The myriad steps to close a commercial real estate deal – Whittier Daily News
Today I focus on the closing process in commercial real estate deals. After all, I’m writing this post before Labor Day weekend so it turned out to be forward-looking.
Regardless of whether you, as an investor or user, depend on the rent generated or the benefits of your business, you follow a similar process to become an owner. Let’s dive in, shall we?
A search is carried out, a purchase candidate is selected and negotiations begin. As soon as the purchase conditions between buyer and seller have been clarified, a contact, the purchase and sale contract, is concluded. This part is relatively easy. Now the fun begins. Buyer and seller now need to close the deal. What happens after the paperwork is signed is the subject of this column.
Purchase and sale contracts – whether standard or proprietary – provide a roadmap for how to proceed. Price, financing (if any), due diligence period, trustee, title company, deposits to be opened, deposits after waiving contingencies and closing deadlines are all clearly delineated.
Price. Pretty straightforward, but typically a combination of cash and debt. Unless a loan is granted, the seller receives the entire proceeds, minus the closing costs, as soon as a deed is entered. Can this amount differ from the agreement? Yes sir. See “Due Diligence”.
Financing. Many of the deals we see these days are funded but not subject to lender approval. Confusing? Yes sir. But this seller’s market that we’re in has created that fold. A seller can say, “Sure, Mr. Buyer, get a loan. However, if you don’t qualify, you won’t be able to quit. Besides, if your lender is late – tough taco. “
In a more conventional approach, a buyer looks for loan proceeds to pair with their cash injection to make the purchase. If she doesn’t get a loan, she goes away and her deposit is refunded.
Crooked. In general, a California trustee is a clearinghouse that accepts the agreement and executes the symphony – also known as the execution of the deal. Deposits, documents, and closing instructions are all neatly integrated into the job of a trustee.
Title. Most title companies also have an escrow department, but often these two functions are separate. Your title clerk prepares a preliminary title report at the beginning of your transaction. This reveals things like loans the seller must have paid off, easements, liens, status of property tax payments, legal description, and other “exceptions”. A commitment is made to insure a clean title. If you run into a problem after graduation, you are covered.
Deposits to open an escrow account. There is no real standard in trading. It’s everything buyers and sellers negotiate. However, these typically make up around 3% of the purchase price. If the buyer chooses not to continue with the purchase and waives any eventuality, the deposit will in most cases be refunded.
Due diligence. Also known as “Emergency Time,” it ranges from just 15 days to 90 days, and there is a lot of work to be done in that time. Funding must be secured, title exemptions approved, the building (roof, electrical, HVAC, etc.) inspection carried out, deeds issued, the financial aspects of the lease analyzed, if any, and environmental diagnoses. Furious! Within each of the main categories of permit there are checkpoints that will lead us to the end.
The financing includes, for example, a loan from the buyer, the tenant, an appraisal, an environmental report and the approval of the lender. There’s a lot to do in a short space of time. What if something is not approved? That, dear readers, is a topic for another column.
Deposits as soon as contingencies are waived. You have traveled the gauntlet of contingency and are ahead at full speed. You are now adding some “skin” to the escrow account in the form of an increased amount of money. By the way, deposits generally apply to purchases. However, once you nod your head, deposits are non-refundable. Can you still get out? Secure. But not in vain.
Conclude. A cacophony of chords completes the transaction. Like a group photo for a family reunion, everyone must look at the camera and smile before the picture can be taken. The lender finances the loan, the buyer adds additional dollars, the grant deeds are deposited and recorded, and the funds are split. The seller receives theirs, the buyer receives their title, the lender receives a trust deed, and broker receives their fees. Boom!
Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at [email protected] or 714.564.7104.