economics of the transaction.

Throughout the due diligence period, part of our job is keeping both sides engaged while working through these issues. Sometimes that means renegotiating the purchase price, changing timelines, obtaining additional reports, requesting further information from the seller or finding another solution that allows the transaction to continue.

The buyer needs to remain comfortable that the numbers still make sense, while the seller needs to feel that the transaction still represents a reasonable outcome.

Why 45–90 Days Isn’t That Long in Commercial Real Estate

From the outside, a commercial property being conditional for two or three months can seem excessive. In reality, there can be an enormous amount happening behind the scenes.

Financing, environmental assessments, appraisals, inspections, zoning, leases, title and legal review can all have an impact on whether the buyer ultimately proceeds. One issue can lead to another investigation, which can extend the timeline even further.

That is why patience is such an important part of commercial real estate. Getting an offer accepted is really only the beginning. The challenge is working through everything that follows, keeping the buyer and seller at the table, and finding solutions when new information inevitably comes to light.

In residential real estate, an accepted offer can feel like you’re approaching the finish line. In commercial real estate, it’s often where the real work begins.