Navigating Your First CRE Closing: A Step-by-Step Guide

(Transcribed by TurboScribe.ai. Go Unlimited to remove this message.)

You got to form your LLC. Yep. If this is a closing, I can't believe this made it to the list actually.

If you're forming the LLC this late, you're fired. All right, what is up and welcome back to How to Invest in Commercial Real Estate. We're back.

What's going on? Excited to be here today. I can tell. Yeah, you're super excited.

Pumped. Well, that's because we got a big closing next week. Yeah, we have a big closing next week.

We've been closing a ton of stuff. The day this comes out, right? Did we close on Martindale last month? The Amarillo deal? Yeah, July. And then St. Louis the month before that? Yep.

So third month in a row. September, we should hopefully be closing on the Henderson Petromax deals. Keep riding the wave.

We just got some offers on the Perfect Auto deal in Vegas. If you're involved in that one, we're negotiating two LOIs on that right now. Super exciting there.

I know we got an offer on Salad and Go. I know we've got tons of offers on our Picklemans. Calloways is out there for sale? Calloways.

And I think we got a verbal offer on that. That's supposed to be papered up soon. Nice.

Powell is up talking today, talking about the September meeting, foreshadowing some... I mean, I think he said we've realized it's time to adjust our policy rate. So that was a definitive statement. Sounds like that to me.

Yeah, I think unless something changes, the rate cut is going to be pretty baked in. Yeah, and I think maybe... I don't know what I think. I'm not going to go that far yet.

I'm excited, is what I think. Crypto had a little bump today. Yeah, it's got a bump.

I'm still keeping my fingers crossed on crypto. Yeah, it's actually been up... Good thing you're not holding your breath. The last week or so.

You'd be dead. Yeah, it's been a long time. Well, okay.

So today, we always try to come up with interesting topics. We don't always achieve that. But we're getting ready to close Little York Shopping Center down in Houston.

So we thought, I wonder if we did an episode on a closing checklist. What are the things, as you approach your first closing, do you need to be thinking about and making sure that are done? And so since we're closing our deal next week, we thought we'd go through a list with you guys. Hopefully, it spurs more questions and at least get you thinking about how to get your first deal closed.

Yeah, I got to say, as we assembled this list, it's a long list. It takes a while, right? To get everything done. Right, you know? Yeah, yeah.

I want to like overdub the Michael Scott clip where he's like, nobody freak out, we're fine. Oh, my God. Okay, it's happening.

Everybody stay calm. What's the procedure? Right? Because that's my partner, Andy, sometimes, you know? These lists get so long and we have a tendency to just like, oh, crap, there's so much we got to do. But the reality of it is, you just check one thing off at a time.

You've got title company. You've got a loan officer. You've got a loan officer assistant.

Typically, you've got your attorney. You've got a bunch of people helping you cross off these items. It's not only your deliverables, but you just generally want to be aware of all these things.

And the earlier on you make yourself aware of them, the less you have to freak out later. Yeah, so would you guys say we've got a list of, really, we've got 15 items. We'll probably come up with more, think of more when we start talking about it.

But would you guys say that there's one or two of these that you really got to start on really quick as soon as you know that you're buying this property? Is there one that takes the longest or? Well, yeah, getting the loan. I mean, so yeah, get started on the loan. That you've got to get started way early.

Of course, for the closing checklist, you're getting loan docs and reviewing those and kind of making sure you have all that ready to go. But that's like a long way. Most of this stuff, though, is we try to differentiate between due diligence and closing.

There's a little bleed over, but the due diligence items you're working on all through the process. And these items, most of these are just things you have to get done before you close. Yeah.

All right. Well, Brian, why don't you, in no particular order, and it's not a comprehensive list. Yeah.

But let's just run through it for me. Okay. You want me to go through or you want to make a brief comment about exactly what they are? You say it and we'll talk about it and then we'll go to the next one.

Okay. So number one on our list, like you said, no particular order is assignment and assumption of leases. Yeah.

So this is super easy, right? Because a lot of people in residential real estate think that when you get to commercial real estate, you're actually buying real estate. But it's a common misnomer. You're buying a stream of cash flow.

You're buying a bunch of leases and they basically just give you the building for free, right? So the most important thing at closing is arguably that assignment assumption of leases because that just gives me the power to go to those tenants and say, hey, I'm your new landlord. I got your lease assigned to me. You make your rent payments to me now.

I mean, that's the crux of the thing. Right. Okay.

We got a long list. I'm going to keep going. Title company documents.

Yeah. These are a few pages, waivers that say you're going to comply if you need to come back and get another signature. Who's doing these? The title company.

Yeah. The title company. Each title company will have their own few pages of documents.

They're typically prepping the title commitment too, which is the other big thing. And then just finalizing the survey and make sure that survey and title commitment have the same legal description. They're doing lien searches.

Yeah. Doc review. They're the ones actually filing some of these documents at the courthouse.

