Friday, April 28, 2017

Buying Commercial Real Estate – The Mechanics

Your reasons for buying commercial real estate may vary. Currently, your business home is rented and you’ve decided now is the time to buy a building and become your own landlord. 

Or, a portion of your income is received from the rent generated by a commercial real estate asset and you’ve decided to buy another building. 

Regardless of your reasons for buying, the mechanics of the transaction are similar. Today’s post is focused upon the process most buyers undertake to buy commercial real estate.

Search. Chances are you will engage a commercial real estate professional to expose you to the market and the current availabilities that fit your search criteria. In these days of short supply, plan on this taking a bit more time than you anticipate. As we’ve recently discussed, commercial searches are more challenging than residential because information on commercial availabilities, comps, and data are not readily available on-line. You will need a tour guide with a key to the walled garden in order to see most of what’s out there.

Negotiation. Once you select the building you want to pursue, a round of negotiations ensues. Because we are steeped in an owner’s market, it’s common for there to be multiple suitors that result in multiple offers. Sellers want certainty. The highest offer, but with a questionable buyer, will often lose out to a solid buyer with a lender pre-qualification letter or better still, no financing contingency. The more convincing your need for the purchase and your ability to communicate your story will bode well for your success.

Contingent Escrow. The agreed upon terms are memorialized in a Purchase and Sale Agreement. A signed PSA along with your deposit is forwarded to a neutral holding company (escrow) for processing. Once escrow is in receipt of the documents and deposit, your contingency period begins. These periods can range from a minimum of 30 days to as many as 90 days. During this time, your deposit is generally refundable if you change your mind or find something untoward with the purchase. Use this time wisely to secure your financing, check title, perform a physical inspection of the building, make sure the soil is clean, review all of the tenant leases if any, take a look at the contracts for services such as landscaping, make a visit to the city to make sure there are no issues with your use of the building. If you encounter an issue, you will need to notice the escrow company, seller and seller’s broker. There are some remedies available to you to resolve problems. We will leave those remedies to another column, however.

Perfected Escrow. Now you’ve checked all the boxes – your loan is approved, the city will welcome your business with open arms, and you cannot wait to close. After you waive your contingencies and prior to close, your deposit is non-refundable. You can still walk away if you change your mind – but at a cost. Perfected escrow periods precede the close and typically last two weeks to thirty days. During this time, the banks is preparing loan documents for your signature, the seller is signing and notarizing the grant deed, and assignment of leases are being prepared for the transfer. Don’t forget to put insurance in place for your new building.

Close. You sign an estimated closing statement. Money then flows into escrow from you and your lender. The grant deed is recorded and voila, you own a building! Now the heavy lifting of moving your operation commences.

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