Closing Costs in a Commercial Purchase

The closing process for commercial real estate transactions can be expensive, far more expensive than a residential real estate closing. In addition to preparing and negotiating the purchase contract to satisfy the requirements of the buyer’s lender, the buyer needs to plan for the high cost of bringing a commercial real estate transaction from contract to closing.

If all parties work together, everyone understanding what is required to be done to get the transaction closed, the cost of closing can be kept to a minimum, even though the cost will still be high. [pullquote-right]It is not unusual for closing costs for a commercial real estate transaction with even typical closing issues to run tens of thousands of dollars.[/pullquote-right]For a first time buyer this may be sticker shock. An experienced buyer will understand the costs involved in documenting and closing a commercial real estate transaction and factors them into the overall cost of the transaction, just as is done with other costs such as the agreed upon purchase price, real estate brokerage commissions, loan brokerage fees, loan commitment fees and the like.

Closing costs can be a significant transaction expense and must considered in the decision-making process in determining whether to go forward with a commercial real estate transaction. They are unavoidable costs that add to buyer’s cost of acquiring commercial real estate. These costs have to be taken into account to determine the real purchase price to be paid by the buyer to acquire the commercial property and accurately calculate the anticipated yield on investment.

Some closing costs may be shifted to the seller through custom or effective contract negotiation, but many will be the sole responsibility of the buyer. Expenditures that will the responsibility of the buyer include title insurance with required lender endorsements, an ALTA Survey, environmental site assessment(s), a Site Improvements Inspection Report and the buyer’s attorney’s fees. The attorney fee should not come as a surprise. A good rule of thumb is that the combined fees a buyer must pay to its own attorney and to the lender’s attorney is usually around 1% of the purchase price.

The first expense the buyer will incur immediately is paying for the appraisal. A first time commercial real estate purchaser may shocked at the cost. Where a residential buyer may be charged $300 to $400 for an appraisal, the commercial appraisal can run 5 times that amount and maybe more depending on the type of property. The buyer must recognize the substantial costs to be incurred in preparing for closing so that cash requirements can be accurately calculated. With a clear understanding of what is required, and advanced planning to satisfy those requirements, the likelihood of successfully closing will be greatly enhanced.

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