Closing a real estate transaction involves completing necessary investigations and actions performed by a single agent or title attorney before issuing the title insurance policy. While title attorneys or agents don’t have the primary responsibility to resolve every title defect, they often provide valuable assistance in this area. Here’s a step-by-step guide to understanding the Commercial Real Estate (CRE) closing process:
Establishing a Plan
The first step is to develop a transaction plan. This plan should guide contract negotiations and outline the necessary actions for closing and post-closing. For example, if zoning requirements, utility availability issues, or the need to confirm structural elements of a building exist, the plan must address these and include them as part of the closing requirements.
Assessing Potential Issues
Prepare for problems that may arise during a commercial closing. Failure to identify and resolve these issues can lead to transaction missteps. You can effectively mitigate risks through risk-shifting techniques like obtaining insurance with appropriate commercial endorsements. An experienced commercial real estate attorney, familiar with these endorsements, can often overcome title obstacles through effective contract drafting and collaboration with a professional title underwriter.
Opening an Escrow Account
An escrow account, managed by a neutral third party, plays an essential role in a commercial property sale. Given that such transactions typically involve multiple steps and take between 15 to 90 days to complete, an escrow account ensures a secure process. The third party holds all funds and documents related to the transaction until everything is resolved. Once all procedural and substantive formalities are complete, the capital and records transfer to the seller and buyer through the escrow account, ensuring a secure transaction.
Conducting a Title Search and Securing Title Insurance
A title search and title insurance offer both peace of mind and legal protection. During a title search, public records are examined to verify a property’s legal ownership and identify any claims against it. If claims exist, they must be resolved before the buyer acquires the property. Title insurance protects the holder against financial loss due to defects in the property’s title, safeguarding real estate owners and creditors from potential claims.
Coordinating All Closing Requirements
New issues often arise towards the end of closing, frequently due to the need to rely on independent third parties for certifications and property tours that must be completed near the conclusion. As closing approaches, CRE brokers, counsel, and all necessary buyer and seller representatives must stay available and ready to address changing demands and circumstances.
Negotiating Closing Costs
Closing costs can quickly accumulate, ranging from opening an escrow account to hiring a real estate attorney. Unfortunately, many services exploit consumers’ lack of knowledge by charging exorbitant fees. Even legitimate fees for closing services are often subject to inflation. Lenders may impose “junk fees,” unexpected costs not clearly explained to the borrower, leading to significant expenses. These fees include administrative, application review, appraisal review, ancillary, processing, and settlement fees.
Securing Proper Interest Rates
Interest rates, including those on mortgages, can fluctuate and are influenced by several factors, such as geographic location, property type, loan type, and the applicant’s credit score. To avoid market fluctuations that could raise rates before finalizing your property purchase, it’s advisable to lock in your interest rate in advance. Even a small rate increase can significantly impact your monthly payments and the overall cost of your mortgage.
Meeting Funding Requirements
When signing the purchase agreement, you likely deposited earnest money, demonstrating your good faith and commitment to the transaction. To complete the purchase, deposit additional funds into escrow. Failing to do so can result in the sale getting canceled, with the earnest money forfeited to the seller.
Reviewing Title and Closing Paperwork
Before finalizing the transaction, both buyer and seller must accept the title report and complete the closing documents. These may include leases, deeds, environmental reports, zoning disclosures, and any other agreed-upon terms necessary to close the deal.
During the sale process, the title company provides a report on the property’s title. The buyer carefully reviews this report and files any objections. The seller must respond to these objections within a limited timeframe to proceed with the sale. Once all title issues are resolved, a final title report is prepared, which both parties must approve before moving forward with other closing documents.
Understanding the Paperwork
Properly reviewing paperwork is essential to closing a property deal. Although the documents contain legal terms, it’s important to read them thoroughly. If any terms are unclear, hire an attorney to review the documents and help smooth out any issues with the transaction.
Final Thoughts on the Closing Process
The closing process may seem overwhelming, but investing time and effort to get everything in order before signing is crucial. While real estate brokers and other entities can assist during the transaction, they cannot guarantee a problem-free process. Ultimately, you must ensure the transaction is fair and free from potential pitfalls before closing the Commercial Real Estate Transaction.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
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