Buying Commercial Real Estate - Closing the Deal

Today, I focus my labor on the closing process. After all, I’m penning this post prior to the Labor Day weekend - so it proved prescient. Whether you rely upon the rent generated or for the utility gained by your business - an investor or an occupant - you execute a similar process to become a owner. Let’s dive in, shall we?
 
A search is conducted, a candidate for purchase selected and negotiation commenced. Simple. Once the terms of the buy are settled between you and the seller, a contact is drawn - known as a Purchase and Sale Agreement. Easy. But now the fun begins. The parties - buyer and seller must now complete the deal. What occurs after the paperwork is signed is the subject of this column.
 
Purchase and Sale agreements - whether standard or proprietary - provide a roadmap for how to proceed. Price, financing - if any, due diligence period, escrow holder, title company, deposits to open, deposits once contingencies are waived, and closing period are all neatly niched.
 
Price. Fairly straightforward but typically a combination of cash and debt. The seller - unless providing a loan - receives all the proceeds - less closing costs once a deed is recorded. Can this sum vary from what’s agreed? Yes. See “due diligence”.
 
Financing. Many deals we see these days are financed but not subject to lender approval. Confusing? Yes. But this seller’s market, in which we are mired, has produced this wrinkle. A seller may say - sure, Mr. buyer. Go get a loan. But, failure to qualify won’t allow you to cancel. Plus, if your lender is tardy - tough taco. In a more conventional approach, a buyer seeks loan proceeds to couple with her cash infusion to make the buy. If she can’t get a loan, she walks away and her deposit is returned.
 
Escrow. Generally, in California, an escrow holder is a clearinghouse to accept the agreement and conduct the symphony - also known as executing the deal. Deposits, documents, and closing instructions are all neatly folded into an escrow holder’s task.
 
Title. Most title companies also have an escrow department but frequently, these two functions are separate. Your title officer will produce a preliminary title report - a “prelim” early in your transaction. This uncovers things such as loans the seller has ordinated that must be paid, easements, liens, status of property tax payments, legal description, and other “exceptions”. A commitment to insure a clean title will be issued. Should a problem arise post close - you’re covered.
 
Deposits to open escrow. In commercial deals - there is no real standard. It’s whatever the buyer and seller negotiate. However, typically these run about 3% of the purchase price. Should the buyer elect not to proceed with the purchase and prior to waiver of contingencies - in most cases, the deposit is returned.
 
Due diligence. Also referred to as a “contingency period”. Ranging from as few as 15 days to as long as 90 - a ton must occur during this time frame. Financing must be secured, title exceptions approved, inspection of the building - roof, electrical, HVAC, etc. accomplished, vesting documents drawn, financial aspects of the tenancy - if any - analyzed, and environmental health diagnosed. Whew! Within each of the main categories of approval - there are checkpoints which guide toward the end. Financing, for example, involves - credit of the buyer, the tenant, an appraisal, an enviro report, and lender concurrence. There’s a lot to be done in a short time. What if something isn’t approved? That, dear readers, is a subject for another column.
 
Deposits once contingencies are waived. Ok. You’ve traveled the gauntlet of contingencies and are full speed ahead. You’ll now add some “skin” - in the form of an increased amount of money - to the escrow. Deposits, by the way, are generally applicable to the purchase. But, once you nod your head - deposits are non-refundable. Can you still back out? Sure. But not for free.
 
Closing. A cacophony of chords completes the transaction. Akin to a family reunion group photo - all must be looking at the camera and smiling before the image may be captured. Lender funds the loan, buyer adds the supplemental dollars, granting deeds are deposited and recorded, and monies are apportioned - seller gets hers, buyer gets title, lender gets a trust deed, and agents get their fees. Boom!
 
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.

Why Make it So Hard?

My neighbor constantly reminds me my voice echoes with commercial real estate owners well above his pay grade. Certainly not my intention but I take any comments to my missives seriously and attempt to morph into a more meaningful messenger. Regardless of the size of a commercial real estate portfolio - one multi-family property or global holdings of distribution boxes populated with Amazon-eque tenants - investments are simple! Why do we make them so hard? You see, any investment of money seeks a return. Period. Sure. You’d like the return to be commensurate with the risk. But after all the fancy terms of capitalization rates, internal rates of return, replacement cost, source of capital, exit strategy, expense leakage, cash on cash, leverage, etc. it’s really about this. I shell out this much money and get this much back. Mic drop.
 
Commercial real estate brokerage is simple. Why do we make it so hard? A real estate transaction - a sale or lease of commercial property - has two sides - an owner and an occupant. Now. The occupant may seek to lease or own and the owner may want to sell or lease - but you get the idea. Inject our representation and you now understand what we do. We are matchmakers of sorts. An owner engages us to locate a tenant or buyer to fill her vacant building and/or an occupant awards us the opportunity to source a location for their use. The former assignment is known as a listing and the latter an occupant representation. If you ask me what I do and I respond - “I sell commercial real estate” - you’ll probably wonder - “what the heck is commercial real estate?” But if I explain - “many of our clients are family owned and operated manufacturing companies experiencing a transition - such as a move” - my guess is you’ll have a better idea what fills our days.
 
Networking is simple. Why do we make it so hard? I’ve often opined - “the true value of a commercial real estate professional is the depth of her network.” Need a roofer? Got you covered. How about a legal professional to draw a new LLC? Hold on - I have several. Someone to install new warehouse racking? Yep. Got just the gal. But all of these examples are “downstream” of the deal. By that I mean the need is after - or “downstream” of the sale or lease. But, what about “upstream”? What classes of professionals see a transaction before it takes flight? The answer harkens back to what we do. Remember - “many of our clients are family owned and operated manufacturing companies experiencing a transition - such as a move”? If we focus on those professional service providers who complement not compete with our efforts - a treasure trove emerges. As an example - let’s say a manufacturing concern experiences a record year but leases their building. During a periodic meeting with her CPA these facts are discussed - revenue and leasing. If the CPA advises his client to buy a building - you get the idea.
 
Business is hard enough. Your commercial real advisor should make it easier for you.
 
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.