CHCP Commercial Closing Differences 3 — Questions and Answers
Question 1: In a commercial closing involving a multi-tenant building, what document assigns existing leases from seller to buyer?
- Lease Novation Agreement
- Assignment and Assumption of Leases (Correct answer)
- Lease Subordination Agreement
- Tenant Recognition Agreement
Correct answer: Assignment and Assumption of Leases
An Assignment and Assumption of Leases transfers the seller's rights and obligations under existing leases to the buyer at closing.
Question 2: What is 'prorated rent' in a commercial closing and who typically benefits when closing mid-month?
- The buyer pays all rent collected on closing day
- Rent is split proportionally between seller and buyer based on the closing date (Correct answer)
- The tenant receives a credit for prepaid rent
- The lender collects all rents during the escrow period
Correct answer: Rent is split proportionally between seller and buyer based on the closing date
Rent collected for the month is prorated at closing so the seller receives payment through the closing date and the buyer receives the remainder.
Question 3: What does 'SNDA' stand for and why is it important in commercial real estate closings?
- Standard Net Debt Agreement
- Subordination, Non-Disturbance, and Attornment Agreement (Correct answer)
- Secured Note and Deed Assignment
- Seller's Net Distribution Amount
Correct answer: Subordination, Non-Disturbance, and Attornment Agreement
An SNDA agreement defines the relationship between tenants and a lender, protecting tenants from eviction if the landlord defaults on the mortgage.
Question 4: In commercial closings, what is a 'CAM reconciliation' that buyers must understand before taking ownership?
- A mortgage balance confirmation from the lender
- A calculation of outstanding Common Area Maintenance charges owed by tenants (Correct answer)
- A title company's cash accounting method
- A commercial appraisal methodology
Correct answer: A calculation of outstanding Common Area Maintenance charges owed by tenants
CAM reconciliation determines whether tenants owe additional charges or are owed credits based on actual versus estimated common area maintenance costs.
Question 5: How does the closing timeline for a commercial transaction typically compare to a residential closing?
- Commercial closings are always completed within 30 days like residential
- Commercial closings take only a week because investors move faster
- Commercial closings generally take 60–180 days due to due diligence, financing complexity, and legal review (Correct answer)
- State law mandates the same timeline for both transaction types
Correct answer: Commercial closings generally take 60–180 days due to due diligence, financing complexity, and legal review
The complexity of commercial deals, including environmental reviews, lease analysis, and complex financing, extends timelines well beyond typical residential closings.
Question 6: What is a 'DSCR' and why do commercial lenders focus on it during loan underwriting for a closing?
- Deed of Sale Completion Ratio — the percentage of agreed terms met before closing
- Debt Service Coverage Ratio — net operating income divided by annual debt service (Correct answer)
- Documentary Stamp Calculation Requirement — a tax assessment tool
- Default Settlement and Credit Report — a borrower risk profile
Correct answer: Debt Service Coverage Ratio — net operating income divided by annual debt service
DSCR measures whether a property's income is sufficient to cover its debt obligations, and lenders typically require a minimum ratio of 1.20–1.25 for commercial loans.
Question 7: Which entity type commonly used in commercial real estate purchases requires additional closing documentation such as operating agreements and authorizing resolutions?
- Individual buyers using their personal names
- Limited Liability Companies (LLCs) (Correct answer)
- Married couples taking title jointly
- Trust accounts for estate planning
Correct answer: Limited Liability Companies (LLCs)
When an LLC purchases commercial property, the closing attorney must verify the entity's authority to transact through operating agreements and member resolutions.
CHCP Commercial Closing Differences 3
In a commercial closing involving a multi-tenant building, what document assigns existing leases from seller to buyer?