Anatomy of a Commercial Real Estate Purchase

by Sands Anderson PC
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Once you have selected a property and have some idea of a fair price and market conditions, it is time for the real estate attorney to be involved. There are many protections for consumers purchasing real estate, but hardly any in the commercial arena, so it is important to have a trusted adviser to protect you.  

The attorney will draft and negotiate the purchase contract, manage due diligence, search the title, review the bank documents, prepare the closing statement, hold the closing and disburse the money.  Often the attorney will form a limited liability company to hold the real estate asset.

Buyer's market

Buyer's market (Photo credit: kevin dooley)

Commercial purchase agreements typically have a due diligence period during which the buyer can inspect the buildings, mechanical systems, environmental issues, zoning issues, title issues and anything else he or she desires.  During this period, the buyer can typically walk away and get a full refund of the earnest money deposit.  Sometimes as a result of what is discovered during due diligence period, the seller will make repairs or reduce the price.

Typically, while a buyer is starting to look for a building, he or she will start working with a bank on the funding end.  Commercial mortgages are typically much shorter than residential mortgages and carry higher interest rates.

Once the contract is settled, the bank will send the closing attorney the loan documents for review.  It varies widely whether these are negotiable, but it is essential a buyer understand what he or she is signing and what happens in a worst case scenario.  It is also common for the principals of the company to personally guaranty payment of the loan.

Then the attorney prepares a closing statement that is approved by buyer, seller and the bank.  The buyer delivers certified funds to the attorney for the out-of-pocket costs and signs the bank loan documents at closing.  At closing, seller signs the deed and an affidavit regarding recent construction (either there wasn’t any or all workers have been paid).

North Carolina is an attorney closing state, so an attorney has to make sure there have been no new liens filed since the initial title examination.  The attorney (or a paralegal) goes to the register of deeds in the county where the property lies, and makes sure there are no new liens since the due diligence title search.  After recording the deed and other documents, the attorney disburses all funds shown on the closing statement (including payoff of the seller’s mortgage).

It is often beneficial for a business to buy commercial real estate in a separate limited liability company, both for risk management (separate the property from liabilities of the business) and for tax savings.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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