Five Ways Commercial and Residential Real Estate Closings Are Different

Commercial real estate closings differ in some very substantive ways.  Even though there are complex matters that can arise during a residential closing, i.e. owner financing and 1031 exchanges, parties to commercial real estate sales need to understand these additional differences.  Here are a few key ways these transactions differ from residential closings.  

1. Complexity of Transactions: Commercial transactions often involve more complex legal and financial structures.  Corporations and investors are involved, which often require additional documentation and agreements, i.e. lease assignments, partnership agreements, entity formation, and bills of sale, etc., al of which can require additional due diligence and negotiation.

2. Lengthier Due Diligence: The due diligence period for commercial properties is typically longer, involving thorough inspections with different vendors, complicated and expensive environmental assessments, and detailed financial analysis of income potential, all of which can delay the closing process.

3. Financing Structures: Commercial real estate financing often involves different loan structures, such as commercial mortgages or equity financing, which can have more stringent requirements and longer approval times compared to residential loans.

4. Valuation Methods: Commercial properties are usually valued based on income potential and capitalization rates rather than comparables or market conditions.  The difference in valuation methods often requires detailed appraisals and could potentially affect negotiations and closing timelines.

5. Regulatory Considerations: Commercial properties may face more extensive regulatory and zoning requirements, i.e. Fire Marshall clearances, local permits and lengthy environmental evaluations.  These make commercial closings much more complicated and require additional time to resolve.