And because commercial real estate transactions are less regulated than residential transactions, the responsibility of performing proper due diligence falls on the individuals involved in the deal.
However, this process doesn’t need to be intimidating. There are many steps, but they can be taken one at a time. Meticulous attention to detail is essential throughout the entire process. This requirement is true whether you are selling a piece of commercial real estate or purchasing one.
Here are the top considerations that should be kept in mind when closing on commercial real estate.
Ensure All Escrow Agreements Are Fulfilled
A neutral third-party will hold onto the funds for the transaction and disperse them when all previously agreed-upon stipulations of the sale have been met. Because of the tendency for these transactions to involve large sums of money, the rules dictating this process are usually tightly controlled.
These agreements are highly customized as opposed to the form documents frequently used in residential real estate transactions. The agent in charge of the escrow will only disperse the funds once all of the escrow requirements are met.
Inspect the Site Yourself
Professional inspections will need to be done by outside companies prior to calling in a closing attorney. The buyer has most likely seen the property before deciding to make an offer, but the site should be revisited to verify repairs were completed, nothing catastrophic happened in the since the last visit, and so on.
Buying commercial real estate is a big decision. The buyer should be sure everything is up to the buyer’s standards before the sale enters the closing process.
Streamline Signing Authority
Commercial real estate transactions often involve companies, corporations, or groups of people rather than two people working one-on-one with each other. This complexity can lead to some difficulties since there is going to need to be a person signing papers on behalf of a company or corporation.
Designating a person in the corporate charter as possessing signing authority will clear this issue up long before it becomes a potential problem. The board of directors can also elect a representative to sign on behalf of the company, or a signed and notarized letter from business partners can designate this person as well.
Account for the Lack of RESPA
The Real Estate Settlement Procedures Act (RESPA) is a federal law that protects buyers and sellers in a residential real estate transaction. However, RESPA doesn’t apply to commercial real estate transactions. Because of the inapplicability of this law in the commercial setting, the commercial transaction is impacted in a number of ways.
Because RESPA does not apply, the importance of performing thorough inspections is especially critical with respect to all aspects of the commercial closing process. This investigation is what’s known as due diligence. Due diligence can be a lengthy process which can push the closing date back. It’s recommended to perform these duties early and to give yourself enough time to complete them to avoid delays in closing.
Arrange Title Commitment
The title commitment discloses all applicable title information about a commercial property prior to closing. This information can have a large impact on how it is managed moving forward. It can disclose issues such as liens, encumbrances, tax information, property value, and more.
The title commitment provides a complete legal description of the property as well as information on any unreleased or open mortgages. A closing attorney will help you navigate these essentials, but a title company will often compile the report.
Use the Appropriate Deed
The deed transfers ownership of the property from seller to buyer. There are a variety of types of deeds due to the fact that commercial real estate transactions can be quite different. The terms of the deed will be discussed prior to the actual closing day, but there are options for how this will look.
The most common deed is a quitclaim deed. This deed does not offer a warranty to the buyer regarding the status of the property title. However, this is not the only option. Special warranty deeds and general warranty deeds offer additional protections.
Verify Accuracy of Closing Documents
The closing documents cover a variety of specifics to be agreed upon by both the buyer and the seller. This specifics include items such as environmental reports, assignments of liability, assumption of leases, deeds, and more.
A closing attorney will help you compile these documents and verify the accuracy of the information contained within. The closing documents, along with the title commitment and policy, will complete the transaction. For this reason, it is essential to verify and agree upon the presented information.