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5 Red Flags to Check Before Closing on a Commercial Property

If real estate was easy, everyone would do it.

So, when it comes to the closing statement on a commercial real estate property, you 100% need to dot all the i’s and cross all the t’s before the Close of Escrow (COE) on your transaction.

While keeping your acquisition closing checklist handy, remember to reference the following questions to be proactive for the closing. 

 

Have all the necessary documents been fully executed?

Of course, you’ll need to have all the necessary documents signed or initialed, including the most current Purchase and Sale Agreement (PSA), all of its addendums, true copies of the tenant lease(s), estoppels, etc. But take it a step further and check the ownership type to ensure you have all the sign-offs needed.

On this note, if there’s a signing authority, or a person signing on behalf of the selling entity, it needs to be verified.

*Tip: Look for a “time is of the essence” clause in each applicable document as that will clarify whether it is a firm deadline to sign.  

 

Have you checked compliance with the loan commitment requirements?

Perhaps the most important item after having all the signatures is to confirm compliance with the loan commitment requirements. This is especially important because the purchase will not close if the loan terms don’t coincide with the requirements and affirmative covenants of the letter. 

Specifically, search the confirmation of the zoning compliance, updated survey report, and any outstanding taxes, liens or encumbrances such as easements, among other reports.  

*Tip: If there is some noncompliance, your attorney may be able to negotiate some items in the loan documents.

 

Is the deed in proper recordable format?

The commercial property deed is the most vital piece of conveyancing documentation in the transaction. However, if the proper form is not used, there is no effective conveyance of title. So even though the deed is valid, the buyer would not be unable to record it and put the public on notice of the transfer of title.

Your best defense against this flagged item is to research what format the local recorder’s office will accept the recording documents. This may include any color or size requirements; for example, some recorders may call for a three-inch margin at the top and a one-inch one on the side.

*Tip: Don’t forget to inquire about which submittals must be “original” versions.  

 

Have you checked for any title defects?

If any title defects should appear for your commercial property, take note of the type of deed so you’ll know how to proceed. For example, in a general warranty deed the seller must compensate the buyer up to the amount of the consideration that the buyer paid.

Some of the common defects to watch for include public records errors, unknown liens against the property, and forgeries/false impersonations. 

*Tip: Protect against being blindsided by title defects by obtaining the most recent title insurance policy from the seller before closing. 

 

Are there any closing contingencies left to be fulfilled?

Finally, refer to your closing checklist one more time for any contingency documents that may have been skipped. During this stage, also ask if the accuracy of the representations, square footage, and anything else applicable to the property has been verified.

Another example of a contingency to not overlook is if the Phase I Environmental Site Assessment called for a Phase II because that entire assessment must be conducted within one year of closing. Also, don’t forget the report should be in the name of the prospective buyer as sometimes it may be in the name of the entity ordering it instead.   

*Tip: Be sure to take detailed note of the pre-closing condition of the property.


The PSA will dictate the specifics of the closing checklist for the responsibilities of all parties. However, keep these red flag items in mind before closing on your next commercial property because the process offers less protection for buyers but allows for more creative deal-making.  

Tags: Acquisition Best Practices Seller Broker Buyer

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