Buying or selling commercial property comes with a diverse range of transaction-related expenses. This includes your closing costs.
Keep reading for a high-level overview of closing costs in commercial real estate.
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What Are Closing Costs?
Closing is the final stage of a commercial real estate transaction (although it applies to the residential world, too). It’s when all remaining processes and details are accounted for, and the property is legally transferred from the seller to the buyer.
Because there are so many legal, financial, and regulatory variables at stake, the closing process can be incredibly intricate. It also means that buyers and sellers require outside support from specialized professionals to ensure their interests are protected as the deal wraps up. The expenses that occur as a result of this are known as closing costs.
Types of Commercial Closing Costs
Let’s explore some of the main types of commercial real estate closing costs.
In terms of the cost model, there are two main types of closing-related expenses: those that are based on a fixed, one-time fee and those that are based on value.
Title Search & Title Insurance
One of the first (and most essential) processes that occurs on closing day is the title search.
During this step, the buyer’s lawyer will closely analyze all available records to ensure that there are no issues with the title, such as ownership disputes or outstanding debts. The goal is to confirm that the seller is the legal owner of the property and has the right to transfer it to the buyer.
Because the title search requires legal guidance and access to government records, there is a cost attached to it. This can vary based on the complexity of the situation and is the responsibility of the buyer.
Many lenders recommend (or even require) that commercial buyers obtain title insurance before property closing. This protects both the lender and buyer from any issues that arise during the title search. Again, exact costs for title insurance can vary based on property specifics and any other nuances impacting the transaction.
Property Inspection Costs
Having a property professionally inspected isn’t just a formality. It’s an essential process in confirming an asset’s overall condition and market value. A commercial property inspection can also uncover undisclosed issues, preventing costly repairs down the line.
Commercial property inspectors are specialized, and many operate on a per-square-foot basis in terms of fees. Therefore, the larger or more intricate the property is, the greater the inspection costs will be.
Canadian averages for commercial property inspection costs range between $1.50 to $3.50 per square foot, depending on the required level of expertise from the inspector.
Preparing for a commercial real estate transaction? Explore these related resources from our site.
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- What to Know Before You Buy Commercial Property
- How to Buy Land in Ontario
Environmental Assessments
Similar to a property inspection, an environmental site assessment (ESA) allows buyers to ensure they’re making an informed investment. Utilized based on relevance, ESAs are a reliable way to determine if a property shows signs of past or present environmental contamination.
Phase 1 ESAs are most common for commercial real estate purchases in Ontario. They involve a thorough but non-intrusive deep dive into the property itself, its historical usage, and other relevant factors. In some cases, a more in-depth Phase 2 ESA may be required.
A standard Phase 1 ESA usually costs a few thousand dollars, while a Phase 2 assessment can cost tens of thousands of dollars, depending on complexity.
Loan Service Fees (Origination Points)
Commercial real estate buyers may face processing or service fees related to their loan. These charges, known as origination points, are calculated based on the total amount of a mortgage. While every lender is different, 1% is a fairly common rate for origination points in Canada.
Underwriting Expenses
Underwriting costs are another loan-related expense. They represent a lender’s due diligence process when assessing a buyer’s request for financing. Most banks or lenders have a flat rate for underwriting or processing fees.
Legal Expenses
Buying or selling commercial real estate means navigating complex legal processes (not limited to just the title search). As a result, investors on both sides of the transaction will be responsible for paying any legal costs associated with the deal.
Exact costs will depend on the services and degree of due diligence required. While legal expenses related to a commercial transaction can be significant, they are a necessary and extraordinarily valuable aspect of protecting one’s investment.
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Need an expert commercial Realtor? Get in touch at christian@naccaratogroup.ca or call (647) 492-6508.
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