The closing process for commercial real estate transactions is similar to that of residential real estate in a few key ways: first, you will need a purchase agreement that outlines the terms of the transaction, and time will be allotted for the proper inspection and investigation of the property. Secondly, the extent of due diligence required from the buyer and lender is different when buying commercial property. Third, buyers of commercial real estate have fewer protections than buyers of residential real estate, but they can access more creative means of purchasing.
Unlike residential real estate transactions, which include two persons, commercial real estate transactions entail a contract between two legal entities. The question, “What are the steps in a commercial real estate transaction?” arises because of the multi-step procedure involved in this transaction, which could take months to complete.
What Are the Steps in a Commercial Real Estate Transaction?
A commercial real estate transaction consists of the following steps: identification and coordination, due diligence, underwriting, and closing. Each of these processes entails a number of crucial tasks, like market analysis, pro forma analysis, good-faith deposit, and property appraisal, that gradually move the deal closer to completion.
Every commercial real estate transaction typically follows a different procedure. All of these procedures, though, are centered around the same broad structure. The legal entities engaged in a transaction define its path to completion from the outset, taking into account the unique characteristics of each one.
As a new commercial real estate investor looking to invest in properties, here are the steps to follow to ensure the smooth running of your commercial real estate transaction:
This stage has to do with the identification of investment opportunities. As a result of the vast number of commercial buildings around, ranging from shopping centers to office towers, investors have to pay a lot of attention while searching for the right one to invest in.
To guide yourself through this process, you should have a market analysis strategy. Building an investment thesis would help guide your market search, meaning you could either:
- Analyze the market based on a specific property type that provides the best investment opportunities, for example, Class A buildings
- Or analyze the market based on geography by determining the best locations to invest in commercial properties
The identification process could take months and could involve reviewing tens or hundreds of properties before selecting one that you believe to be the best for you. For this reason, it is advisable to analyze markets within less crowded areas, such as cities in the Midwest zone like the Cincinnati or Northern Kentucky area, to promote a quicker search process.
This stage has to do with carrying out a thorough analysis of past and current info of the selected property. This research is mostly carried out to determine how well a property will fare in future, based on its past and current performances. Here are some of the activities included in this stage:
- Procuring financial documents of the property such as bank account statements, balance sheets, and invoices
- Carrying out a pro forma analysis based on past data to arrive at a prediction of future expenses and income, thereby determining whether or not the investment is worth it
- Carrying out market and submarket research
- Talking to the seller or their representative to find out their initial price
If the selected property makes it through this stage, then a purchase agreement can be drafted by one of the parties. Furthermore, the buyer makes a good-faith deposit to a title and escrow company to show their serious intent in going through with the purchase.
To quicken this process and to ensure reliable results, it is advisable to work with a local realtor service
Due diligence period involves carrying out an inspection of a property to discover as much information as possible about it, in order to determine whether or not to invest in it. The main purpose of carrying out due diligence is to ensure that the property is exactly as advertised and to further confirm the predictions from the underwriting stage.
Here are some ways through which due diligence can be carried out:
- Hiring an appraiser to evaluate the property
- Hiring professional structural engineers to determine the integrity of the building
- Assessing the property’s documentation to be sure there are no questionable data
- Carrying out interviews with the property manager to find out if there are any issues regarding maintenance
- Touring the property to carry out a physical test of all plumbing and electrical systems.
If you are satisfied with the results of the due diligence, you can then move to the final stage of the transaction.
The closing is perhaps the shortest stage of the entire transaction process, but yet, is one of the most sensitive stages. In this stage, both parties sign all necessary closing documents and funds are transferred from the buyer’s agent to the seller’s agent through the title and escrow company. Also, keys, access codes, and important documents are transferred at closing.
The steps above are all salient in a commercial real estate transaction, and following them diligently will ensure that the transaction begins and ends smoothly. If you are in need of any additional help, it is advisable to hire the services of a real estate company.
Types of Commercial Real Estate
Commercial real estate is a broad term that covers various types of properties. Some of the most common types of properties involved in commercial real estate transactions include:
- Office buildings
- Shopping centers
- Industrial properties
- Multi-family properties
- Office space
- Hotels and resorts
- Medical offices
Commercial real estate transactions are complex, involving multiple parties and numerous steps. Here’s an overview of the steps involved in a commercial real estate transaction:
- Create a purchase agreement: After an offer is accepted, buyers and sellers sign a purchase agreement, which outlines the details of the transaction. This agreement includes information about the price, financing terms, timeline, buyer’s and seller’s obligations, contingencies, and other provisions related to the transaction.
