Commercial Real Estate Closing Costs: Everything You Need to Know
When buying or selling commercial property, you need to be aware of certain commercial real estate closing costs. These costs add up quickly, so it is important to understand what they are and how they will impact your transaction.
At Point Acquisitions, we buy commercial real estate in any condition. If you are selling commercial real estate, contact us before taking the steps in this article, as some or all of these costs can be avoided!
In this blog post, we will discuss the most common commercial closing costs associated with commercial real estate transactions for sellers. We’ll also advise you on how to lower these selling costs whenever feasible.
Table of Contents
Types of commercial real estate closing costs
The three most common commercial real estate selling costs are:
- Real Estate Broker Fees
Other costs are:
- Debts and property taxes
- Unpaid utility bills
- Marketing expenses
- Legal fees
- Title clearing
- Transfer taxes
- ALTA Survey
The most common Commercial Real Estate closing costs
The inspection process and fees
If you are a seller, you must hire an inspector to examine your property’s condition before listing your property. A Property Condition Assessment or PCA is often available from engineering firms to give you a sense of the state of your structure. The PCA will assist you in identifying any potential issues that might prevent a buyer from making an offer on your property. It will also allow you to fix the property and increase its value and listing price.
To have a PCA done, you must provide your inspector access to all areas of the property, including the roof and basement.
The cost of a Property Condition Assessment (PCA) can range anywhere from $500 to $5000, depending on the size and complexity of the property. The average cost is around $2000.
Note: Sometimes, a buyer might order an independent inspection and pay for it separately.
The appraisal process and fees
A commercial real estate appraisal is a prediction of the property’s value. The appraiser will evaluate aspects such as the location, condition, and size of the commercial property and recent sales of comparable commercial properties in the area.
Commercial appraisal cost depends on the size and complexity of the appraised commercial property. Appraisers typically charge by the hour, and fees can range from $500 to $2000.
In some cases, for really large commercial properties, the appraisal cost and fees might reach $10,000 or more. Most lenders will require an appraisal before committing to a loan amount.
Commercial Real Estate Broker Fees
Commercial real estate brokers are important in facilitating transactions between sellers and buyers. Their network, expertise, and tools make them indispensable for selling or purchasing commercial properties.
Most commercial real estate sellers hire an agent or a broker and pay between 4% and 8% of the selling price. Buyers have the option to pay part of the fee in some cases.
Working with a commercial real estate broker might be beneficial for exposing your property to more purchasers. It’s crucial, though, to work with a broker who knows the commercial real estate transaction industry.
Should you hire a commercial real estate broker?
This blog lists all the pros and cons of working with a broker. Check it out!
Other potential expenses for commercial property sellers
Debts and property taxes
If there are any liens on remaining debts secured by the commercial property, the seller must pay them off at closing. The buyer is sometimes responsible for paying the seller, who then pays his or her remaining debts secured by the property. Ensure you know all debts associated with the commercial property before selling.
Tax issues are a major deterrent for most purchasers regarding commercial real estate. As a result, all tax liabilities for commercial properties should be addressed ahead of time to avoid worry about purchasers’ costs.
Repairs to critical parts of your property may improve its value. The exterior and common areas of the building should be repaired. Any structure’s roof and the bathrooms’ plumbing should be free of leaks. Foundation issues, HVAC, and roof issues are big-ticket items that a buyer will want to inspect before purchasing the property.
The cost of repairs varies greatly, so it’s important to get an estimate before you start any work. When receiving bids for required repairs, look to the inspection report for assistance.
Unpaid utility bills
Utility bills, which encompass expenses such as water, electricity, gas, and sometimes sewerage, play a role in the financial considerations during a commercial property sale.
If you are current on your utility bills up to the closing date, you should only pay them up to that point. Before attempting to sell the property, the owner must reimburse any outstanding utility expenses.
The decision on how extensive and diverse the marketing for a sale hinges on several factors. Firstly, the budget allocated for marketing will directly influence the scope and reach of the promotional efforts. Secondly, the sale’s urgency can dictate the marketing strategy’s aggressiveness.
Some sellers choose to pay for marketing efforts to generate more leads. This could include anything from online listings and advertising to signage and open houses.
How much you spend on marketing depends on your budget, how quickly you want to sell, and how competitive the market is.
Some sellers choose to have a commercial real estate attorney review and negotiate the contract of sale. This is not required but could be beneficial if the agreement has any complex terms or conditions. Using a commercial real estate attorney for larger deals and specific states is typical. Sellers can expect to pay anywhere from $500 to $2000 for legal fees.
Title clearing verifies that the title is clear of any outstanding liens or judgments. The cost for this service ranges from $250 to $750. Some examples of liens or judgments are:
– IRS tax liens
– Mechanics liens
– State and local tax liens
– Judgments from previous owners
UCC (Uniform Commercial Code) filing is usually a part of title clearing. This is a process in which the lender files a security interest against the property’s title insurance to protect its investment. The cost for this service is about $50.
As a seller, you should do due diligence and check with your county for a transfer tax estimate. Transfer taxes are a fee the government charges to sell a property. The tax is based on the purchase price or assessed value, whichever is greater. To estimate transfer property taxes due, multiply the purchase price by .005 (or 0.005). The party responsible for paying transfer taxes will differ from state to state. In some states, it is the seller; in some, the buyer, and in some, it is a combination of both. Find out more about tax on commercial real estate sales.
An ALTA Survey, which stands for American Land Title Association, aims to identify any physical encroachments on the property. This is a detailed survey that goes beyond the boundaries of the property. ALTA surveys provide a detailed, thorough overview of a property, ensuring buyers, lenders, and title insurance companies have all the necessary information to proceed confidently in real estate transactions. The cost for an ALTA Survey ranges from $500 to $2000. Most lenders will require an ALTA survey if the property does not have a current survey.
Some closing costs paid by the buyer
The buyer also is responsible for several legal fees, some of which are:
– Commercial Real Estate Loan application fee
– Origination fee
– Credit report fee
– Closing agent’s fee
– Title insurance
– Survey fee
These are just a few of the most common costs buyers pay when purchasing or selling commercial real estate. Discussing these expenses with your lender and closing agent is important to avoid any surprises at settlement.
Closing costs summary
Closing costs for commercial real estate can be expensive, but it’s important to be aware before putting your commercial property on the market. Knowing about the various expenses prepares you for what’s to come.
Should you have any inquiries regarding the closing process, please contact us. We are at your service to assist.
About The Author
Please note that Point Acquisitions is not a tax expert or tax advisor. The information on our blogs and pages is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Any information provided does not constitute professional advice or create an attorney-client or any other professional relationship. We recommend that you consult with your tax advisor or seek professional advice before making any decisions based on the information provided on our blogs and pages. Point Acquisitions is not responsible for any actions taken based on the information provided on our blogs and pages.
Selling a hotel isn’t just a transaction; it’s an art that demands a deep understanding of the accommodation sector. The industry has witnessed considerable shifts in recent years, influenced by changing traveler preferences, technological advancements, and economic trends. These shifts…Read More
Taxes play an important role in determining the profitability of commercial real estate investments. Understanding the various types of taxes involved and the strategies to minimize tax liability will significantly impact an investor’s financial success. This article will guide you…Read More
The type of net lease you choose can profoundly impact your investment and management experiences in commercial real estate. Among the various lease structures available, single net lease, double net lease, and triple net lease stand out, each with specific…Read More