Protect Your Commercial Real Estate Investment At Closing And Beyond
When you reach the closing in a commercial real estate deal, it can feel like the finish line. You’ve found the opportunity, negotiated the terms, lined up financing, and completed inspections. That said, it’s also important to remember that at closing, there is a transfer of risk.
When I interviewed Pierre E. Debbas, Esq., founding partner of Romer Debbas, he explained, “As a landlord or investor, you inherit all the good and bad that comes with the building.” For this reason, you’ll want to carry out the right steps to protect yourself at closing.
Keep these in mind as you approach the finish line of a real estate transaction:
You Inherit More Than Just the Asset
Unlike residential transactions, which have established protections for consumers, commercial deals often come “as is.” You’ll be expected to do your own diligence. As Pierre said, “You have to look at wherever you’re investing and what the regulatory environment is in that area.”
In some cities, rent regulations, Certificates of Occupancy, and historical filings can affect value. For instance, a property marketed as having ten legal units might have two additional unapproved units in a basement. That could impact financing, insurance, valuation, and your ability to collect rent.
Engage Legal Counsel Early
Having the right counsel can help you establish a strategy. You’ll want your attorney to review the purchase and sale agreement carefully, paying attention to terms and language used. Legal counsel should also review your entity structure before closing. Separating assets into different entities can prevent risk at one property from affecting your broader portfolio.
Be Thorough with Due Diligence
In competitive markets, buyers sometimes waive contingencies to make offers more attractive. While that may help secure a property, it could also increase your exposure. You’ll want to make sure you have enough time to look for open violations, unpaid fines, or unresolved permits. You’ll also want to check that prior rent increases or tenant deregulations were executed legally.
To carry out proper due diligence, you’ll want to have the right experts on your team. These specialists can help with Phase 1 and Phase 2 environmental and property condition reports. You’ll want a title agent who can research any issues with the property. Land use and landlord-tenant attorneys can help you gain an understanding as well. You might also request estoppel certificates from tenants to confirm rent amounts and lease terms. Banks may require additional documentation or certifications. You’ll want to be aware of these possibilities so you can ensure you have enough time to gather what’s needed before closing.
Be Aware of Your Risk Tolerance
As Pierre pointed out in our conversation, once the transaction is complete, you own both the upside and the exposure. If you’ve verified compliance, structured entities properly, negotiated protective contract language, reviewed leases thoroughly, confirmed title, and completed environmental diligence, you can move forward with confidence.
Ultimately, protecting yourself at closing takes the right about of detailed discipline. The most successful investors give themselves enough time to confirm that everything aligns with their expectations and their risk tolerance. If you understand the regulatory environment, engage experienced legal counsel, and complete thorough due diligence, you’ll reduce the risk of surprises after the transaction is complete.
Commercial real estate rewards those who protect their downside at closing time. By taking the right steps, you can put yourself in a position with less exposure. Above all, having the right attorney who is a specialist in what you’re looking to do will be valuable. When you approach closing with a detailed plan and strategy, you’ll lay the foundation for long-term performance.