Friday, July 31, 2020

Little Things Add Up!

Image Attribution: www.gograph.com
We are scheduled to close a deal today. Yes! Deals are happening - albeit a bit more challenging - during the year of the pandemic. Time on market, due diligence periods, and loan processing require additional days vs the halcyon era of 2019. Shortened are buyer’s and seller’s patience with the delays. This particular transaction found its genesis in February. Met with enthusiasm was the offering. We quickly selected a buyer and opened escrow - just in time for the ballooning cases of Covid-19 and state lockdowns of non-essential businesses. Our buyer bolted. We re-launched in late April. Curiously, we received more interest than in February. Granted - at a lower price -but only about 10% from the previous contract. Not bad.

 In reviewing our estimated closing statement - it occurred to me there are numerous “small” charges that can really add up in a commercial real estate purchase. Seller’s net proceeds are diminished and the amount of buyer cash needed for close are greater. A bit of a review of these “small” charges is in order. So, here goes.

 Purchase Price. This is the starting point from which a number of the amounts below are based.

 Documentary transfer tax. Depending upon the county in which your sale is located - this charge is generally $1.10 of every $1000. Simply, if your sale amount is $5,000,000, the documentary transfer tax is $5500. In Southern California, this expense is born by the seller. However, this varies in other parts of the state. By the way, here is a great website if you need further clarification - California Documentary Transfer Tax Explained | Viva Escrow

 Escrow holder amount. Your escrow company will want to be paid. Fees vary wildly, especially as the deal size increases. Generally the bigger the deal, the smaller the amount. Think of an escrow as a sort of Switzerland. They are neutral. Serving as a clearinghouse for money and documents - an escrow company only performs the tasks mutually agreed upon and instructed by buyer and seller.

 Prorations. Many sellers are surprised by prorations and if not properly anticipated - tcan be shocking! Normally, prorations are computed based upon a 30 day month regardless of the true number of days. “30 days has September, April, June, and November - indeed!” But, with prorations, the months with 31 days only get the benefit of 30 - like July. Let’s use a closing date of July 17th. Escrow will figure out rents (if any). As the seller - you are entitled to 17/30ths of the rent. The buyer the other 13/30ths. If our rent is $10,000 per month - as the seller you’ll receive a debit of $4333. Presumably, the rent was paid by the tenant in early July. So, as the seller, you’ve received a full rent payment and now must credit the buyer for the amount the buyer deserves for owning the property the final 13 days of the month. Property taxes can be very tricky and seldom understood. Simply. Our state runs its budget from July 1st of the current year to June 30th of next year. 1st half taxes - July through December - are due in November. 2nd half taxes - January through June - are due in April. Yeah, confusing. Therefore, depending upon your close date - property taxes will be debited and credited. A July closing is particularly interesting. You see, although the 1st half of the year started on July 1st - property tax bills are not sent until October. Therefore, an estimate must be made of the anticipated total. An easy way to accomplish this is simply to add a 2% increase to last year’s payment. Inexact, but simple.

 Policy of title insurance. Generally a seller charge. Here’s a great interactive website to compute title policy amounts. http://www.firstam.com/title/resources/calculators/title-fee-calculator.html. Based upon a purchase price of $1,000,000 an ALTA owner’s policy will run you about $2100.

 Lender fees. Appearing on the buyer’s ledger. Included are loan origination percentages, processing fees, document preparation, etc. if you’re funding a loan, your bank will outline all of these charges for you in great detail.

 Brokerage commission. Typically from 2-6% of the purchase price and commonly paid by the seller. Therefore a debit will appear on the seller’s statement.

 Miscellaneous charges. Copies, notaries, recording fees, attorney fees, natural disclosure reports, pad for closing date fluctuations, and others - can find their way to a closing estimate.

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. His website is allencbuchanan.blogspot.com.


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