Purchasing Commercial Real Estate in Colorado? Legal Considerations You Need to Know
Whether you are a beginning investor or expanding your real estate investment portfolio, purchasing commercial real estate in Colorado can be a smart long-term investment strategy with potentially strong returns. Navigating the legal terrain of commercial real estate purchase and sales requires more than selecting a property with consistent income—you need a strategic and legally sound approach from the start.
As attorneys experienced in Colorado commercial real estate law, we help buyers avoid costly mistakes and maximize the value of their commercial real estate investments. Below, we break down key legal considerations to keep in mind as you prepare to buy commercial real property in Colorado.
Understanding Zoning, Land Use Laws and Covenants and Restrictions
Zoning is the cornerstone of any commercial real estate deal in Colorado. Local zoning regulations determine how you can legally use real property. Whether you intend to use the property for retail, office space, industrial, or mixed-use development, confirming permitted uses is critical before signing a purchase agreement. Common zoning pitfalls include purchasing property zoned for residential use when the intended use of the property is commercial. A buyer may assume that a zoning use variance will be easy to obtain once under contract to purchase the property. Another common pitfall is overlooking any overlay districts or historical preservation ordinances that apply to the property. Use restrictions in covenants prepared by owners’ associations or developers can also affect future uses of real property.
Pro Tip: Consult with a real estate attorney early on in the stage of selecting a property to review local zoning maps and ordinances and covenants and restrictions recorded on the property.
Due Diligence: It Is More Than Just an Inspection
The due diligence phase is the buyer’s opportunity to investigate the property in all respects and it is one of the most legally significant stages of the transaction. Buyers should review:
Title Matters: Look for the vesting deed, liens, encumbrances, easements, and recorded litigation matters.
Survey Reports: Ensure that all structures comply with setback requirements, and structures or other conditions do not encroach on neighboring parcels.
Environmental Site Assessments (Phase 1 ESA) Reports: Especially important for industrial properties. A Phase I ESA can identify potential hazardous substance contamination that could lead to liability under state or federal law.
Existing Leases, License Agreement and Purchase Options: If you are purchasing an occupied property, review all active leases for obligations, purchase options and renewal clauses. Any license agreements should also be reviewed.
Colorado-Specific Tip: Colorado follows the “buyer beware” rule in real estate transactions. While Colorado requires that sellers provide the Seller’s Property Disclosure form to buyers in real estate transactions, sellers are not obliged to carry out investigations or inspections to discover unknown conditions that could be problematic. A thorough due diligence process helps protect your investment.
Understanding the Purchase and Sale Agreement
The purchase and sale agreement is a legally binding contract that outlines the terms and conditions of the deal. This document requires more than a fill-in-the-blank approach—it requires strategic drafting and negotiating. Key provisions to pay attention to include:
Contingencies: These may include financing, zoning and entitlements approval, title and survey review, environmental clearance, and satisfactory due diligence of all other aspects of the property. If the conditions to closing are not met, the buyer has the option to terminate the purchase and sale agreement before closing.
Representations and Warranties: The seller may provide certain guarantees about the property. It is important that a commercial real estate attorney include as many seller-provided representations and warranties about the property’s physical conditions, seller’s receipt of any governmental notices especially notices related to environmental law violations, any existing leases, rights of refusal and purchase options and any potential litigation involving the property.
Indemnification Clauses: Whether seller or buyer is responsible if an undisclosed condition or matter emerges after closing.
Default Provisions: What happens if either party fails to follow through with closing on the deal. Typical default language may include seller retaining the earnest money deposit if buyer fails to close and buyer seeking out of pocket expenses and damages from seller if seller fails to close.
A commercial real estate attorney can help negotiate the terms of a purchase and sale agreement in your favor as a buyer and ensure the agreement complies with Colorado’s real property laws.
Commercial Real Estate Financing in Colorado
Securing financing for commercial property is not as straightforward as obtaining a residential mortgage. For commercial loans, banks often require personal and completion guarantees, environmental indemnifications, assignment and subordination of construction and management agreements, deeds of trust and assignment of rents as security for the loan, as well as detailed business plans and projections.
You may opt for seller-financing or private money lending options. Regardless of the source of financing, always have the loan documents reviewed by legal counsel. Common provisions in loan documents include:
Prepayment Penalties. This is a penalty that is typically a percentage of the outstanding loan amount if the loan is paid in full prior to the due date or maturity date.
Default Interest Rate. This rate is typically much higher than what the state’s usury laws allow on personal loans.
Balloon Payments. This payment represents the outstanding balance due on the loan on the maturity date.
Personal Liability. Banks often require personal guarantees from owners of the entity that represents the borrower on the loan.
Cross-Collateral Default. This provision allows the lender to call a default on the loan if you default on any other loan with the lender or any other loan secured by the property.
Entity Formation and Liability Protection
Before you close on a purchase of real property in Colorado, you will need to decide how to hold title to the property. Purchasing real property as an individual may expose you to unnecessary legal risk. Instead, consider forming an entity such as a limited liability company (LLC) to limit your personal liability exposure. Benefits of holding real property in an LLC include personal asset protection, pass-through taxation, and ease with regard to taking on investors.
We regularly assist clients with entity formation and preparing operating agreements tailored to real estate holdings in Colorado.
State and Local Taxes
Colorado imposes a documentary fee (similar to a transfer tax) of 1 cent for every $100 of the property’s sale price. You may also encounter local transfer taxes in cities like Aspen or Telluride. Additionally, owning commercial real estate comes with ongoing tax obligations, including annual real property taxes, income taxes on rental profits and capital gains taxes upon the sale.
Closing and Recording the Deal
Closing on commercial property is a multi-step process involving a review of the final documents, title insurance, and settlement statements, coordinating funding of the purchase price and prorations and recording of the deed and any lender documents like a deed of trust.
Your Commercial Real Estate attorney should attend the closing (in person or virtually) to protect your interests and ensure the deed is properly recorded in the county clerk’s office.
FAQs: Commercial Real Estate in Colorado
What are common mistakes buyers make with purchasing commercial real estate in Colorado? Failing to do due diligence, misunderstanding zoning and land use laws, and using generic contracts are common and often costly errors.
Do I need an attorney to buy commercial real estate in Colorado?
Yes. Commercial transactions are complex and involve high stakes dollar amounts. Having legal counsel protects you from hidden liabilities and allows negotiation oversights.
Can I buy property through an LLC in Colorado?
Absolutely. Many investors form an LLC specifically to hold property. It offers liability protection and tax advantages.
How long does it take to close a commercial real estate deal in Colorado?
Timelines vary but expect 45 to 90 days depending on financing, inspections, and any zoning or environmental concerns.
What happens if the seller fails to disclose a problem?
Colorado operates under a “buyer beware” rule but you may have legal remedies if the seller intentionally withheld material facts or breached its warranties.
Final Thoughts
Purchasing commercial real estate in Colorado offers significant upside—but only if you approach the process with the right legal guidance. From due diligence, zoning to tax strategy, every detail matters. At Lotus Law, we are here to help you invest confidently, minimize risk, and set your real estate ventures up for long-term success.
Need legal guidance for your commercial property purchase in Colorado?
Contact Lotus Law today to schedule a consultation with a knowledgeable commercial real estate attorney.