- Open an escrow account: The buyer deposits money with a third-party escrow company to demonstrate their commitment to the transaction. It serves as security for both parties. Escrow for a commercial deal is more tightly controlled than residential real estate sales. No funds from the account are released until both parties meet the terms they’ve agreed on.
- Buyer receives books and records: Buyers should ask for a complete set of financial and operational documents from the seller to ensure they understand the property’s condition before the closing. This may include financial statements, tax returns, leases, permits, licenses, surveys, and appraisals.
- Inspect the property’s physical condition and title and negotiate buyer’s contingencies: Buyers should inspect the property and thoroughly review any liens or other encumbrances on the title before moving forward with the purchase. Buyers can also negotiate contingencies with the seller that they must meet before closing.
- Apply for a loan: If the buyer requires financing, they need to apply to a lender who will determine whether they are eligible for a loan and at what terms. Generally, buyers don’t make a non-refundable deposit with their lender until after contingencies are met.
- Close the transaction and notify tenants: Once the buyer has completed all inspections and the lenders approve the loans, the transaction is officially closed, and the title changes hands. The buyer should notify all tenants of their new ownership.
What are the Types of Estate Management?
The evaluation, purchase, development, and marketing of commercial real estate, such as stores, hotels, and offices, are all included in estate management. Estate management is not just for business properties. The administration of residential buildings is also included.
To put it simply, estate management is the process of managing both urban and rural properties in order to generate revenue for the owner. In order to obtain returns in the form of monetary value, political, social position, prestige, etc., it entails a person who has demonstrated interest in the estate and property managing and overseeing a landed property.
Facility management and estate management are related fields. Estate management is included in the field of facility management, and facility managers can also serve as property or estate managers. In order to provide essential answers and discover solutions to issues, estate managers use scientific methodologies and apps to assist in estimating the value of a property.
Real estate management and property management are two different but similar fields that are overlapped.
The major difference between estate management and property management is this: Real estate management is involved with listing and selling of properties for property owners. Meanwhile, property management on the other hand is involved with managing properties for property owners. Managing properties include repairs and maintenance, renting of properties, dealing with tenant issues, and other property management services. Hence, a property manager can also be referred to a facilities manager.
Property managers are often in a contract deal with property owners, who pay an agreed percentage of the profit gotten from the property through leasing or other means to the professional property managers for their managing services.
Moreover, while estate managers often get affected when there is a down-slide in housing market, property managers usually don’t get affected because property owners turn to them to rent out their houses until the wave is calmed.
There are several types of property management or estate management. The types of estate management that exist depend on the type of building or facilities being managed. While some estate management companies focus on one type of estate management, others focus on more than one type of estate management.
There are 4 major types of estate management:
- Asset Management: Although often associated with the finance sector, asset management also have a connection with property and estate management. Asset management is the process of developing, maintaining, and selling items of property having value owned by either a person or company to generate profit. These items can meet debts, commitments, or legacies.
- Self-storage Management:This is a type of estate management that involves overseeing and managing operations in a facility that offers storage space rentals. Managing a self-storage includes ensuring that the storage units are clean and the security and safety system is functioning.
- Commercial Property management: This type of estate management or property management includes managing buildings or facilities that generate income. These facilities may consist of office buildings, retail stores, industrial properties, and warehouses. Commercial estate management can be a very profitable estate management depending on the number of the tenant occupying the facility, the size, and the specific use of the facility.
Commercial property managers or estate manager duties may include filling vacancies, daily maintenance of facilities, etc.
Why is property management critical? A facility, building, property, or estate managed by a property manager or an estate manager will not cost the property owner money. Rather, it will fetch him money. The following are the duties of a property manager or an estate manager:
The following are the duties of a property manager or an estate manager:
- Fulfill Property Owner’s Goals: The first function of a real estate agent is to meet the goal of the owner
- Property managers help to develop a plan to manage the properties
- Estate managers are saddled with the responsibility of developing and implementing marketing plans using tools needed to conduct market and property analysis to determine rental rates and target audiences for the purpose of marketing.
- Another function of a real estate manager is the development of a maintenance program for the facility or restate to be managed.
- Responding to and meeting the needs of the occupants of a facility such as security is another duty of an estate manager.
- Preparing budgets and cash flow projections that adhere to the forecast of the property owners.
- Effective communication between facility occupants and owners.
To become a real estate manager or a property manager, you will need a bachelor’s degree or a master’s degree in a relevant field such as real estate management or hotel management. It is also important to get a degree or professional certification in facility management, property management, or building surveying.