Here are some tips to ensure that your commercial real estate closing is a smooth one. Commercial real estate closings are often much more complicated than your regular residential closing, there are usually multiple business entities, often with layers, leased property where there is a tenant or tenants in the property, elaborate surveys, environmental due diligence, and zoning concerns. With all these items in play, it is important to be prepared.
- Assemble your Team. Choosing the right commercial real estate agent is only the beginning. Let your agent know if you want more control over the closing and want to select the closing agent, so your agent can provide for this during the offer and acceptance back and forth. Commercial real estate contracts due to their complexity can take a life of their own and depart wildly from the standard Commercial Contract Form 5 (CC-5), so it is important to identify a commercial real estate attorney to review the contract before signing on the dotted line.
- Your closing starts when the property is listed, so don’t wait. Start collecting all the information you can about the property, so you know what items are available to turnover to the buyer during its due diligence period. It would be a mistake to agree that you will turn over the mechanical and service records for the HVAC system within 5 days of executing the contract, only to find out you don’t have it once you start digging through your records and can’t remember what company you used.
- Identify your Signatory. Business entities are all over the place in commercial real estate. It is important to know who can bind the business. It might seem like an obvious task, but confusion as to who the proper signatory is for an entity happens routinely. Nothing breaks the momentum of your transaction more than a “Who’s on First” investigation of organizational documents that are either not clear, not properly prepared, or non-existent. Make sure your company’s house is in order. Your entity’s fully executed operating agreement or bylaws should be easy to access and ready for review. If you have questions about who should be signing, then your real estate attorney should be able to review the your organizational document and assist you. It is also important to make sure the proper signatory is available to sign all the documents necessary to consummate the transactions. It is hard to execute everything needed for closing day when the Manager of your LLC is in Bali for a week.
- Update Your Financial Records. Once you are under contract, you will start getting the buyer and/or lender requests for financials. Don’t be caught being “in-between” accountants when the requests come rolling in. Update your financials. Some the financials and documents that are routinely requested are:
- tax returns
- annual financial statements
- the current operating budget
- rent rolls
- schedule of CAM escrow accounts showing deposits and payments for the past couple of years
- service contracts
- balance sheets
- profit and loss statements
- utility bills going back two years
- outstanding debt documents
- other documents related to the property’s cash flow.
- Where the Lease? Remember the “Where’s the Beef?” lady from the 80’s? All too often in the commercial closing process, the question is “where’s the lease?” Make sure you track down all the fully executed copies of the lease agreements and any addendums, contact information for all the tenants, and information about the common area expenses you have reached with your tenants. If you have a month-to-month tenant it may be time to get a committed lease at market rent to improve the financial appeal to buyers and their lenders. If a tenant is in default with payments, then the time to remedy is before you get a contract, not after the buyer discovers the default during the due diligence period!
I hope these tips help you with the sale of your commercial real estate property. As always, should you have any questions or concerns about this or any other real estate matter, please contact your trusted local real estate attorney.
Berlin Patten Ebling, PLLC
Article Authored by Kelly Roberts, Esq., firstname.lastname@example.org
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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