The process of Closing a commercial real estate transaction differs significantly from a residential transaction. A lender’s requirements typically demand more from the borrower purchasing a commercial piece of real estate than from a homeowner. From the formation of the Contract to Closing, the commercial real estate transaction differs from a residential real estate transaction.
First, commercial real estate transactions are not governed by the attorney review requirements that control residential real estate transactions. More often, the initial Contract for commercial real estate purchase is prepared by an attorney. The terms of the Contract often begin with a Terms Sheet or Letter of Intent, and are negotiated between the parties and then finalized in a formal Contract. For larger transactions or if there is a business being sold simultaneously, the Contract may have several asset schedules, and the parties will need to determine how to deal with inventory, benefit plans, key employees and any seller financing. Frequently, the Seller will be subject to a non-compete and/or non-solicitation covenant.
Once the Contract has been executed, it will typically provide for a period of due diligence in which the purchaser is allowed to inspect the property. Inspections can include searching for structural defects, environmental contamination, reviewing the history, including the environmental history of the property, checking to confirm that the zoning matches the purchasers’ anticipated use of the property, confirming the existence of adequate utilities and performing searches with the New Jersey Division of Taxation to insure that the current owner is up to date on taxes. Once all of these due diligent steps are completed, the parties await confirmation of any financing if financing is involved.
When it comes to financing, the process starts with an application to a lender. The lender will then issue a financing commitment or mortgage commitment, which includes all of the conditions that must be satisfied before the loan will be completed. Frequently, the lender will involve an attorney who will prepare a lengthy checklist to be satisfied prior to Closing. The attorney for the purchaser will work with the lender and its attorneys to complete the checklist and satisfy all the items. These items can include the purchase of hazard insurance, confirmation of financial records, receipt of environmental inspections, includes good standing certificates for purchasing entities, completion of operating or partnership agreements for purchase amenities, and various other steps to ensure the legitimacy and sufficiency of both the organizations and their financial capacity. Once the checklist has been completed, the loan will be cleared to close.
Like the residential Closing, the Closing can take place at the office of the buyers’ attorney but when financing is involved, will frequently occur at the office of the attorney for the lender, since the lender will have a significant number of documents for the borrower/purchaser to sign at Closing. These documents can include the Note, Loan Agreements, Mortgage, Security Agreement, Guarantees, Environmental Indemnifications, Assignment of Rents, Assignment of Building or Architect Documents and various other documents for the protection of the lender. A commercial Closing will typically take much longer than a residential purchase, given the number of documents involved. The fees associated with a commercial transaction are therefore also higher than for a residential transaction.
The lawyers of Byrnes, O’Hern & Heugle have experience handling both residential and commercial real estate transactions, as well as the sales and purchases of businesses and their assets.
