What Is a PSA In Commercial Real Estate?

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May 6, 2022

Blueprints with Purchase and Sale Agreement

All commercial real estate transactions involve a lot of paperwork, and investors need to have a good knowledge of what these documents are and their functions. One of such documents is the purchase and sale agreement (PSA). What is a PSA in commercial real estate?

What Is a PSA In Commercial Real Estate?

A purchase and sale agreement (PSA) is the most important document in any commercial real estate transaction. It is a legally-binding document that specifies the terms of the transaction, as well as requirements to be met by both parties. The process of drafting a PSA involves a series of negotiations and revisions before a final document is accepted. 

A PSA is usually drafted up after a letter of intent (LOI) has been signed and both seller and buyer have agreed on the basic terms of the sale such as price. In some cases, however, both parties might choose to waive an LOI and proceed straight to negotiating the terms of the PSA. 

Clients shaking hands with realtor after closing a deal

Basic Aspects of a Purchase and Sales Agreement in Commercial Real Estate

Recitals 

The recitals usually come right after the effective date of the agreement, and the parties involved -the seller, buyer, and escrow agent- have been identified. Recitals usually begin with the word “whereas” and serve as an introduction of sorts. However, they are generally not considered to be part of the contract’s operative sections. 

Sales of Property

This section includes a description of the property to be sold, usually of three types -real, personal, and other. Real property includes the land and improvements. Personal properties include structures and facilities on the land. Other properties include rights, licenses, warranties, etc. 

Also included in this section is a purchase and sale statement, the purchase price, and the deposit and escrow details.  

Title and Survey

This section covers all the requirements that surround the buyer obtaining a title report as well as a survey of the property. The contract also states what party finances the survey, how long the buyer has to submit an objection notice, and how long the seller has to cure them.

Finally, provisions will be made for the buyer to terminate the transaction if the objections made are not cured by the seller in due time.

Blueprints with Purchase and Sale Agreement

Inspections and Due Diligence 

Here, the right of the buyer to carry out inspections and the rules to be followed during these inspections will be stated. It also covers the consequences the buyer would face if any of the rules are broken. The duration of the due diligence period is also stated, alongside other provisions regarding various forms of due diligence.

Representations, Warranties, and Covenants

Representations and warranties are statements that serve to declare the truthfulness of facts laid down by both parties about themselves and about the property to be sold or bought. Examples of some common representations and warranties are:

  • That seller/buyer has the legal authority to sign the contract 
  • There are no violations regarding land use
  • The documents provided to the seller by the buyer are correct

The requirements for warranties might also vary from state to state. For instance, in Ohio all sellers from all counties, including the Cincinnati area, are mandated by the law to fully disclose all building defects that they are aware of before the closing date. Northern Kentucky has the same requirements. This might not be the case in some other states. 

Closing 

Important details about the closing such as where and when it will take place, and by whom it shall be supervised -usually the escrow agent are also covered. In most cases, closing dates are not flexible, and the buyer has the right to end the contract if the closing does not hold as planned.

Documents to be provided at the closing include:

  • Transfer deed
  • Assignment and assumption of leases
  • Bill of sale
  • Original of the leases
Commercial real estate property

Terminations and Default 

The contract also discusses other actions. These include actions from both parties that could result in a default, whether or not it is possible to waive the default and move on to closing, and what happens after the termination of the contract by either buyer or seller, as regarding buyer’s deposit and damages.  

Related Questions

What Kind of Professional Help Is Needed to Draft a PSA?

To draft a purchase and sale agreement, both parties have to hire the help of legal practitioners with experience working on commercial real estate transactions. Also, you could hire the services of a commercial real estate company, such as Si Vales Valeo Real Estate to oversee the transaction from start to finish to ensure that everything goes smoothly. 

Does Signing a PSA Mean the Transaction Is Completed?

No, by signing the PSA, both parties do not automatically agree to buy/sell the property.

A purchase and sale agreement is not an agreement to sell or buy a property, but instead, a framework containing the negotiation process and agreed terms that lead up to the completion of the transaction. 

Conclusion 

While preparing to invest in a commercial property, you should also make adequate preparations for the back and forth negotiations that come with drafting a PSA. We believe that the information above will give you an edge as you negotiate, but to ensure a seamless transaction, you should contract the services of a real estate lawyer and a commercial real estate agent.

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