They're charging $300, $500 closing fees. If you're charging more than that, you're screwing people over and you're getting screwed over. The main value prop for title companies is title insurance, right? Because as long as they do their job right, then you don't claim on it.

They always do their job right. I've never heard of somebody claiming on title insurance and it's literally thousands and thousands of dollars. They've got to be killing it.

All right. Deans. Yeah, that's just the transfer of the title from one owner to the other.

This gets filed by the title company at the courthouse. Yeah. Super easy.

One of the buyer or seller attorney will prep it. A lot of times we incorporate this as an exhibit in our purchase and sale agreement, just so it doesn't come up later. It's just very clearly, hey, here's the deed.

We're just throwing in the legal description. Okay. Mortgage.

Yeah. I already talked about that, but that's just working with your lender and you need to have your lender needs to have all of those loan documents, the mortgage, the guarantee, all that needs to be to you in time for you to review it before you close. Okay.

Promissory notes. Another big one. A lot of times the mortgage will just have more surface level information because this is a publicly filed document.

You could pull up somebody's mortgage on public record, but the promissory note a lot of times isn't filed publicly and that may have more intricate details of the loan. Maybe some of the covenants or something like that. Certificate of insurance.

Yeah. That's one thing that you've got to do is get property insurance. I guess if you don't have a loan, I guess you don't have to get it.

You know, your lender is going to require you to have insurance and so you could roll the dice if you wanted to, if you didn't have a loan, but yeah, you need to have your property insured in case of fire, tornado, flood, you know, all this stuff. Yeah. It's super interesting.

We at Criterion, I think Precision does too. We have a big all encompassing policy, right? So when we have one policy that renews once a year and ours happens to be in November, that's completely irrelevant. So after November, we buy a property.

We just endorse this property onto that specific policy. So they're charging us the same rate per dollar of insurance that we've already pre negotiated for that policy period, right? And then our thought process and the advice we've been given by our insurance brokers is that gives you some sort of buying power, right? Because you've got a larger total insured value. You're sending the carrier larger amounts of premium.

So it gives you a bit more leverage and buying power, so to speak, as opposed to just having 30 policies that, you know, you're renewing an insurance policy a couple times a month. That would be really overwhelming. So does that rate per dollar go down the larger your portfolio gets? Theoretically, yes.

Yeah, theoretically. And there's a lot of other factors. We need to have an insurance professional on the podcast and just go through with them.

But geographic distribution, size, type, age, all that affects that way. Yeah. If you have a $100 million portfolio in New Orleans where it's in a flood zone, it's going to be expensive, right? We're in northeast Oklahoma where there's a lot of wind and hail risk.

We get dinged for that. But we've spread out enough geographically now with criterion specifically that it's starting to look... It's not like one flood is going to take out all our properties, right? Right. On the Gulf Coast or something.

Yeah. All right. You got to form your LLC.

Yep. If this is a closing, I can't believe this made it to the list, actually. If you're forming the LLC this late, you're fired.

You're freaking fired. Well, this is just after you... This is after... This is, let's say, after your due diligence and you've decided you're going to close. Now, what do you have to do to get to the closing? Yeah, form the LLC.

You've got to do that before you can work on loan documents. You've got to do that before you can assign the contract over, before you can get your title commitment, before you can open your bank account. You've got to get the name, right? You've got to get that LLC opened.

Yeah. So that's one of the first things, probably. By the way, free plug for the Oklahoma Secretary of State.

A lot of times we form LLCs and get the same day documents. It's $100. I can't tell you how amazing the Oklahoma Secretary of State is and how easy it is to do business in the state of Oklahoma.

Go, Oklahoma. Got to get your bank account open. Yeah, in the name of the LLC.

Yeah, that's a good one. Yeah, so- Sometimes there's three, four. I know on Little York, we've got a operating reserve account for taxes, insurance, and reserve sweeps.

We've got a reserve, reserve account for CapEx and tenant improvement and leasing commissions, and we've got an operating account. And then we've got- Typically, it's the bank though, right? Typically. Those three are at the operating bank.

And then we run all of our equity contributions and distributions through Mabry Bank. So that would be the fourth. Again, one deal, right? Four bank accounts.

Not necessarily ideal. It kind of depends on the lender. We try to push back.

Lenders always want the accounts at their bank, but it just gets tough for us when we're buying deals all over the country with a bunch of different banks. I don't want to have 30 accounts across seven states. It just is such a hassle.

But sometimes you can't get around it. Speaking of which, we are buying Little York, which is a property in Houston. And we are getting a loan from Arvest Bank with a loan officer in Arkansas.

I want to say Fayetteville. So when people tell me they can't find local banks, I just like, you don't need to find a local bank. This guy is in Arkansas.

We're buying a deal in Texas. It works. They're in the business of lending money.

All right. Investor docs. Yeah, I mean, if you're going to syndicate, you need to get the investor docs.

Attorney will do all those for you. But it's your private placement memorandum. It's your subscription agreement.

