If buying real estate was easy, everyone would do it.
So, regarding the closing statement on commercial real estate property, you must dot all the i’s and cross all the t’s before the transaction’s Close of Escrow (COE).
To be proactive for the closing, keep your acquisition closing checklist handy, and remember to reference the following questions.
Has all required paperwork been signed in full?
Of course, all necessary documents must be signed or initialed, including the most recent Purchase and Sale Agreement (PSA), all addendums, true copies of the tenant lease(s), estoppels, and so on. But go further and check the ownership type to ensure you have all the necessary sign-offs.
On that note, any signing authority, or person signing on behalf of the selling entity, must have confirmation.
*Tip: Search for a “time is of the essence” clause in each relevant document to determine whether there is a firm deadline to sign.
Have the loan commitment’s conditions been followed?
After collecting all signatures, the most important thing is to confirm compliance with the loan commitment requirements. It is especially important because the purchase will not close if the loan terms do not correspond with the letter’s requirements and affirmative covenants.
Specifically, look for zoning compliance confirmation, among other reports, the most recent survey report, any unpaid taxes, liens, or encumbrances like easements.
*Tip: If there is some non-compliance, your attorney may be able to negotiate a reduction in penalties loan terms.
Is the transaction properly recorded?
The most important conveyancing documentation in the transaction is the commercial property deed. However, there is no effective conveyance of the title if the proper form is not used. So, even if the deed is valid, the buyer would be able to record it and notify the public of the title transfer.
The best way to combat this flagged item is to find out what format the local recorder’s office will accept recording documents. It can include any color or size requirements; for example, some recorders may require a three-inch top margin and a one-inch wide margin.
*Tip: Ask which submissions must be “original” versions.
Have any title flaws been discovered?
Take note of the type of deed if any title defects appear for your commercial property, so you know how to proceed. In a general warranty deed, for example, the seller must compensate the buyer up to the amount of the consideration paid by the buyer.
Common flaws to look out for include public records errors, unknown liens on the property, and forgeries/false impersonations.
*Tip: Before closing, get the seller’s most recent title insurance policy to avoid being caught off guard by title flaws.
Are there any remaining closing contingencies to be met?
Finally, review your closing checklist once for any missing contingency documents. Inquire whether the accuracy of the representations, square footage, and any other property-related information has been verified.
Another contingency to consider is if the Phase 1 Environmental Site Assessment required a Phase 2 because of the assessment’s one-year completion deadline within one year of closing. Also, remember that the report should be in the name of the prospective buyer, as it is sometimes in the name of the entity ordering it instead.
*Tip: Take careful notes on the property’s pre-closing condition.
The PSA will specify the specifics of the closing checklist for all parties’ responsibilities. Keep these red flag items in mind before closing on your next commercial property, as the process provides less protection for buyers while allowing for more creative deal-making.
******************************
Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.