A Davis Law Group Guide to Commercial Real Estate Closings — Part 3
You’ve negotiated the Letter of Intent, worked up a Purchase and Sale Agreement, done your due diligence, and secured your financing. The work is done, now all you have to do is sign the closing paperwork, right?
Not exactly. Closing day and the weeks of preparation leading up to it have their own moving parts. A commercial real estate closing is not a single moment, but rather a coordinated sequence of deliverables, financial calculations, executed documents, funding steps, and deed recordation that must all come together at the right time. So, let’s walk through what closing day entails and what you can expect.
The Pre-Closing Period
The time between signing the PSA and sitting down at the closing table can range from a few weeks to several months. During this period, both parties should communicate regularly so that problems can be resolved as they arise, rather than first identified on closing day.
An important and helpful pre-closing tool is a closing checklist. A well-prepared checklist tracks every deliverable, deadline, and responsible party, including formation and authority documents, acquisition documents, title and survey items, loan documents, and the final closing statement. Important dates should also be noted, such as the expiration of due diligence and financing contingency periods, lender payoff notification deadlines, and wire transfer cut-off times on the day of closing. Missing any one of these items can delay the closing, which nobody wants.
Title Insurance and Title Review
Title insurance is a central part of the commercial closing process. Early in the transaction, the title company issues a title commitment identifying the conditions that must be satisfied before closing and the exceptions that will remain in the owner’s title policy. The purchaser, lender, surveyor, and counsel should review the commitment, exception documents, and survey together so that easements, restrictions, access issues, encroachments, unreleased liens, and other title matters can be addressed before the closing date.
In financed transactions, the lender will usually require a lender’s title policy, specific endorsements, gap coverage, and confirmation that the deed of trust will be recorded in the required priority position. The owner’s policy and any requested endorsements should also match the negotiated title requirements in the PSA. After closing and recordation, the title company should issue the final owner’s and lender’s policies, along with copies of the recorded deed, deed of trust, releases, and other recorded instruments.
Entity and Authority Documents
Before the deed changes hands, the title company and lender will require that the seller and purchaser show that they have the legal authority to complete the transaction.
For the seller, that typically means producing an updated certificate of good standing from the state where the entity is formed (generally required to be dated no more than 30 days before closing), a certificate of authority to do business in Virginia if the entity is formed elsewhere, and internal organizational consents or resolutions authorizing the transaction.
For the purchaser, the same requirements generally apply. If the purchaser is using a newly formed LLC to purchase the property, which is common, formation documents must be filed and a federal tax identification number obtained well in advance of closing. These documents should be sent to the title company for review and approval weeks before closing, when possible.
Coordinating Estoppels, Consents, and Contract Notices
For income-producing properties such as office buildings, retail centers, or industrial parks, the seller may have an obligation under the PSA to deliver tenant estoppel certificates before closing. As we covered in Part 2 of this blog series, these are certifications from tenants confirming that their leases are in effect, there are no outstanding defaults, and the economic terms are accurately reflected.
Estoppels take time to collect. A “clean” estoppel with no noted defaults, claims, or open issues is the goal. Any estoppel that comes back with exceptions needs to be addressed before closing can proceed. Simultaneously, both parties are finalizing which service contracts the purchaser will assume and which will be terminated. Termination notices, assignment notices, and any required third-party consents should all be coordinated well in advance.
Sit-Down Closing vs. Escrow Closing
In Virginia, commercial real estate transactions typically close through one of two formats: sit-down or escrow closings.
In a sit-down closing, all parties or their representatives gather in one place, sign documents, exchange funds, and authorize the deed to be recorded. This format works well for straightforward transactions but can be logistically complicated when multiple recording jurisdictions are involved. This format is rarely used in Virginia.
An escrow closing is more common in Virginia, especially for larger or more complex deals. In this format, the parties deliver all signed closing documents and closing funds to the escrow agent, typically the title company, one to two days before the scheduled closing date. The documents and funds are held in escrow and are not released or deemed effective until the parties authorize release and recordation under agreed escrow instructions. This approach gives everyone time to confirm that everything is in order before the transaction becomes irrevocable.
The Closing Statement
The closing statement or settlement statement accounts for the purchase price, the earnest money deposit, all prorations and adjustments, outstanding payoffs, and the net funds each party will send or receive at closing.
