A Guide to Commercial Real Estate Transactions

Commercial real estate transactions involve several critical steps, each contributing to the successful completion of the deal. These steps, namely Identification and Origination, Underwriting, Due Diligence, and Closing, require careful attention and proper execution. While each transaction may follow a unique process, they all adhere to a general framework tailored to the specific legal entities involved and the transaction’s peculiarities.

For aspiring commercial real estate investors, understanding and following these steps are essential for a smooth transaction:

Identification and Origination:

This initial stage involves identifying potential investment opportunities amidst the vast array of commercial properties available. Thorough market analysis and the development of an investment thesis are crucial strategies to guide the search. Investors can focus on specific property types, like Class A buildings, or analyze promising geographical locations for commercial property investments.

Underwriting:

Underwriting entails a comprehensive analysis of the selected property’s past and current data to project its future performance. Key activities in this stage include gathering financial documents like bank statements and invoices, conducting a pro forma analysis based on historical data to predict future expenses and income, and conducting market and submarket research. Negotiations with the seller or their representative regarding the property’s initial price are also part of this step. If the property successfully navigates this stage, a purchase agreement is drafted, and the buyer typically provides a good-faith deposit to a title and escrow company to confirm their commitment to the purchase.

Due Diligence:

During the due diligence period, a thorough inspection of the property is carried out to verify its condition and information, confirming its suitability for investment. The primary objective is to ensure that the property aligns with the claims made during the underwriting stage. This process involves hiring an appraiser to evaluate the property, engaging professional structural engineers to assess the building’s integrity, scrutinizing property documentation for accuracy, conducting interviews with the property manager to address any maintenance concerns, and physically inspecting plumbing and electrical systems. Satisfactory results from the due diligence phase pave the way for the final stage of the transaction.

The due diligence period is typically between 30 to 60 days, but this timeframe may vary depending on the buyer’s requirements. It’s essential to note that buyers can back out from a commercial real estate deal, but doing so without a valid reason may result in losing the good-faith deposit.

Commercial Real Estate Closings:

The closing phase is the culmination of the transaction process. While relatively short, it requires meticulous attention to detail. During closing, both parties sign all necessary documents, and funds are transferred from the buyer’s agent to the seller’s agent through the title and escrow company. Additionally, keys, access codes, and vital documents are exchanged to complete the transfer of ownership.

Understanding and diligently following the steps in a commercial real estate transaction are paramount to its success. Hiring a reputable real estate attorney like the Hedgeman Law Firm, can provide valuable support and guidance throughout the process.