Common Pitfalls in Commercial Closings and How to Avoid Them

Closing on a commercial property can be one of the most exciting and nerve-wracking milestones in your business journey. Whether you’re purchasing a storefront, leasing office space, or expanding your company’s real estate portfolio, commercial closings are a major investment that requires careful attention to detail.

Unfortunately, commercial closings can also be riddled with complexities that may lead to costly mistakes if not handled correctly. In this blog post, we’ll break down some of the most frequent issues that arise during commercial real estate closings and provide practical advice on how to steer clear of them.

1. Not Conducting a Proper Title Search

A title search is one of the most critical steps in any real estate transaction, yet it’s often overlooked or rushed. The purpose of a title search is to uncover any liens, claims, or defects associated with the property that could impact your ownership rights.

The Pitfall:

Failing to conduct a thorough title search can result in unexpected surprises, such as unpaid property taxes, liens, or disputes over ownership. Imagine purchasing a property only to find out later that someone else has a legal claim to it.

How to Avoid It:

Work with a qualified attorney or title company to perform a comprehensive title search. Your attorney will ensure any potential issues are addressed before closing, and they can help you obtain title insurance to protect your investment in case of unforeseen problems.

2. Overlooking Zoning and Land Use Regulations

Zoning laws dictate how a property can be used, and ignoring these regulations can result in serious consequences for your business plans.

The Pitfall:

You purchase a property intending to open a restaurant, only to find out that the zoning designation prohibits commercial kitchens. Or worse, you learn after closing that rezoning the property will take months or years.

How to Avoid It:

Before you close, consult with a real estate attorney to review local zoning ordinances, building codes, and land use restrictions. An attorney will confirm that the property aligns with your intended business use and identify any regulatory hurdles you may face.

3. Failing to Negotiate a Favorable Purchase Agreement

The purchase agreement is the foundation of any commercial closing, outlining the terms and conditions of the transaction. Yet many buyers rush through this stage without fully understanding what they’re signing.

The Pitfall:

Important terms such as inspection periods, closing contingencies, or representations from the seller are omitted or unclear. As a result, you may be locked into an agreement that doesn’t fully protect your interests.

How to Avoid It:

Get an attorney to draft, review, or negotiate the purchase agreement on your behalf. A well-crafted agreement will include essential protections, such as the right to terminate the deal if certain conditions aren’t met (e.g., financing approval or property inspection results).

4. Underestimating the Importance of Due Diligence

Due diligence is your opportunity to investigate every aspect of the property before committing to the purchase. This includes reviewing financial records, inspecting the physical condition of the property, and verifying compliance with regulations.

The Pitfall:

Skipping or cutting corners during due diligence can lead to unforeseen expenses, such as costly repairs, environmental remediation, or unanticipated operational restrictions.

How to Avoid It:

Take the time to thoroughly investigate the property, and hire professionals when necessary. Your due diligence checklist should include:

• A property inspection.
• An environmental assessment (especially for industrial properties).
• A review of existing leases or tenant agreements (for investment properties).
• A review of utility, maintenance, and other operational expenses.

5. Mishandling Escrow and Closing Funds

Commercial transactions typically involve significant sums of money, which are often held in escrow until closing. Mishandling these funds can delay the process or, in extreme cases, result in fraud or financial loss.

The Pitfall:

Improperly structured escrow agreements or choosing an untrustworthy escrow agent can create disputes or jeopardize your funds.

How to Avoid It:

Work with a reputable escrow company and have your attorney review all escrow arrangements to ensure your money is safe. Your attorney can also verify that all funds are disbursed correctly at closing.

6. Ignoring Tax Implications

Commercial property transactions can have significant tax implications, including transfer taxes, property taxes, and potential capital gains taxes.

The Pitfall:

Failing to account for these costs can lead to unexpected financial burdens after closing.

How to Avoid It:

Consult with a tax professional or attorney to understand how the transaction will affect your tax liability. They can help you identify any tax-saving strategies, such as structuring the deal as a 1031 exchange if applicable.

7. Overlooking Post-Closing Obligations

Once the closing documents are signed, many buyers think the process is over. However, there are often post-closing obligations that must be fulfilled to complete the transaction successfully.

The Pitfall:

Failing to follow through on post-closing tasks, such as transferring utility accounts or recording the deed, can result in operational delays or legal issues.

How to Avoid It:

Create a post-closing checklist with the help of an attorney to ensure all necessary steps are completed. An attorney can also guide you through the process of recording documents with the appropriate government offices.

Why You Need an Experienced Real Estate Attorney

Navigating a commercial closing can be overwhelming, especially with the number of legal, financial, and regulatory issues involved. At Ayala Law, we specialize in real estate litigation and transactions, and we’re here to protect your interests at every stage of the process.

If you’re preparing for a commercial real estate closing, contact one of our experienced attorneys at 305-570-2208. You can also email our lead attorney Eduardo directly at eduardo@ayalalawpa.com.  

We at Ayala Law PA are passionate about helping those in legal need, so please don’t hesitate to schedule a case evaluation with us online here. 

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case].