Common proration items include rent, real estate taxes, utility charges, and amounts under assigned service contracts. Security deposits are either transferred directly or credited to the purchaser on the closing statement. The seller is credited for prepaid expenses that benefit the purchaser after closing; the purchaser is credited for accrued but unpaid expenses.
In Virginia, transfer taxes must be accounted for on the closing statement. Virginia imposes both a state grantor’s tax and in some localities the Hampton Roads Regional Transit Fund, generally paid by the seller, and state and local recordation taxes, often paid by the purchaser unless the PSA or local practice provides otherwise. Some entities, such as churches, may be exempt from the transfer taxes. These amounts are calculated based on the purchase price and must be included in the final figures before the closing statement is approved.
What Changes Hands at Closing
The closing document package in a commercial transaction is considerably more extensive than in a residential sale. The seller executes and delivers the deed, a bill of sale for personal property, assignments of leases and assumed contracts, an assignment of intangible property (licenses, permits, warranties), a FIRPTA certificate, a title affidavit for the title company, and a bring-down certificate confirming that representations and warranties remain accurate as of closing. The purchaser delivers its counterpart documents, wires the net purchase price, and confirms that its property insurance is bound and effective as of the closing date.
Post-Closing
Several items typically require attention in the days and weeks following closing. Notices must go to tenants informing them of the change in ownership and directing future rent payments to the purchaser or its new property manager. Utility accounts need to be transferred. Any service contracts the purchaser assumed should be formally acknowledged with the counterparties.
Both parties must also complete a post-closing reconciliation for any proration items where a final figure could not be determined at closing, such as real estate tax bills not yet assessed, water meter readings taken after the fact, or tenant rent arrearages. The PSA should specify a deadline for completing this reconciliation, typically no more than 180 days after closing. Once that window closes, the books are settled.
Davis Law Group Can Help
A commercial real estate closing is not a single event. It is the culmination of a process that began with the LOI, ran through the PSA and due diligence, and ends with the recorded deed and a set of clean closing binders. Every step along the way is important and can make or break a good deal.
At Davis Law Group, we guide clients through the full arc of commercial real estate transactions, from LOI to final post-closing reconciliation, with the goal of a clean closing, on schedule, with no surprises. If you are planning a commercial acquisition or sale and would like to discuss the process, contact our office to schedule a consultation.
From Contract to Keys: What Actually Happens at a Commercial Real Estate Closing
A Davis Law Group Guide to Commercial Real Estate Closings — Part 3
You’ve negotiated the Letter of Intent, worked up a Purchase and Sale Agreement, done your due diligence, and secured your financing. The work is done, now all you have to do is sign the closing paperwork, right?
Not exactly. Closing day and the weeks of preparation leading up to it have their own moving parts. A commercial real estate closing is not a single moment, but rather a coordinated sequence of deliverables, financial calculations, executed documents, funding steps, and deed recordation that must all come together at the right time. So, let’s walk through what closing day entails and what you can expect.
The Pre-Closing Period
The time between signing the PSA and sitting down at the closing table can range from a few weeks to several months. During this period, both parties should communicate regularly so that problems can be resolved as they arise, rather than first identified on closing day.
An important and helpful pre-closing tool is a closing checklist. A well-prepared checklist tracks every deliverable, deadline, and responsible party, including formation and authority documents, acquisition documents, title and survey items, loan documents, and the final closing statement. Important dates should also be noted, such as the expiration of due diligence and financing contingency periods, lender payoff notification deadlines, and wire transfer cut-off times on the day of closing. Missing any one of these items can delay the closing, which nobody wants.
Title Insurance and Title Review
Title insurance is a central part of the commercial closing process. Early in the transaction, the title company issues a title commitment identifying the conditions that must be satisfied before closing and the exceptions that will remain in the owner’s title policy. The purchaser, lender, surveyor, and counsel should review the commitment, exception documents, and survey together so that easements, restrictions, access issues, encroachments, unreleased liens, and other title matters can be addressed before the closing date.
In financed transactions, the lender will usually require a lender’s title policy, specific endorsements, gap coverage, and confirmation that the deed of trust will be recorded in the required priority position. The owner’s policy and any requested endorsements should also match the negotiated title requirements in the PSA. After closing and recordation, the title company should issue the final owner’s and lender’s policies, along with copies of the recorded deed, deed of trust, releases, and other recorded instruments.
Entity and Authority Documents
Before the deed changes hands, the title company and lender will require that the seller and purchaser show that they have the legal authority to complete the transaction.
