Each commercial transaction is unique and the main role of the title/settlement agent becomes that of a coordinator and problem solver. Handling commercial closings requires unique skills, and the professionals at Alpha Title & Closing have the experience and skills necessary to manage the complex issues that arise in commercial closings.
Commercial Closing Services
- Open the Escrow Transaction
- Fee Quotes
- Deposit Funds
- Coordinate Title Issues
- Gather Information
- Organize Documents and Verify Authority
- Demand/Lien Information
- Rents, Tenant Deposits and Estoppels
- Tax Deferred Exchange
- 1099-S Reporting
- FIRPTA – Foreign Investment in Real Property Tax Act
- Property and Casualty Insurance Requirements
Opening the Commercial Transaction
A commercial transaction is typically opened by the lender or attorneys involved in the transaction. The specific transaction information required to open the order may be communicated to Alpha Title & Closing by telephone, facsimile, email or in person. Any of the following minimum information is requested at the time of opening a new transaction:
- Purchase and Sale Agreement;
- Sale Price/Loan Amount;
- Property Address and/or Legal Description;
- Assessor’s Parcel Number(s);
- Prior Policy (if available);
- Contact Information for Professionals (such as listing/selling agent, attorneys and lenders)
Title and closing fees are provided by quote based on the property location and the complexity of the transaction. To obtain fee quotes, please contact Alpha Title & Closing.
Commercial escrow deposits can include large sums of money held for long periods of time. Frequently multiple deposits are required through the course of the transaction as contract contingencies are fulfilled. Alpha Title & Closing has relationships with several banks with solid financial ratings to insure the safety of your deposit.
The parties will need to complete an Escrow Agreement provided by Alpha Title & Closing, as well as provide the taxpayer identification number for the party earning interest.
Alpha Title & Closing will work closely with the principals and their representatives to ensure that title issues are resolved, that authoritative documents are requested from the principals, and that future deposits and release of funds occur within the agreed upon time constraints. An Escrow Receipt and Critical Dates letter is sent to all parties upon the receipt of the earnest money deposit.
Coordinate Title Issues and Gather Information
Alpha Title & Closing will perform a title search and examination of the property, request inspections, note survey requirements, prepare an owner’s affidavit, and draft leases (recorded and unrecorded) prior to closing the transaction, according to the requests of the parties.
During the contingency period, Alpha Title & Closing will work to gather the information and documents necessary to prepare the closing statement and closing documents. Alpha Title & Closing’s list of documents and information required may be revised throughout the course of the transaction as documents and information are received, the terms of the purchase agreement change, or if the parties request any additional services or products.
The initial list of documents and information needed by Alpha Title & Closing are as follows:
- Organizational Documents for the Entities;
- Copies of Leases;
- Rent Roll with security deposits;
- A list of service contracts or other items to be prorated at closing;
- A list of personal property to be included in the Bill of Sale;
- At least two (2) copies of the survey;
- Original documents attached as exhibits to the contract for execution at closing.
Organizational Documents and Verifying Authority
When the seller or buyer is not a natural born person, Alpha Title & Closing and the title insurance underwriter must verify that the entity was properly formed and that the person(s) signing the documents are duly authorized and have the power to sell and/or loan money, or to buy and/or borrower money. The transaction cannot close until the documents are signed by a duly authorized representative of the corporation, trust, company, partnership, etc.
Alpha Title & Closing will obtain information from the Seller for all existing liens which will have to be satisfied or removed at closing. This includes information on security deeds or mortgages to be paid off, and also includes tax liens, judgments, and defects in title or unrecorded leases. If a Seller is deceased, probate documents will be required. A Seller in bankruptcy will need a certified court order.
There may be many items to prorate in a real estate transaction. As in any other transaction, how an item is prorated will depend upon whether or not it is paid in arrears or in advance, and will be prorated according to the agreement between the parties.
Items typically prorated at closing include:
- Real estate taxes;
- Special assessments;
- Property owner’s assessments;
- Common area maintenance fees.
Rents, Tenant Deposits and Estoppels
The Rent Roll is a list of tenants and units, rents due and delinquent, and tenant deposits. Alpha Title & Closing will facilitate the procurement of the rent roll from the seller or property manager. Rent may also include other items such as rental tax, liability insurance, common area maintenance, taxes, etc.
A Tenant Estoppel is a document signed by the tenant confirming the terms of the lease. By the nature of an “estoppel”, the tenant would be estopped (prevented) from asserting any other rights in the future other than those stated in the lease.
Tenant Estoppels are typically a contractual issue between buyer and seller. It is the responsibility of the seller to provide a form of Estoppel that is acceptable to the buyer, to obtain the tenants’ signature and to deliver the estoppels to the buyer.
Tax Deferred Exchange
Section 1031 of the Internal Revenue code of 1986 (as amended), offers real estate investors an opportunity to build wealth and save taxes. In a tax deferred exchange, the investor (Exchanger) can dispose of investment property and defer the capital gains tax by leveraging all their equity into replacement property. Section 1031 contains many requirements that must be met to defer the capital gain. Two of the most commonly understood requirements to effectuate a 1031 exchange are the following:
- The Exchanger must acquire “like-kind property”
- The Exchanger cannot take “constructive receipt of funds” (receive proceeds)
The following are the common steps required to effectuate a valid exchange:
- The Exchanger must enter into an exchange transaction prior to closing on the relinquished property.
