With a rapidly growing, competitive, and potentially prosperous industry, commercial real estate transactions require legal services to keep up with the same industry traits.
Closing costs in a commercial real estate purchase or sale are the costs payable by the buyer (aside from the purchase price itself) or seller on closing.
For a buyer, the biggest of these is the land transfer tax. In Ontario for commercial property it’s on a sliding scale, up to 2% of generally the purchase price. Non-Canadians buyers of land in many specified areas in Ontario pay an additional tax of 15% of the purchase price. Title insurance comes with a premium tied to the purchase price, about 50 to 70 cents per $1,000, so on a $10 million purchase, an owner’s policy will cost $5,000 to $10,000. The buyer also has to pay the fees of his or her lawyer and others assisting the buyer to get to closing, for environmental, financial, building and other investigations and reports commissioned as part of the due diligence. The buyer also has to pay his or her accountants and financial advisors who advised on structuring the deal for the buyer. Title insurance comes with a premium tied to the purchase price, about 50 to 70 cents per $1,000, so on a $10 million purchase, a owner’s policy will cost $5,000 to $10,000. Other costs: appraisal fee
The seller also has closing costs to pay. The largest of these is paying the commission to the real estate broker, often 4% to 6% of the sale price. The seller also has to pay its lawyer and others assisting the seller on the sale. If a mortgage has to paid off, then in addition to the mortgage amount, the seller has to pay accrued interest to date, and perhaps early-termination penalties and fees and, to register a discharge of the mortgage, a mortgage discharge fee.
All these costs have to be planned and budgeted for. Each party’s respective lawyer will prepare a closing funds statement for his or her client well ahead of closing and arrange to be “in funds” to close.
Of course, though you might expect a lawyer to say that. But in 30 years of commercial real estate work, I’ve never seen a buyer or seller without a lawyer for closing. And for good reason: closing a commercial real estate deal is not “cookie-cutter” work, and has to be mapped out well in advance. The lawyers, between them, prepare a detailed closing agenda setting out who does what when, prepare and negotiate the many documents, some of which on closing are registered (such as the transfer) and others are not (such as confirmations of the representations and warranties from the agreement of purchase and sale). But the real value an experienced lawyer brings to closing the deal is to handle the unexpected – missing confirmations, obtaining undertakings, holdbacks or arranging an escrow closing until the problem is resolved. These problems could include the buyer discovering a latent defect in the building,
More plainly called a Tenant Status Certificate, this Certificate is a statement obtained from a tenant in which the tenant confirms facts about the lease. These facts typically include: what are the lease documents; what changes have been made to the lease since it was signed; what’s the current rent; whether the tenant claims there are any defaults by the landlord; what’s the remaining term of the lease; and whether there’s any dispute between the landlord and tenant.
The Certificate is obtained as part of purchase of commercial real estate that has tenants on it. A lender to the buyer will also usually like to see the Certificates. Most leases require the tenant to deliver some form of this Certificate on request by the landlord. Issues may arise if the buyer or lender require more information from the tenant than the tenant is required to give – this can put the parties in a bind and jeopardize the sale. There are work-arounds to mitigate this risk, such as the buyer and seller agreeing in the sale agreement on the form of Certificate the tenant will be requested to sign and a materiality threshold on how many Certificates the seller must obtain and from which tenants.