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September 2011 Experts Speak Out
www.myRealtyLine.com
Commentary By Susie McCreary • Gracy Title
What you Need to Know When Closing a Commercial Property Transaction
I
f you are an experienced residential broker and have been approached to list a commercial property you may find that your new job description is not in any way similar to the work required for listing and selling residential real estate. There is no commercial multiple listing service for marketing your property and substantial networking may be required on your part to connect with a potential buyer. In commercial real estate, co-brokerage is not assumed; many times the buyer will pay his own broker and use this as a negotiation tool before finalizing the purchase agreement. Any agreement must be in writing. The commercial broker will have less control over the process than a residential agent has. Lending and financing are different and contract to close can take from three months to a year or two. During this time the feasibility or option period may be extended in order for the buyer to be satisfied that the property will be sufficient for the intended usage. If the property is raw land that will be
sold for development or if the land usage will change for the new purchaser, there could be layers of governmental requirements to be dealt with as well as environmental and land usage issues. Consideration includes flood plain locations, proximity to major roadways and areas to be dedicated for school facilities and park land. When selling office buildings and retail centers, considerations include rents, utilities and tenant finish out. Hotels, hospitals and other industries have issues unique to that particular industry. Once the price has been agreed to, the Purchase Money Agreements are generally prepared by attorneys representing the parties. At this point confidentiality is extremely important. Feasibility periods could last from 90 days to several months and may be extended several times. During this time anything could stop the transaction and there is no road map to piece it back together. Economic conditions may change; politics can interfere and financing approval is lengthy. Depending
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on the type of transaction the financing may be difficult to obtain. Appraisals are more subjective and values are harder to determine. When the purchase money agreement has been signed and escrowed with the title company the clock begins to tick. At this point it is critical to note and be sensitive to time deadlines as outlined in the purchase agreement. The title commitment and title exception documents must be delivered to the purchaser within the time frame allowed. If a new survey is required or if the seller is to deliver an existing survey, the contract will specify a period of time for delivery. The seller must also deliver any information required by the contract such as engineering and environmental studies, existing leases, and property tax information during the time set out in the purchase agreement. The purchaser may be allowed a period of time to conduct his own inspections during the feasibility or option period in order to determine if the property will actually meet the needs of his intended use. The purchaser must make any objections to the due diligence items within the time frame allowed under the contract.
If the attorneys or other broker do not prepare one, ask your escrow officer to prepare and circulate a “Critical Date Letter” outlining the dates as set out in the purchase agreement. Title issues become critical at this point and will be reviewed by the attorneys who represent the buyer. During the feasibility period any title objections voiced by the buyer and not addressed by the seller may cause the contract to terminate. An experienced escrow team will help address any title objections raised. Any notices must be given in strict compliance with the contract. Once all hurdles have been cleared and all contract stipulations have been met the closing will be scheduled. At this point the seller or his agent will need to provide amounts for any items to be prorated, including rent, security deposits, management agreements and utility bills to the escrow officer for inclusion on the closing statement. All parties should review the closing documents and settlement statement in advance of closing. Attorneys generally need advance notice and adequate time for review. There also may be post closing agreements or other items to be dealt with after the closing. RL
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