Closing a commercial real estate deal involves many of the same costs as you would find in a residential closing. The main difference is the costs are normally much higher for a commercial deal due to the additional research required in not only closing on the physical property but the financial aspects as well.
It is normal for commercial real estate closing costs, even for an inexpensive property, to run into the thousands of dollars. As a buyer you need to be aware of these costs and factor them into your overall price for obtaining the property.
All of the closing costs are negotiable between the seller and buyer. As a buyer you can, and should, have it stated in the contract which party will be responsible for each cost at closing such as title insurance, deed stamps, surveys and settlement fees just to name a few. However, since RESPA (Real Estate Settlement and Procedures Act) does not apply to properties that have more than 4 residential units, your lender is not restricted in what they can collect from you at closing.
For example, in a residential closing the lender can only collect a certain amount of money to hold in escrow for expenses like real estate taxes and insurance. In a commercial real estate transaction there is no limitation and your lender could require you to put significantly more money into escrow or charge higher loan administration fees, points or any other cost they deem acceptable. Because of this it is critical you negotiate all of the fees for your loan with your lender well in advance of closing.
While there is nothing stopping you from closing a commercial real estate transaction on your own, it is highly recommended you use the services of a qualified real estate attorney. Although this presents an added expense at closing that can run anywhere from $1,000 to $5,000 or more depending on the size and complexity of the deal, it is money well spent. A mistake made at the closing table can cost you untold tens of thousands of dollars over your entire length of ownership of the property.
With all of this in mind, here is a basic breakdown of what you can expect each party to pay for in a commercial real estate closing.
Seller Paid Expenses
- Title Policy covering the basic insurance requirements but if your lender requires specific endorsements to the title policy then the buyer can expect to pay for those endorsements.
- ALTA Survey. Most lenders will require a new survey before lending on a commercial property. These surveys can cost anywhere from $800 and up depending on the property involved.
- UCC Searches. These are similar to title searches except they are done on any personal property or equipment that is being sold as part of the transaction. The UCC is similar to a mortgage that is placed on property. The UCC search tells the prospective buyer if there are any remaining liens on the property and equipment being transferred.
- State and County Transfer Taxes. This is normally the deed stamps required by the local jurisdiction to be paid whenever title changes hands on a piece of property. The rate collected is set by the state or county.
- Pro-rated expenses up until the day of closing. For example any utility bills such as water/sewer or electric that are paid on a monthly or quarterly basis will be paid by the seller up to and including the day of closing. This is also true for any real estate taxes that are owed on the property. The seller is responsible for paying all taxes owed up to the day of closing.
- Costs to clear title. This includes any amounts needed to pay off the sellers existing financing on the property, record satisfactions of liens or mortgages, payoffs to municipalities, or any other expense that must be paid in order for the seller to deliver clean title to the buyer.
Buyer Paid Expenses
- Environmental Due Diligence. This includes a Phase I or Phase II environmental study on the property. However many times a contract will state the seller will reimburse the buyer for this expense if any undisclosed contamination is found in the report that causes the closing to be canceled.
- Title Endorsements. As stated above, these are endorsements to the title policy such as an environmental hazard endorsement that the buyer’s lender requires in order to fund the loan on the transaction.
- Municipal Transfer Taxes that may be required such as operating permits or pre-paid business licensing requirements.
- Special Survey Additions such as a flood search or topographical contours of the property or aerial views required by the buyer’s lender.
- Property Inspection expenses. These include the expenses you incurred as part of your due diligence to determine the status of the property both structurally and for its intended use.
- Financing Expenses. These are any fees charged by the buyer’s lender to facilitate the funding of the transaction and can include the cost of recording the mortgage, assignment of rents, recording the deed, lender administration and closing fees.
Some expenses are shared by both parties such as the settlement closing fee charged by the title company to perform the actual signing and recording of documents. Also any escrow fee charged by the title company to transfer the funds from one party to the other.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.