By Ryan McNeill, Attorney at Law
If you plan to purchase commercial property, it is important to understand there are some significant differences in the purchase and closing process when compared to residential real estate. Commercial real estate transactions are governed by different laws than residential real estate transactions. In residential transactions, the buyer has more protection under the Real Estate Settlement Procedures Act (RESPA), a federal law that governs residential home sales. In commercial transactions, the buyer is responsible for doing more intensive due diligence on the property in question.
Here are some of the main differences with a commercial real estate closing:
- The documentation required is much more complex in a commercial real estate transaction. These sales often begin with a letter of intent from the prospective buyer to the property owner. In addition to the sales agreement and financing documentation, the buyer will often need to have specific experts inspect the property. This can include structural evaluation, an environmental assessment, and a zoning investigation. If the building currently has tenants, a review of all legal agreements with those tenants must be conducted. If issues are discovered, the seller may choose not to fix any of them, leaving the buyer to decide if they still want to purchase the property.
- Legal ownership of commercial property is not always as clear cut as residential ownership. A corporation or LLC may own the property, and in some cases the signing parties could be other entities with ownership or control over the corporation or LLC. In addition, a commercial property is more likely to have liens filed against it than personal property. These UCC (Uniform Commercial Code) liens must be searched carefully because clear title cannot be conveyed until payoffs of those loans take place. Title “defects” are more common in commercial transactions, increasing the buyer’s risk. Quitclaim or special warranty deeds are the most common method of transferring ownership.
- There are usually more parties involved in commercial real estate transactions. In addition to the buyer(s) and seller(s), brokers, lenders, tenants, and attorneys may all be included in the process. Escrow is tightly controlled, however the buyer and seller in a commercial transaction must agree on an escrow agent. Since the commercial property purchaser is usually not one individual, signature authority must be verified.
- Commercial transactions typically also take longer to close than traditional residential real estate closings. Plan for delays in the process.
- The lending (or mortgage) process is also different. With residential real estate, loan agreements and closing documents are very standardized. In a commercial closing, there are no rules governing interest rates or the format of the loan agreement. In addition, the lender often has more rights to foreclose on the property than a residential lender.
All-in-all, commercial real estate closings are much more complicated than residential transactions. It is in your best interest to check with a real estate attorney prior to purchasing commercial real estate. Contact our office today to schedule an appointment.