Commercial real estate closings are very different from residential real estate closings.
In general, they are more complicated because they have more extensive procedures. Negotiations also tend to last much longer (up to a year or more) than residential real estate negotiations because commercial real estate contracts don’t have as many buyer protections that inhibit negotiations.
They are also more risky than residential closings. Some of the biggest risks include:
- No RESPA regulations. The Real Estate Settlement Procedures Act (RESPA) does not cover commercial transactions, only residential, which means there are no guarantees or warranties about the condition of a commercial property.
- Multiple and/or unknown owners. Often, a commercial property is owned by a company or multiple owners instead of an individual. If owned by a corporation, it can be much more difficult to determine ownership because of limited access to public records for LLC.
- UCC liens. If a business has to borrow money to purchase a commercial property and uses collateral to secure the loan, the lender will place a public notice about the loan and the creditor’s security interest in the property (known as a UCC lien).
All parties need to understand these risks before entering into a commercial contract.
The 4 Key Steps in Commercial Closings
The process for closing on a commercial property is also different from the residential closing process. Here’s a brief overview of the four main steps involved in commercial real estate closings.
Step 1: Escrow
Escrow in commercial closings is tightly controlled. All parties decide on the terms and conditions of the escrow ahead of time and the money is held by an impartial third party until those conditions are met. This helps establish trust between all sides and better manage the money that usually comes from multiple sources to purchase the property.
Step 2: Legal Entities and Authorities
Since these transactions are usually between multiple parties and involve more money than residential transactions, all parties usually create legal entities for the sole purpose of closing the commercial property transaction. This helps limit the personal liabilities to both buyers and sellers. Because a person must sign on behalf of the entity, the entity must provide documentation that proves the signing authority of the individual who signs the paperwork.
Step 3: Due Diligence
Due diligence is more extensive in commercial real estate transactions. Buyers need to be aware of items such as updated survey reports, proper contract execution, confirmation of zoning compliance, and a search for outstanding taxes and liens. Sellers need to ensure the down payment is delivered on time, the contract is properly executed, and they respond to any objections to title and survey reports.
Step 4: Title and Closing
The buyer must review the title report provided by the title company and file any objections within a specified time frame. The seller then must respond to those objections quickly to move forward with the sale. When all issues are resolved, both parties examine the final report for final approval. Once done, both sides will complete closing documents.
Experienced real estate and title agents can help buyers and sellers navigate these steps and the complexities of a commercial closing.
