What are Some Differences Between Residential and Commercial Real Estate Transactions?

Commercial real estate transactions involve properties that are used for business purposes. This type of property includes office buildings, hotels, warehouses and vacant land. The due diligence process is different for commercial real estate. There are specialized inspections, and an income & expense analysis for the property must be completed. In addition, lending for commercial real estate purchases is guided by different standards than those that apply to residential properties.

Commercial property transactions most often involve corporate entities such as limited liability companies as buyers and sellers. Closing a commercial real estate transaction involves reviewing the corporate documentation of the entity in title as well as that of the purchaser. One purpose of this procedure is to find out who has the authority to sign on behalf of each of the corporate entities.

What Does Corporate Ownership Protect?

Corporate ownership guards the personal interests of the individual members the organization by protecting their personal assets from creditors of the corporation. Members or shareholders are shielded from the debt liabilities of the corporate entity because only corporate assets need to be used to pay business debts.

Of course, there are some circumstances in which limited liability does not protect a member’s personal assets. Proper formation of the corporation under the guidance of an attorney and adequate business liability insurance coverage are both essential in order to gain maximum benefit from incorporating.

What Does the Transaction Include?

Similar to residential real estate transactions, commercial property transactions include a typical deed, a Non-Foreign Affidavit to attest that the seller of the real property is not a non-resident alien or a foreign corporation, and an owner’s affidavit.

However, commercial property transactions usually involve several other documents relevant to the transfer of personal property, proration of rents, and transfer of security deposits. Also, a Uniform Commercial Code (UCC) lien search is conducted to determine whether or not the property has been used as collateral for any secured transaction.

Sometimes a commercial transaction is part of the sale of a business and this entails handling additional complexities and details.

What About Escrow?

A commercial real estate closing generally involves a more structured escrow process than a traditional residential transaction. Typically, after an initial deposit is placed, an additional deposit is required after inspections are completed and loan approval is obtained. These deposits often become non-refundable.

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