What to Expect in a Commercial Real Estate Transaction
Entering a commercial real estate transaction is a bit like playing high-stakes chess: it’s strategic, highly detailed, and involves a lot of moving parts. Unlike residential deals, commercial transactions are driven almost entirely by financial logic and risk mitigation.
Depending upon the complexity of the situation, commercial real estate transactions take much longer than a residential real estate transaction. The timeline for a commercial real estate transaction goes through four key phases:
1. The Contract Phase
2. The Due Diligence “Deep Dive” Phase
3. The Underwriting and Financing Phase
4. The Closing Phase
The Contract Phase is a time when there is a lot of back-and-forth between the buyer, seller, and their attorneys and/or real estate agents. In many transactions, this starts with a Letter of Intent that outlines the “big” picture. It’s a non-binding document covering terms, deposits, price, and duration. This document ensures both parties are on the same page and agree to the big-ticket terms of the deal before drafting a formal Purchase Agreement. Once those key terms are agreed to, the parties can proceed to formalize a thorough Purchase Agreement that contains all the specifics needed to carry a successful transaction across the finish line.
The Due Diligence Phase is a critical phase of discovery. This transaction isn’t just a building being bought; it’s a business asset, so several aspects will need to be investigated: 1) financials review (property tax history, utility bills, rental income, etc.) with your lender and financial team; 2) the physical condition of the building (get professional inspections of the roof, HVAC, structure); 3) environmental phase (check for soil contamination or feasibility of planned construction); 4) title work review with a real estate attorney to ensure there are no hidden liens or property disputes; and 5) contracts with tenants or other parties in possession of the sale property.
The Underwriting and Finance Phase can be a demanding phase due to the requirements of lenders. This phase will include details such as appraisals, debt ratio review, and discussion of personal guarantees. This phase often happens simultaneously with the Due Diligence Phase and can make or break a deal.
Lastly, the Closing Phase leads up to when the buyer can call “checkmate” on this game of chess, making this property theirs and sending the seller home with the sale proceeds. The closing agent works closely with the buyer, seller, lender, attorneys, and real estate agents to accurately document the transfer of the property, closing funds, and all related contracts or business interests. Closing documents are often pre-signed and held “in escrow” by the closing agent until the agreed date of Closing, when the transfer legally happens and the buyer and seller part ways with their new property and cash in hand.
Commercial transactions move fast but like any transaction, there can be slowdowns or surprises. Slowdowns can be avoided by working with experienced bankers, realtors, real estate attorneys, and title examiners who know the ins and outs of zoning issues, financial hiccups and know how to navigate environmental findings and legalese.
As this season of growth begins, buyers deserve counsel who knows the market. With the breadth of experience our business and real estate attorneys have, paired with their relationships with professional real estate partners, you can lean on us to support your business and next commercial real estate transaction.