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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.