As far as real estate transactions go, all settlements are basically the same, right? Wrong. Residential and commercial approaches differ drastically, and not just in the paperwork. As a homeowner, you’re primarily concerned with protecting yourself and your family at the settlement table. From a commercial perspective, you’re also involving the assets of your business, including the livelihood of any and all employees, in addition to your family; thus, the stakes are usually greater. Additionally, the funds involved tends to be larger and more regulated , so you should seriously consider involving a qualified real estate attorney throughout the entire process—most importantly at settlement.
Starting with Escrow
This is an important step to initiating the closing of any real estate contract, but in the commercial sector, it’s a little more individualized. When the funds are “in escrow,” essentially, they’re being held by a third party who should be neutral in nature. The money is to remain there until the terms of the deal have been met—unless one of the parties pulls out in accordance with the agreement. With this in place, it solves the problem of trust between the two parties.
What tends to be informal in your average individual mortgage closing must be outlined and controlled in a commercial setting. As we mentioned, not only are the funds involved typically larger, but also they can come from multiple sources. If your business doesn’t have the liquid assets to cover such a purchase, you may have to raise capital from other investors and/or take out additional loans. In which case, it’s not just your money that’s involved, but a variety of sources. All of which need to be protected by an in-depth escrow agreement that’s substantially larger and more complicated in a commercial deal.
Verifying Legal Entities and Authorities
Though there’s still a buyer and a seller in these scenarios, rather than acting as individuals, the entire business becomes involved. In many cases, a legal entity (such as an LLC) is created specifically for the purpose of owning a commercial property. Each party that’s involved must be verified for financial solvency and fitness to be sure they can actually complete the deal. Once this has been established, authority must be granted to an individual who can sign documents on behalf of the entire entity.
Remember, many of these steps are in place to limit the liability of the investors, so they’re not losing more than they committed should the deal fall apart. Thus, you’ll want to consult an attorney early to see if you need to create such entities and inspire confidence in the other parties/investors involved.
Performing Due Diligence
In a real estate transaction, this means that you’ve taken reasonable steps to ensure the property transfers cleanly. This means different things for both the buyer and seller, but there are fewer protections on the commercial side, which places a bigger burden on both parties. In a residential transaction, sellers are required to follow the rules and regulations of the Real Estate Settlement Procedures Act (RESPA), which exists primarily to protect homebuyers.
Unfortunately, there’s no such law for commercial contracts, so it’s up to the seller (or the assisting attorneys) to manage uncovering many of the real estate documents and ensure they’re up-to-date. For the buyer, you’ll want to review said documents, raise any objections and ensure that your concerns are addressed in revisions to the documents (if necessary), and/or transfer the funds in a timely manner. Because every property is different, it makes it especially difficult to use form documents and manage all of these tasks singlehandedly. With our team of attorneys, you can rest assured, your due diligence will be well-managed through detailed checklists and key date charts.
Drafting Title and Closing Documents
The lack of RESPA means that your closing documents on the commercial side can be more flexible—provided that’s what both parties agreed to in advance. Anyone who has purchased property previously is familiar with the stack of papers presented at the settlement table and the endless signatures required. Few people actually read these documents, despite the fact that they’re a legally binding contract regarding the transfer of large sums of money.
That’s why you need someone on your side that has not only read these documents, but has worked to create them with your interest in mind. Everything from the title report, to the deed, to the zoning, and environmental report needs to be carefully reviewed in advance of the closing to avoid messy legal issues down the road. Rather than divert your valuable time from your business endeavors, allow our experienced team to handle every nuance of your next commercial real estate deal. Our track record speaks for itself!