05 Jul Understanding Closing Costs in Commercial Real Estate Deals

Closing costs are a crucial aspect of any commercial real estate transaction. While buyers typically shoulder the majority of these expenses, sellers should also be aware of their financial responsibilities. 

What Are Closing Costs?

Closing costs are the fees and expenses associated with finalizing a real estate transaction. For sellers, these costs can include prorated property taxes, mortgage cancellation fees, and various administrative charges. 

Prorated Property Taxes

One of the most significant closing costs for sellers is property taxes, explains Fabian Edwards, an Office Sales & Leasing Specialist with ELIFIN®. “When they’re in the process of selling something, most people don’t think about prorated property taxes for that year.” This expense covers the portion of the year’s property taxes that the seller is responsible for up to the date of closing. 

For example, if a property closes on July 5th, the seller is responsible for property taxes from January 1st to July 5th. Edwards further clarifies, “Most of the time, the actual amount will be a prorated share based on the previous year’s taxes, assuming that in the year you’re actually selling, the tax bill hasn’t been generated for that yet.” Since you benefited from municipal services during that time, you are responsible for paying your share of the annual taxes.

Mortgage Cancellation Fees

Another common cost is the mortgage cancellation fee. Edwards mentions, “There can be a few hundred dollars that the seller may be responsible for, for things like cancellation of their current mortgage, some filing fees, things of that nature.” When a seller’s existing mortgage is paid off, there are often fees associated with canceling the mortgage and filing the necessary paperwork. These fees usually range from $200 to $400, depending on the title company’s rates.

Title Work

Typically, buyers cover the costs associated with title work and standard fees. In some cases, agreeing to cover certain closing costs can give sellers a competitive edge, especially in a buyer’s market. Offering to pay for specific expenses can make a property more appealing and help close the deal faster.

Administrative Fees

Additional administrative fees may include charges for document preparation, notary services, and filing fees. While these costs are generally smaller, they can add up and surprise sellers who are unprepared. Edwards notes, “A lot of times the sellers will see that and think, okay, well why do they need to do this paperwork? A lot of times that’s the cost of doing business and, most of the time those fees are relatively small.” Even though these are usually minor, these fees should be included in your budget.

Working with Your Agent on Closing Costs

A skilled agent will maintain open communication throughout the process and help you anticipate potential closing costs. Your agent is not only your advocate but also a skilled and experienced professional who can navigate complex paperwork and negotiate effectively.

Review the Closing Disclosure

Carefully review the closing disclosure as soon as you receive it. This document outlines all the fees and costs associated with the transaction. Being proactive allows you to address any surprises and seek clarification on charges you don’t understand.

Be Prepared for Negotiations

While most closing costs fall to the buyer, be prepared to negotiate in a competitive market. Offering to cover certain expenses can make your property more attractive and expedite the sale.

Understanding and preparing for closing costs is important for sellers in commercial real estate transactions. By being informed and proactive, and working with a skilled agent, sellers can be ready for these costs and ensure a smooth closing process.