For the seller, that typically means producing an updated certificate of good standing from the state where the entity is formed (generally required to be dated no more than 30 days before closing), a certificate of authority to do business in Virginia if the entity is formed elsewhere, and internal organizational consents or resolutions authorizing the transaction.
For the purchaser, the same requirements generally apply. If the purchaser is using a newly formed LLC to purchase the property, which is common, formation documents must be filed and a federal tax identification number obtained well in advance of closing. These documents should be sent to the title company for review and approval weeks before closing, when possible.
Coordinating Estoppels, Consents, and Contract Notices
For income-producing properties such as office buildings, retail centers, or industrial parks, the seller may have an obligation under the PSA to deliver tenant estoppel certificates before closing. As we covered in Part 2 of this blog series, these are certifications from tenants confirming that their leases are in effect, there are no outstanding defaults, and the economic terms are accurately reflected.
Estoppels take time to collect. A “clean” estoppel with no noted defaults, claims, or open issues is the goal. Any estoppel that comes back with exceptions needs to be addressed before closing can proceed. Simultaneously, both parties are finalizing which service contracts the purchaser will assume and which will be terminated. Termination notices, assignment notices, and any required third-party consents should all be coordinated well in advance.
Sit-Down Closing vs. Escrow Closing
In Virginia, commercial real estate transactions typically close through one of two formats: sit-down or escrow closings.
In a sit-down closing, all parties or their representatives gather in one place, sign documents, exchange funds, and authorize the deed to be recorded. This format works well for straightforward transactions but can be logistically complicated when multiple recording jurisdictions are involved. This format is rarely used in Virginia.
An escrow closing is more common in Virginia, especially for larger or more complex deals. In this format, the parties deliver all signed closing documents and closing funds to the escrow agent, typically the title company, one to two days before the scheduled closing date. The documents and funds are held in escrow and are not released or deemed effective until the parties authorize release and recordation under agreed escrow instructions. This approach gives everyone time to confirm that everything is in order before the transaction becomes irrevocable.
The Closing Statement
The closing statement or settlement statement accounts for the purchase price, the earnest money deposit, all prorations and adjustments, outstanding payoffs, and the net funds each party will send or receive at closing.
Common proration items include rent, real estate taxes, utility charges, and amounts under assigned service contracts. Security deposits are either transferred directly or credited to the purchaser on the closing statement. The seller is credited for prepaid expenses that benefit the purchaser after closing; the purchaser is credited for accrued but unpaid expenses.
In Virginia, transfer taxes must be accounted for on the closing statement. Virginia imposes both a state grantor’s tax and in some localities the Hampton Roads Regional Transit Fund, generally paid by the seller, and state and local recordation taxes, often paid by the purchaser unless the PSA or local practice provides otherwise. Some entities, such as churches, may be exempt from the transfer taxes. These amounts are calculated based on the purchase price and must be included in the final figures before the closing statement is approved.
What Changes Hands at Closing
The closing document package in a commercial transaction is considerably more extensive than in a residential sale. The seller executes and delivers the deed, a bill of sale for personal property, assignments of leases and assumed contracts, an assignment of intangible property (licenses, permits, warranties), a FIRPTA certificate, a title affidavit for the title company, and a bring-down certificate confirming that representations and warranties remain accurate as of closing. The purchaser delivers its counterpart documents, wires the net purchase price, and confirms that its property insurance is bound and effective as of the closing date.
Post-Closing
Several items typically require attention in the days and weeks following closing. Notices must go to tenants informing them of the change in ownership and directing future rent payments to the purchaser or its new property manager. Utility accounts need to be transferred. Any service contracts the purchaser assumed should be formally acknowledged with the counterparties.
Both parties must also complete a post-closing reconciliation for any proration items where a final figure could not be determined at closing, such as real estate tax bills not yet assessed, water meter readings taken after the fact, or tenant rent arrearages. The PSA should specify a deadline for completing this reconciliation, typically no more than 180 days after closing. Once that window closes, the books are settled.
Davis Law Group Can Help
A commercial real estate closing is not a single event. It is the culmination of a process that began with the LOI, ran through the PSA and due diligence, and ends with the recorded deed and a set of clean closing binders. Every step along the way is important and can make or break a good deal.
At Davis Law Group, we guide clients through the full arc of commercial real estate transactions, from LOI to final post-closing reconciliation, with the goal of a clean closing, on schedule, with no surprises. If you are planning a commercial acquisition or sale and would like to discuss the process, contact our office to schedule a consultation.
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