The Anatomy of a Commercial Transaction
While a lot of seasoned residential agents are savvy enough to understand the general anatomy of a commercial transaction, we hope that they are equally savvy to understand that they should refer that business out to a commercial agent.
Residential transactions in California are laden with forms, paperwork, local, regional, and state specific disclosures, agency disclosures, related business disclosures, and of course all of the many actual purchase documents themselves.
Well, with regard to a commercial transaction, there is a whole other level of materials, forms and buyer/seller due diligence that an agent must (or at least should) be aware of in order to properly and effectively represent the best interests of their client. The knowledge base of a commercial agent comes from many years of training and transaction experience.
For example, while a commercial agent is typically not a structural engineer, they should know the difference between a 15 and a 25 PML (probable maximum loss) rating for the office building they are representing the buyer on. The buyer will be looking to the agent to tell them that a lot of commercial lenders typically will not lend on projects with a PML over 20.
Or, the agent should assist the buyer in obtaining a new Phase I Environmental Report on the shopping center being purchased and understand if and why that report recommends a Phase II study and how to bridge that issue.
Or, the agent should have a firm understanding of what makes up the net operating income at the property and assist the buyer (or market as the listing agent) in the analysis of that number and overall net cash flow from the property and whether that meets a buyers desired return on investment.
I can go on and on with actual real experiences and hypotheticals, but the point being made is that a commercial agent should have a general understanding of the very technical matters that are not present in a standard residential transaction.
Below is a simple illustration of a 3-point general Anatomy of some of the considerations in a Commercial Transaction (which in no way is close to being exhaustive but merely a taste of some of the general issues and proper procedures):
- Purchase Contract: depending on the size of the commercial transaction, some buyers/sellers utilitize form contracts, such as a California Association of Realtors form. However, a significant number of commercial purchase agreements are custom prepared by either sides real estate attorney and are loaded with concepts ranging from strick periods of performance, the different exclusions allowed from title, risk of loss during escrow, representations and warranties, how new leases during escrow are handled, and many others. The agent typically is involved in these negotiations on behalf of their respective client.
- Due Diligence: once a contract is executed and the diligence period commences (known as inspection period in residential transactions), the agent should be the go-between to make sure the sides deliver the documents required. Some examples of materials required and delivered in a commercial transaction are: income and expense statements for a number of years, general ledgers, balance statements, tenant rental statements, rental delinquency reports, rent roll, common area maintenance and property tax reconciliations for a number of years, all lease documents and amendments, tenant lease correspondence files, background of each tenant, credit rating of each tenant, analysis of proper tenant synergy, analysis of current tenant lease rates to current market rates, demographics of the current market and current residents spending habits, tenant sales history, environmental reports, property condition reports, geological reports, seismic report, property land and building survey, preliminary title report and underlying documents on title, review of reciprocal easement agreements and CC&R's, executed estoppel certificates and any lender required documents by the tenants, and other material depending on the transaction.
- Agent Customary Responsibilities: the agent should be aware of all the documents in 2 above and should assist the client in their analysis and updating of such material. If the agent is the listing agent, a full offering memorandum package and teaser are typically prepared and delivered to potential buyers. Property tours are conducted by the listing agent, making accomodations with various tenants allowable inspection time periods. The listing agent shall arrange for the final offer date and reconciliation of any and all offers with the seller. The listing agent also typically assists with any new or existing lender on the project at issue.
Our Team is not only the Conejo Valley area experts for residential property, but also includes over 20 years of commercial real estate transaction experience in multi-family, industrial, mixed-use properties, shopping centers, office buildings and commercial developable land.
We would love to help you and your clients in a successful commercial transaction.
The Anatomy of a Commercial Transaction