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What is the best way to document closing costs in a commercial real estate agreement?

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Closing costs are the fees and expenses that both buyers and sellers have to pay when a commercial real estate transaction is completed. They can vary widely depending on the type, size, and location of the property, as well as the financing and negotiation terms. Therefore, it is important to document them clearly and accurately in a commercial real estate agreement, or CRE agreement, to avoid disputes and surprises. In this article, you will learn what are the common closing costs in a commercial real estate deal, how to estimate them, and how to document them in a CRE agreement.

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1 Common closing costs

When closing a commercial real estate deal, there are several common costs to be aware of. Brokerage commissions are fees paid to the agents representing the buyer and seller, and they are typically a percentage of the sale price. Title insurance and search costs verify the ownership and legal status of the property, and appraisal and inspection fees hire professionals to evaluate the condition and value of the property. Loan origination and underwriting fees are charged by the lender to process and approve the loan for the buyer, while transfer taxes and recording fees are imposed by the government to record the change of ownership. Lastly, escrow and closing fees pay for an escrow agent or closing attorney who handles the closing process.

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Beth Tarasi

Attorney @ Tarasi & Tarasi P.C. | Trial Practice, Civil Litigation
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In my experience keep an envelope or folder. Create a spread sheet to track all your costs. Keep your spreadsheet updated on a daily basis.

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Zurab Taymaskhanov

Real Estate Investment Consultant @ Century 21 Karun Gayrimenkul
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Navigating commercial real estate deals involves understanding various closing costs. Brokerage commissions, based on the sale price, compensate buyer and seller agents. Title insurance and search costs validate property ownership and legal status. Appraisal and inspection fees secure professional assessments. Lenders charge loan origination and underwriting fees for processing and approval. Government-imposed transfer taxes and recording fees document ownership changes. Lastly, escrow and closing fees cover professionals managing the closing process. Being aware of these costs is crucial for a seamless transaction.

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2 Estimating closing costs

Estimating closing costs can be challenging, as they depend on many factors that may not be known until the closing date. However, it is advisable to have a rough idea of how much they will be, and to budget for them accordingly. One way to estimate closing costs is to use a percentage of the sale price, which can range from 2% to 5% for commercial properties. Another way is to request a good faith estimate, or GFE, from the lender, which is a document that shows the expected closing costs based on the loan amount and terms. A third way is to consult with your broker, attorney, or escrow agent, who may have experience with similar transactions and can provide you with an estimate based on their knowledge.

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3 Documenting closing costs

Documenting closing costs in a CRE agreement is essential to avoid confusion and conflict between the parties. The agreement should specify which closing costs are the responsibility of the buyer and which are the responsibility of the seller, and how they will be calculated and paid. The agreement should also include a contingency clause that allows the parties to adjust or cancel the deal if the closing costs exceed a certain amount or percentage. Additionally, the agreement should include a closing statement, or HUD-1, which is a document that summarizes the final closing costs and shows how they are distributed among the parties. The closing statement should be prepared by the escrow agent or closing attorney, and reviewed and signed by the buyer and seller at the closing.

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Michael Fiffik, Esquire

Managing Member at Fiffik Law Group, P.C.
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Neither party wants the deal to fail over a last-minute dispute over the allocation of closing costs and pro-ratable items. The agreement should define what the closing costs are as well as the pro-ratable items. It should provide that the deal with close with those items the parties can agree to with a mechanism to resolve disputes quickly and inexpensively post-closing. There should be a period to true up costs post closing as well. An amount can be help back in escrow to address these issues. I'd never suggest to a client to allow a deal to be terminated over a closing cost dispute.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Joe Averill

MD @ LEVEL | Office Search Specialist | Flexible, Managed & Leased office space.
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The best way to document is calculating and breaking down every closing cost along side every other cost the client will incur so they can budget accordingly and there’s no hidden costs. Closing costs should also include legal fees, SDLT. However they should be documented along with; rent, service charge, rates, utilities, cleaning, Telcom and even an estimated dilapidations fee on exit. This should all be cash flowed across the term and broken down into which are monthly/annual costs and those which are one off costs so your client knows each cost across the entirety of the project. Incentive/rent free should also be factored into your equation alongside closing costs.

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What is the best way to document closing costs in a commercial real estate agreement?

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1 Common closing costs

2 Estimating closing costs

3 Documenting closing costs

4 Here’s what else to consider

Commercial Real Estate

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What is the best way to document closing costs in a commercial real estate agreement?

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1 Common closing costs

2 Estimating closing costs

3 Documenting closing costs

4 Here’s what else to consider

Commercial Real Estate

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