Closing Process Looks Like in Commercial Real Estate Purchases

The closing process of a commercial real estate transaction looks a little different than smaller more common residential purchases. Any real estate purchasing process can seem overwhelming and full of paperwork, legalities, and terms that could have anyone’s head spinning. This article will help to lay out the steps of the closing process in a commercial real estate sale so you are prepared and ready for what to expect in your commercial real estate purchase.  

Commercial purchases have fewer protective measures for the buyer than  a residential purchase, but this also allows for more freedom in the deal making process. There are four main steps involved in the closing of purchasing commercial real estate.  

Escrow 

This is a very important part of any real estate process. During escrow a neutral third party will hold money in an account until all the escrow agreement requirements have been met or until one of the parties pulls out of the real estate contract deal still in compliance with the escrow terms. Escrow is an added measure to solve any trust issues that could arise. No money leaves the escrow account until both parties involved in the purchase have had their conditions fulfilled. 

Escrow is more formal and more controlled in a commercial real estate purchase than a residential one.  The capital for a commercial transaction usually comes form a number of different sources. The paperwork is more customized and extensive than residential escrow forms. There is no legal requirement for who acts as the escrow agent, in most cases the title agent will act as well because they know the escrow process and have no monetary interest  in the transaction.  

Before any money is put in the escrow account both parties must come together to decide what the escrow terms will be and the duties of the escrow agent. Escrow agreements are different for each commercial real estate deal. Some common escrow agreements in commercial real estate may include:  

• A clause appointing the title agent as the escrow agent and waive any fees of the title agent acting as escrow agent 
• A clause ordering the escrow agent not to mix funds with others sent in by the buyer 
• A written statement of instructions from both the buyer and seller to go ahead and release the funds because they acknowledge terms have been met 

Legal Entities and Authority 

Residential property purchases are deals between two parties. Commercial transactions are usually between two or more legal entities with one or more contracts. These deals can quickly become expensive so all parties involved in the purchase will want to limit liabilities and will often create legal entities that only function for the purpose of owning a commercial property. For every entity involved in the transaction extra steps must be taken to verify the ability to conduct such a transaction you the entity.  

Buying commercial real estate can come with big risks and using an LLC or LLP to purchase a property helps to protect both buyers and sellers from losing other properties or even personal properties.  

Since an actual person needs to sign on behalf of  each legal entity involved in the purchase this will also create an extra step in the paperwork process. There needs to be proof that each person signing has signing authority and until documents verifying signing authority are received the escrow money will not be released.  

Here are some steps to help smooth the signing authority process:  

• Designate someone by name or title in the corporate charter to have the authority to enter commercial real estate transactions 
• Get authorization from the board of directors to finalize the sale of a certain property 
• Put together a signed and notarized letter written by the other partners authorizing the signer to sign on the entity’s behalf. 
• Solve the proof of authority before the closing transactions to save more time 

RESPA and Due Diligence 

RESPA stands for Real Estate Settlement Procedures Act. This act regulates what a seller needs to guarantee and warranty to buyers in residential transactions. It helps to protect buyers against buying unsafe and faulty properties without first being told about issues.RESPA also regulates the type of closing forms used in a residential transaction. These regulations, however, do not apply to commercial transactions.  

In a commercial real estate transaction it is not uncommon for the buyer to try and push for as much time to be able to back out of the deal as possible while the seller at the same time pushes for a limit on the amount of time the buyer has to back out of the deal. These measures are usually reflected in the due diligence process.  

Due diligence is much more extensive in commercial real estate. When purchasing commercial real estate make sure:  

• The contract of sale is properly executed 
• There is a receipt of the most recent title insurance policy 
• There is an updated survey report 

• There are true copies of all leases attained  
• They review the new environment report 
• The termination notice conditions and due diligence deadline is in order 
• There has been delivery of all tenant estoppels 
• The sellers books and records have been reviewed  
• There has been confirmation of zoning compliance 
• A search has been conducted of any outstanding taxes and or liens 

Sellers will want to be sure :  

• The contract has been properly executed 
• Buyer delivered the down payment to the escrow agent 
• The escrow agent deposited the money into the escrow account 
• They have filed a response to any objections of the title and survey report 
• The execution of assignment and assumption of leases has been completed by the buyer 

Both parties will want to make sure all closing documents have been reviewed for accuracy and that they are properly executed on time.  

Title and Closing Paperwork 

Before the transaction can be finalized the buyer and seller both need to accept the title report and complete the closing documents. These documents can include assumption of leases, deeds, environmental reports and assignments of liability, zoning disclosures and warranties, and anything else that has been agreed upon to close the transaction.  

Earlier in the sale process the title company will provide a report of the current state of the property’s title. Once this report is made the buyer needs to carefully review it and file any objections. There is usually a very limited amount of time to do this. The seller is also then under a strict timeline to respond to these in order to move forward in the sale.  

When all issues with the title are resolved a final title report is made and both parties will need to look it over for final approval before moving forward with other closing documents. Including Zoning/ Building Jackets, Environmental Reports and Deed transfer with title affidavit, as well as assignment and assumption of any leases.  

As you can see the commercial property closing process is much more complex than a residential purchase. The process may take longer because more components are necessary and there are more tools available to resolve issues. This is just a scaled down overview of the process, of course you will want a knowledgable attorney and a commercial real estate agent to help you through your commercial real estate purchase in Minot.