We continue our series this month with the last two steps of the commercial transaction escrow process. Revisit the first two steps here: Commercial Transactions 101 Part 1
STEP 3: Legal Impact of Commercial Transaction Escrow
In residential transactions, the Federal law has setup RESPA, the Real Estate Settlement Procedures Act. This statute mandates sellers to make certain assurances to buyers about the property. Thus, buyers avoid receiving an uninhabitable home. RESPA also details the forms that will be used in the transaction. Despite all these specifics, it only applies to residential home sales, not commercial.
Impact of no RESPA
Without all the assurances mandated by law, each party has to spend more time to evaluate the property in question and the entities on the other side of the transaction. In addition, the buyer is trying to keep as many “exits” available should they find an issue while the seller want to close the transaction as quick as possible. In order to accommodate these two competing interests, commercial deals will often get creative and are extremely customized.
Meanwhile, buyers will often want to ensure the following is right:
- A complete sales contract
- Title Insurance
- All lease agreements provided
- Access to environmental reports
- Recent survey reports
- Any conditions or restrictions for tenants is provided
- Seller financials are provided for the commercial unit
- Details about Zoning Parameters
- Information about any tax liens
Sellers will want the following:
- A complete sales contract
- Down payment deposited by escrow in an interest bearing account
- All objections filed in a timely manner
- Documents completed to assign or assume any leases
The above is a broad outline, each transaction is customized so details will differ. In addition, since there are no set forms like in RESPA, commercial transaction documents should be reviewed in detail to ensure accuracy.
STEP 4: Title and Closing Documents
Due to the complexity of a commercial transaction, the parties must agree on any requirements of closing the deal. These could include the title reports, assignments, reports, warranties, zoning disclosures, or anything else they deem necessary.
Similar to in residential transactions, title is a critical aspect of a commercial transaction. A title company provides a preliminary report of title early on. Commercial real estate titles are often much more complicated than residential titles. These properties are more likely to have multiple liens, easements, or encumbrances. In addition, ground or air rights can also be factors in commercial transactions.
Upon receipt of the report, the buyer should act promptly to object or raise any concerns. The time frame they have to raise concerns is usually in the escrow agreement. Once issues are resolved, the title company will issue a final report. You should review this report for any problems or errors.
In the commercial space, the zoning for a property is critical. If you’re buying a place to open a restaurant and the site zoning is industrial, this could ruin your plans. Therefore, any closing will require verification of the property’s zoning. This could come from the title company, city, or some other form of validation.
Federal and state laws have numerous environmental regulations. The worst thing that could happen in purchasing commercial property is to inherit an environmental mess. As a result, it’s important for buyers to do their due diligence as it relates to environmental surveys. This will usually result in a final agreement on any environmental concerns.
Similar to a home sale, a commercial transaction will have a deed of some nature to consummate the transaction. When this is recorded, ownership changes between the entities.
Most commercial deals also have another key element, leases. The seller has to assign the lease to the buyer. The buyer has to assume the lease. Tenants would get notified of such. This allows for continuity and the financial viability of the property.
The commercial transaction process is much more complex and unique than private transactions. Keep these four steps in mind and ensure you hire an experienced commercial escrow company to handle your next transaction. Above all, if you have questions, you can reach out to Bay Area Escrow regarding commercial escrow questions.