What Is Escrow and How Does It Apply to Commercial Real Estate?

Buying commercial real estate can be complex and overwhelming, especially when it comes to the escrow process. The commercial real estate escrow process involves legalities, signing authorities, documents, and more. Working with experienced and knowledgeable real estate agents and escrow officers is the key to successfully buying and selling commercial real estate properties. While large commercial real estate acquisitions fell by 28% year-over-year in Q1 of 2021, a lot has changed since then. The escrow process may be daunting, but you shouldn’t let it keep you from exploring commercial real estate investment opportunities. This article discusses the commercial real estate escrow process, so you know exactly what it involves.

What Is Escrow in Real Estate?

Escrow refers to assets or money being held by a third party until the two parties involved in a transaction complete it. In real estate escrow, parties place funds with an agreed-upon third party until the buyer and seller close on the property transfer. This is beneficial for both buyers and sellers. Buyers can perform due diligence such as home inspections. Sellers can proceed knowing the buyers can make the required payment. The amount held in escrow is transferred to the seller once all the pre-determined conditions of the sale are satisfied.

Real estate escrow is not easy. Yet, it has a number of benefits, such as providing protection during transactions. This is especially true for costly sales such as real estate.

The Commercial Real Estate Escrow Process

The escrow process is an essential part of real estate. It offers buyers and sellers financial protection until they finalize transactions. A neutral third party is responsible for holding funds while the parties involved in the transaction iron out details. While escrow is similar for residential and commercial real estate, the commercial real estate escrow process is much more complex. Thus, it takes longer than a residential real estate transaction. Yet, it’s essential to protect both parties in case either one fails to live up to the escrow agreement.

From appointing an escrow agent and setting the rules of the agreement to ensuring all the necessary documents for closing are present, commercial escrow is time-consuming and complicated. However, diving it into the five stages discussed below makes it easier to understand.

Step 1: Deciding on the Terms of the Escrow Agreement

The first part of the commercial real estate escrow process is determining the terms of the escrow agreement. Both parties must discuss these terms and determine what each party is responsible for. They must also determine how much time each party has to fulfill these obligations. Simple escrow terms will make for an easier process. However, more complex terms will require additional terms, including release conditions, reporting, and the investment of funds. This may even include the limitation of liability on the part of the escrow agent. Both parties must come together and finalize these terms, which can be a long, arduous process.

Step 2: Appointing an Escrow Agent

Both parties must agree on a neutral third party, i.e., an escrow agent. They must also agree on the amount they will pay the agent.

Step 3: Entering the Escrow Transaction

The agent responsible will ensure that all documents that are needed are available and all required information is available. This takes place before entering into the transaction. Information includes the selling price, real estate property address, and policy liability amounts. This also includes the contact information for lawyers, lenders, real estate agents, etc.

Step 4: Signing Authority Verification

The commercial real estate escrow process is much more complex than residential real estate escrow. Because of this, it’s best to use different legal entities as parties rather than using the individual parties. Using LLCs and LLPs instead of individual parties is helpful since it reduces both costs and liabilities. However, because many legal entities can own the same property, it’s essential to designate signing authority. This is so an individual can legally sign on behalf of the different legal entities. Verifying and confirming this is a critical part of the escrow process. The escrow agent doesn’t release funds otherwise. This may take some time to finalize, and depends on how complex the agreement is and the number contracts involved.

Step 5: Closing Documents and Title Report

The type and nature of the escrow transaction will require different documents and reports, including environmental reports, deeds, zoning warranties, etc. These final closing documents and the final title report are accepted, and the escrow is finalized. The title report is provided well before closing so the seller has time to respond to it.

The commercial real estate escrow process comes to a close once all closing documents are finalized and filed, the transfer deed is completed, and the escrow funds are released.

Buy and Sell Commercial Real Estate With Robert DeFalco Realty 

Escrow in real estate can seem daunting at first, especially if you haven’t previously bought or sold property. However, the right real estate brokerage can make the process straightforward and simple. Robert DeFalco Realty has commercial real estate transaction experience. We can help you navigate the commercial real estate escrow process. Our buyer’s agents and seller’s agents can help you optimize your commercial real estate investment and mitigate financial risk. Visit our New York offices or call us at 718-987-9700 to get in touch with us. You can also contact us online here, and our realtors will get back to you as soon as possible.