By Edward B. Woodall

You worked hard to start and grow your business, and now it’s really booming: you’re hiring new employees, adding new customers, and now you’re thinking about expanding. You’ve even picked out a new location and signed a contract to purchase it. Now the big day has arrived: closing. That’s the ceremony where money and documents change hands to consummate the transaction. From the seller’s standpoint, it’s easy – you give them money and they give you the land. But from your point of view, it’s a little more complicated.

Before the property is yours, you have to review and sign the thick stack of documents referred to the closing package. While every deal is different, most commercial real estate closing packages will contain a deed, a promissory note, a deed of trust, and a guaranty. In this blog post, we’ll demystify the closing package by explaining why these documents are part of the closing package and what they do.

The Deed

If you’ve ever bought a house, you’ll be familiar with many of the documents covered in this article, including the deed. Every single real estate purchase includes a deed. The deed is what actually makes you the owner of the property. Every deed contains:

  • The name of the grantor, the person selling you the property;
  • The name and address of the grantee (you, the buyer);
  • The “granting clause,” the magic words which make you owner of the property;
  • The “habendum,” which works hand in hand with the granting clause to convey the correct interest in the property to you;
  • A legal description of the property, which sufficiently identifies which property is being transferred; and
  • The signature of the grantor.

Did you notice what that list didn’t include? Your signature. Buyers don’t sign deeds.

After the deed has been signed and sealed, it must be delivered to you and recorded. Just like in a residential closing, this will be done by the closing agent (often an attorney), who will take the deed to the register of deeds in the county seat of the county where the property is located and have it recorded in the public real estate records.

The Promissory Note

If you have enough cash on hand to purchase the property outright, that’s great. But most buyers have to borrow some of the purchase price from a lender – usually a bank. While addressing the complexities of commercial real estate lending is beyond the scope of this article, there are a few things about the promissory note that any buyer should know. First, you need to know what the note is. A promissory note is evidence of your debt to the bank. If the bank is going to record a deed of trust, it needs to have a promissory note. Second, the note is what establishes many of the terms of the loan. Among the items which the note should include are the interest rate, the frequency of payments, and the bank’s remedies upon default (i.e., a missed payment). Finally, you need to plan to sit down with your attorney and read through the note to make sure that it conforms to the terms of the deal you negotiated with the bank. Your lawyer can also help you spot potentially dangerous provisions hidden in the body of the note as well.

The Deed of Trust

            Homebuyers will also be familiar with the deed of trust. Commonly referred to as a mortgage, the deed of trust is the document you sign pledging the property you just bought as collateral for the loan. It allows the bank to foreclose on the property if you don’t make payments or otherwise breach a condition of the promissory note or other loan agreements.

You might think the deed of trust is a document between just you and the bank, but there’s actually a third party involved: the trustee. The trustee actually holds legal title to the property, while you (the buyer and borrower) retain equitable title. That sounds complicated, but it’s really quite simple – you get to use your property to conduct your business, but the trustee has the power to remove you from the property and sell it to pay off your debt to the bank if you fail to pay. The actual foreclosure process is a little more complicated than that, but it is beyond the scope of this blog post. Just like with the promissory note, it’s best to have your attorney review the deed of trust before you sign.

The Guaranty

For many commercial loans, the individuals behind the borrowing business entity will also be required to guaranty the loan. If you personally sign the guaranty, you (and all your assets) are on the hook if your business doesn’t make payments on its debt to the bank. This means that you’ll be giving up some of the limited liability advantages that your business form should provide. If you have business partners, they’ll likely have to sign guaranties as well. These guaranties are usually “joint and several” guaranties, which means that the bank can collect the full amount from you or any one of the guarantors, instead of just your “share” of the debt. The guaranty is one of the most important documents in the closing package, but it’s also often overlooked by borrowers as something tacked on to the end of the deal.

Good Advice is Key

We covered a lot in this article, just by taking a brief look at the most common documents in a commercial real estate closing packet. Many more types of documents exist, and each of them is subject to a dizzying array of options, complications, and confusions. That’s why competent, experienced counsel is key. The attorneys in Venn Law Group’s Commercial Real Estate practice group have decades of experience negotiating, shepherding, and closing deals of all shapes and sizes. Every day, we provide real estate buyers, sellers, borrowers, landlords, and tenants with the practical, actionable advice they need to understand their transactions and get the best deal they can. Contact us now.

Edward Woodall: Corporate and Commercial Real Estate attorneyEdward B. Woodall is an attorney at Venn Law Group who works incorporate law and commercial real estate, including leasing, financing, taxation, business structures, and dispute resolution. He is passionate about helping business owners solve a variety of complex legal problems and has performed more than 100 hours of pro bono work. In addition to his law degree, he also has a background in history and Spanish.