Due Diligence in a Commercial Property Purchase: What to Review Before Your Deposit Goes Hard

By Hank FasthoffJuly 5, 2026

Due diligence is the buyer's only window to investigate a commercial property before the transaction becomes irrevocable. During the feasibility period (typically 30 to 60 days after execution of the purchase and sale agreement), the buyer can terminate the contract for any reason and recover the earnest money deposit. Once the feasibility period expires and the deposit "goes hard," the buyer's money is non-refundable, and the buyer is committed to closing or forfeiting the deposit.

Everything you need to learn about the property must be learned during that window. Title problems, environmental contamination, zoning violations, lease discrepancies, deferred maintenance, and structural deficiencies all need to surface before the deposit goes hard, because after that date, every issue you discover becomes a problem you've already paid to inherit.

Start with the Long-Lead Reports

Phase I Environmental Site Assessments and ALTA/NSPS surveys take three to four weeks to complete. Order both on day one of the feasibility period, because if you wait until week two, you'll receive the results with days left before your deposit goes hard and no time to evaluate, negotiate, or terminate.

A Phase I ESA evaluates the property's environmental history and current conditions to identify recognized environmental conditions (RECs) that suggest potential contamination. It involves a site inspection, historical records review, regulatory database search, and interviews with owners and occupants. A Phase I typically costs $3,000 to $6,000 depending on property size and complexity. If the Phase I identifies RECs, a Phase II assessment (soil sampling, groundwater testing) may be warranted, and Phase II testing takes additional weeks and can cost $10,000 to $50,000 or more. Environmental liability under CERCLA (the federal Superfund law) is strict, joint, and several, meaning the buyer becomes responsible for contamination regardless of who caused it. Skipping the Phase I eliminates the buyer's ability to assert the innocent landowner defense.

An ALTA/NSPS land title survey confirms property boundaries, locates improvements, identifies easements and encroachments, establishes setback lines, and determines flood zone status. Updated ALTA/NSPS standards took effect on February 23, 2026, replacing the 2021 standards for surveys commenced on or after that date. Ordering a survey that meets current standards ensures the deliverable satisfies lender and title company requirements. An ALTA survey typically costs $3,000 to $8,000 depending on property size, and the surveyor needs site access, which should be coordinated with the seller or property manager immediately after contract execution.

Title Commitment Review

Your attorney should order a title commitment from a title company within the first few days of the feasibility period. A title commitment is the title company's offer to issue a title insurance policy at closing, subject to the conditions and exceptions listed in the commitment.

Schedule A identifies the proposed insured (the buyer), the estate to be insured (fee simple, leasehold, or other interest), and the legal description of the property. Confirm that the legal description matches the survey and the property you're purchasing.

Schedule B-1 lists requirements that must be satisfied before the title company will issue the policy. These typically include payoff of existing liens, execution and recording of the deed, and payment of the title insurance premium. Confirm that every Schedule B-1 requirement is achievable before closing.

Schedule B-2 lists exceptions from coverage, meaning defects, liens, encumbrances, easements, and other items the title company won't insure against. Every item on Schedule B-2 is a risk the buyer assumes at closing. Review every exception against the survey, because an easement listed on Schedule B-2 should correspond to a located easement on the survey. If it doesn't, either the survey missed it or the exception is outdated, and both situations require investigation.

Common title exceptions include utility easements, drainage easements, deed restrictions, mineral reservations, and existing liens. Some exceptions can be removed through curative action (the seller pays off a lien, obtains a release, or provides an indemnity). Others are permanent (a utility easement serving the property can't be removed, but it can be evaluated for whether it affects the buyer's intended use).

Send a written title objection letter to the seller within the contractual deadline, identifying every exception you want removed, insured over, or cured before closing. If the seller can't cure an objection, decide whether a title insurance endorsement solves the risk or whether the problem is fundamental enough to terminate the contract.

Zoning and Land Use Verification

Confirm that the property's current use conforms to local zoning regulations. Contact the municipal planning department or request a zoning verification letter confirming the property's zoning classification, permitted uses, and any special conditions.

Properties operating under nonconforming use (grandfathered) status carry risk because that status can be lost if the property is significantly renovated, expanded beyond its current footprint, or vacated for an extended period (often six months to one year under local ordinances). A buyer who plans to redevelop or change the use of the property needs to verify not just current zoning compliance but whether the intended use is permitted.

Check for pending zoning applications, variances, or special use permits that could affect the property. Review any recorded restrictive covenants, development agreements, or conditions of zoning approval that impose obligations beyond the base zoning classification.

Lease Audit and Tenant Estoppels

For income-producing properties, the lease audit is where you verify whether the income the seller represented is the income the property produces. Don't rely on the seller's rent roll or broker-prepared lease abstracts. Read every executed lease and every amendment, extension, and side letter in full.

