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