Today, I focus my labor on the closing process in commercial real estate deals. After all, I’m penning this post before Labor Day weekend, so it proved prescient.
Whether you rely on the rent generated or for the utility gained by your business as an investor or an occupant, you execute a similar process to become an owner. Let’s dive in, shall we?
A search is conducted, a candidate for purchase is selected and negotiation commences. Once the terms of the buy are settled between buyer and seller, a contact, the purchase and sale agreement, is drawn. That part is relatively easy. Now the fun begins. The buyer and seller now must complete the deal. What occurs after the paperwork is signed is the subject of this column.
Purchase and sale agreements – whether standard or proprietary – provide a roadmap for how to proceed. Price, financing, if any, due diligence period, escrow holder, title company, deposits to open, deposits once contingencies are waived, and closing period are all neatly niched.
Price. Fairly straightforward but typically a combination of cash and debt. The seller – unless providing a loan – receives all the proceeds, less closing costs once a deed is recorded. Can this sum vary from what’s agreed? Yes. See “due diligence.”
Financing. Many deals we see these days are financed but not subject to lender approval. Confusing? Yes. But this seller’s market, in which we are mired, has produced this wrinkle. A seller may say, “Sure, Mr. Buyer, go get a loan. But, failure to qualify won’t allow you to cancel. Plus, if your lender is tardy – tough taco.”
In a more conventional approach, a buyer seeks loan proceeds to couple with her cash infusion to make the buy. If she can’t get a loan, she walks away and her deposit is returned.
Escrow. Generally, in California, an escrow holder is a clearinghouse to accept the agreement and conduct the symphony — also known as executing the deal. Deposits, documents and closing instructions are all neatly folded into an escrow holder’s task.
Title. Most title companies also have an escrow department, but frequently, these two functions are separate. Your title officer will produce a preliminary title report early in your transaction. This uncovers things such as loans the seller must have paid off, easements, liens, status of property tax payments, legal description, and other “exceptions.” A commitment to insure a clean title will be issued. Should a problem arise, post-close, you’re covered.
Deposits to open escrow. In commercial deals, there is no real standard. It’s whatever the buyer and seller negotiate. However, typically these run about 3% of the purchase price. Should the buyer elect not to proceed with the purchase and prior to a waiver of contingencies, in most cases, the deposit is returned.
Due diligence. Also referred to as a “contingency period,” this ranges from as few as 15 days to as long as 90, and a ton of work must occur during this time frame. Financing must be secured, title exceptions approved, inspection of the building (roof, electrical, HVAC, etc.) accomplished, vesting documents drawn, financial aspects of the tenancy – if any – analyzed, and environmental health diagnosed. Whew! Within each of the main categories of approval – there are checkpoints that guide us to the end.
Financing, for example, involves credit of the buyer, the tenant, an appraisal, an enviro report and lender concurrence. There’s a lot to be done in a short time. What if something isn’t approved? That, dear readers, is a subject for another column.
Deposits once contingencies are waived. You’ve traveled the gauntlet of contingencies and are full speed ahead. You’ll now add some “skin” in the form of an increased amount of money to the escrow. Deposits, by the way, are generally applicable to the purchase. But, once you nod your head, deposits are non-refundable. Can you still back out? Sure. But not for free.
Closing. A cacophony of chords completes the transaction. Akin to a family reunion group photo, all must be looking at the camera and smiling before the image can be captured. The lender funds the loan, the buyer adds supplemental dollars, granting deeds are deposited and recorded and monies are apportioned. The seller gets hers, the buyer gets the title, the lender gets a trust deed, and agents get their fees. Boom!
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
Source: Orange County Register
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