- The Exchanger enters into an Exchange Agreement with a Qualified Intermediary (Exchange Accommodator)
- The Intermediary acquires the relinquished property from the exchanger and transfers it to the buyer by a direct deed from the Exchanger.
- The proceeds from the relinquished property are assigned to and held by the Intermediary in a separate, secure account.
- The Intermediary acquires the replacement property from the seller and transfers it to the Exchanger by a direct deed from the seller.
- The exchange funds are used by the Intermediary to purchase replacement property for the Exchanger.
There are strict time limits in which a tax deferred exchange must be completed with absolutely no extensions:
- The Exchanger has 45 days from the date the relinquished property closes to identify potential replacement properties in writing to the Intermediary. Once the 45 days has expired, the Exchanger may not change the property identification list and must close on one or more of the identified properties.
- The purchase of the replacement property must be completed within 180 days from the date of closing on the relinquished property.
Although property is deeded directly between seller and buyer, the Intermediary should be shown on the closing statement and should sign the closing statement on behalf of the Exchanger. The Exchanger approves the closing statement and typically signs all other closing documents.
An Exchanger may also enter into a “Reverse Exchange”, in which the replacement property is purchased prior to closing on the relinquished property.
A tax deferred exchange is also subject to 1099-S reporting and FIRPTA regulations and withholding.
There are many things an investor must consider when thinking about entering into a tax deferred exchange. Interested parties should contact a tax advisor or an attorney who specializes in tax matters, and to speak directly to a qualified exchange accommodator.
The Internal Revenue Code requires that all proceeds from the sale or exchange of a real estate transaction be reported to the IRS. All real estate transfers are subject to 1099-S reporting, including commercial properties, regardless of whether or not there is any consideration paid for the property.
All transferors (sellers) are subject to 1099-S reporting, including individuals, estates/trusts, partnerships, sole proprietorships, limited liability companies. Even foreign sellers are subject to 1099-S reporting, regardless of whether or not FIRPTA taxes are withhold and paid. Corporations are not subject to 1099-S reporting.
FIRPTA – Foreign Investment in Real Property Tax Act
Section 1445 of the Internal Revenue Code requires that the transferee (buyer) must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized (total sale price or consideration on the disposition of a U.S. real property interest by a foreign person (transferor/seller). Taxes and forms must be submitted to the IRS within 20 days of the transfer.
All real estate transactions/transfers, including exchanges, are subject to FIRPTA regulations; however, many commercial contracts contain provisions for the seller’s cooperation with FIRPTA compliance at closing.
There are ten (10) different FIRPTA exemptions, including the Non-Foreign Certification (refer to IRS publication 515). The foreign transferor must prove to the buyer and to Alpha Title & Closing that an allowed exemption applies to the transaction.
Because the buyer is held responsible by the IRS, the buyer should be kept in the loop regarding any matters pertaining to FIRPTA and foreign sellers. Many state’s (California and Hawaii) have their own FIRPTA regulations that are enacted if one or more of the properties are located within that state.
Property and Casualty Insurance Requirements
Evidence of insurance coverage is required before or at closing, if there is a new lender involved in the transaction.
A lender or attorney may request a “proforma” or sample policy and samples of the endorsements they require at closing. Alpha Title & Closing will prepare the “proforma” for delivery to the parties to the transaction.
An “endorsement” is a rider issued to a policy of title insurance that insures over a particular matter or provides additional coverage to the insured. Endorsements may be customized to meet the particular needs or concerns of the proposed insured or the nature of the property to be insured, and may be applicable to either the owner’s or the lender’s policy, or both.
Whenever Alpha Title & Closing is asked to endorse around or insure over a specific matter, there may be certain conditions that must be met depending upon the subject matter of the endorsement, before the endorsement can be issued. Endorsements are subject to approval by the title insurance underwriter.
A Uniform Commercial Code (UCC) search is conducted through the state or county that may have been filed to perfect a lien on personal property in accordance with the Uniform Commercial Code. The search is conducted on name(s) of the Debtor(s) as well as the location of the property. This search is a part of the preliminary report or commitment provided by Alpha Title & Closing.
Many lenders will require a UCC Financing Statement to utilize personal property as additional security for their loan. A UCC-1 Financing Statement may be recorded in the County in which the real property is located. The UCC-1 is typically recorded concurrently with and after the Security Deed or as instructed by the lender.
UCC Financing Statements do not have to be signed by either the Debtor or Secured Party; however, they must be authorized. This means that the parties must instruct Alpha Title & Closing, in writing, to record the UCC with the County Recorder or any other state jurisdiction.
Although the UCC Financing Statement does not require signatures, any attachment such as the legal description or special terms and conditions may require the signature of the Debtor.
A UCC Financing Statement expires after five (5) years, unless a continuation is recorded and/or filed. It is the sole responsibility of the secured party to determine if a continuation is necessary and to record and/or file any continuation statement.