Look for tenant options that affect the property's value, including renewal options (which may lock in below-market rent for years), expansion options, termination options, rights of first refusal on adjacent space, and exclusive use provisions that restrict what you can lease to other tenants.

Compare each lease against the seller's rent roll. Verify the rent amount, the escalation schedule, the lease expiration date, the security deposit amount, and whether the tenant is current on rent. If the lease states $24 per square foot and the rent roll shows $26, that's a $2 per square foot discrepancy that directly affects NOI and therefore the property's value.

Require tenant estoppel certificates from every major tenant and from tenants representing at least 80 percent of occupied square footage. An estoppel is a signed statement from the tenant confirming the lease terms, rent amount, security deposit, commencement and expiration dates, and whether any landlord defaults or tenant disputes exist. Estoppels are the buyer's direct verification from the tenants themselves, and they prevent the seller from misrepresenting lease terms that the buyer can't verify from documents alone. If a major tenant refuses to sign an estoppel, treat it as a warning sign.

Property Condition Assessment

A property condition assessment (PCA) evaluates the building's physical condition, identifies immediate repair needs, and estimates capital expenditure requirements over the next five to 10 years. PCAs are conducted under ASTM E2018 standards and cover structural systems, roofing, mechanical/electrical/plumbing (MEP), building envelope, parking surfaces, ADA accessibility, and fire life safety systems.

Lenders typically require a PCA as a condition of financing, and they use the results to determine whether to escrow funds for immediate repairs or establish replacement reserves. Buyers should use the PCA results to adjust their capital expenditure underwriting and, where findings are material, to negotiate a price reduction, seller credit, or repair escrow.

Order a separate roof inspection if the PCA identifies deferred maintenance on the roof system, and request remaining warranty documentation from the seller. Roof replacement on a commercial building can cost $5 to $15 per square foot, and a 50,000-square-foot building with a roof approaching the end of its useful life represents a $250,000 to $750,000 capital exposure that should be priced into the acquisition.

Financial Verification

Verify the property's financial performance against actual records, not the seller's proforma. Request at least 24 to 36 months of actual operating statements (the trailing 12-month P&L is the minimum), property tax bills, utility bills, insurance policies and loss run reports, and vendor and service contracts.

Reconstruct net operating income (NOI) from actual historical data rather than accepting the seller's calculation. Compare actual expenses against the seller's proforma. Sellers commonly understate operating expenses by excluding one-time costs, deferring maintenance into future periods, or self-performing services (landscaping, property management) at below-market cost that the buyer will have to replace at market rates after closing.

Underwrite property taxes based on the purchase price, not the seller's historical tax bill. Taxing authorities in most Texas counties reassess property values upon sale, and the reassessed value will reflect the purchase price. A property that sold at a price higher than its current assessed value will see a tax increase, sometimes a substantial one, in the first reassessment year after closing.

What Happens When the Deposit Goes Hard

When the feasibility period expires, the buyer's earnest money deposit typically becomes non-refundable (subject to any surviving contingencies like financing or seller's inability to deliver marketable title). From that point, the buyer is committed to close or forfeit the deposit.

Some purchase agreements structure the deposit in two stages. A "soft" deposit of one to two percent of the purchase price is refundable during due diligence. At the end of the feasibility period, the soft deposit goes hard and a second "hard" deposit of three to five percent may be required. On a $5 million acquisition, the hard money exposure can reach $250,000 to $350,000.

Don't let your deposit go hard with unresolved issues. If the Phase I hasn't arrived, the survey hasn't been reviewed, or the lease audit isn't complete, request an extension of the feasibility period before the deadline passes. An extension costs a negotiation with the seller (and sometimes an additional deposit). Missing the deadline costs the ability to terminate.

Using Findings to Renegotiate

Due diligence findings are negotiating tools. A PCA that identifies $200,000 in deferred maintenance, a Phase I that identifies a recognized environmental condition, or a lease audit that reveals below-market rents on renewal options all justify requesting a price reduction, seller credit at closing, repair escrow, or remediation before closing.

Present renegotiation requests in writing with specific findings and specific dollar amounts. "We found some issues with the roof" is a conversation starter. "The PCA identified $180,000 in immediate roof repairs and recommends full replacement within three years at an estimated cost of $400,000; we're requesting a $300,000 price reduction" is a negotiation.

If the seller won't address material findings, you still have the option to terminate during the feasibility period. That optionality is the entire point of due diligence, and it's worth more than any single finding. Use the period fully, order reports early, review everything before your money goes hard, and make your decision with complete information rather than hopeful assumptions.