It's a couple others. It's the operating agreement and maybe one more. Two questionnaires and then accreditation verification.

Yeah. And so an attorney will know exactly what you need there. You just have to get them started early.

Let them know the deal points. And he'll get all those ready. And for us, we want all of those uploaded into the affiliate software and be able to send those to the investors to sign ahead of closing.

I mean, I'm just going to pinpoint, you know, I hope investors are watching. I know signing this shit is really annoying. I don't want to sign it.

Nobody wants to sign it. It's annoying. It's a lot of pages.

Right. But like, do you want to do business with somebody who doesn't want you to like sign a bunch of stuff and is super thorough? Read those documents. There's a lot of very specific shit in there that we disclose purposefully for this investment offering.

So I feel good about making people sign it. I feel good about saying, hey, you're required to be an accredited investor on this deal. I actually need your accreditation that you're an accredited investor.

It's the way it's got to be done. It means we're following the rules. Yeah.

Accounting software. Go ahead. Or I can.

I think we put this on the list and I really meant, hey, get the property set up in your accounting software. OK. So whatever you're using, we use Folio or you might use QuickBooks, but you want to have the property entered.

You want to have all the tenants in there and ready because you got to start collecting money day one and you want to have a system to keep track of who owes what and how the balances are accruing. So getting that set up ahead of time is important. We utilize third party property managers most of the time.

So most of the time we're just helping them make sure they're on track. Right. And most of the time they are.

You can tell Joel is super vertically integrated because he manages all of his own stuff. Tenant notice letters. So you've got to let the tenants know there's going to be a new owner and they need to have your contact information for emergencies or for maintenance.

But they also need to know where they're sending the money. And so that's important to get them all of that information because you don't want checks going to the previous owner. It could be hard tracking that down or getting them to pay it back.

So we typically do this over two different letters. You know, one of them is like a legal notice. Hey, you've got a new legal landlord according to this lease you signed.

It's almost a legal obligation to let them know that the interests on the other side of that contractor are different. And then the other one typically comes from the new property management company. Sometimes you keep the same property management company and that letter can become redundant.

But there's typically a letter saying, hey, we're the new management company acting on behalf of the new owner. Here's where you can pay rent. We're super excited to meet you.

Yeah. Go team. Okay.

Warranties. Yeah. We just want to know, are there warranties that are transferring? Did they put a new roof on? Did they have a parking lot? Did they have HVAC, you know, brand new HVACs? And if they are and there is existing warranties, you want to make sure that you're getting those before closing.

Sometimes there's reps and warranties in the PSA that they're reaffirming to at closing. Yeah. Okay.

Joel, you put this one down. Contracts that you want to keep. Yeah.

So I put that down. Yeah. I think I think Brady mentioned that.

But so the seller is going to have contracts in place with different companies to do a bunch of stuff. Maybe the lawn care, maybe the trash service, you know, the parking lot sweep, the window cleaning. And so you can decide, do I want those? Do I want to keep those? Do I want to honor those? Or do I want to go get my own? So that's why I put that on the list is you need to have all that set up, whether you're going to use the existing companies or whether you're going to negotiate new rates with somebody new.

Yeah. The reason I thought you put it on there because Brayden was on the phone most of the time we were preparing for this list. Yeah.

Anyway, the next. Getting shit done. Yeah, right.

Utilities to be transferred. That's true. Yeah.

You have to have the utilities transferred in your name on a retail deal. It's most likely just, you know, electric like parking lot, parking lot lights. But on a multifamily, you're going to get all the utilities transferred, most likely if it's an all bills paid.

But you'll have you may have gas, water and sewer and all that. So. OK, last one on my list, unless we think of something else is you got to get contractors set up for trash and lawn maintenance.

OK, we kind of talked about that, but we went through all 15. Yeah, man, it's fast. Now you guys know what you have to do to close.

It's not that hard. That list was easy. It only took us about 10 minutes.

Yeah, realistically, there if you've ever bought a piece of commercial real estate, these title companies set up these massive email chains with 20, 30 people in them. And there's just this rolling action on a list. You know, hey, we need this, this, this, this, this, this, this, this as a title company.

They're having to go through every operating agreement from every entity to verify signing authority and they're dispersing funds and they're going through all of these things. So it sounds can sound like it's a lot. The reality is there's a lot of people mutually and mutually aligned to getting this done.

Right. Because at closing, everyone gets paid. Title company is paid.

The buyer gets paid. The seller gets paid. The brokers get paid.

The attorneys, everybody. Everybody gets paid. So everybody's trying to get this deal closed.

Yeah. Anyway, we are excited to go through this because we have another exciting closing coming up. Obviously, Little York, Houston, we're super excited about it.

Biggest acquisition date. Not going to talk about the price, but it's the biggest one. And we're super excited about it.

Yeah. All right, guys. Till next time.

All right. Thanks. All right.

Talk to you later.

(Transcribed by TurboScribe.ai. Go Unlimited to remove this message.)