The commercial title search is a critical hurdle for a commercial real estate transaction to clear. If it’s done incorrectly, the deal may not be able to legally close.
No one wants the transaction held up — hundreds of thousands, even millions of dollars are at stake. But it’s exactly because so much money is at stake that it must be done right.
What is a commercial title search?
A commercial title search is a thorough search for official records pertaining to the subject commercial property. This could include, but is not limited to:
Why is it important to do this search? For these two big reasons:
- The title search can confirm or deny that the property itself matches the information contained in the purchase agreement. You don’t want to purchase property, only to discover that details like the boundaries or allowed uses aren’t what you thought they were.
- The title search can confirm or deny that the seller is actually the owner of record, with the legal right to sell the property. This is rare, but occasionally competing owners emerge or the seller is revealed to be a fraud, trying to sell property he doesn’t actually own and pocket the proceeds. You want to find this out before money changes hands. Otherwise, title could revert back to the legal owner and you — and your lender — are out a fortune.
What’s The Difference Between A Commercial Title Search and a Residential Title Search
So what’s the difference between a residential title search and a commercial title search? A commercial title search can be much more complicated.
Why is this the case? Many factors contribute to the complexity. For example, the property may comprise different tracts of land that were obtained at different times from different prior owners. Each tract of land will need its chain of ownership searched during the statutory lookback period.
Commercial title searches must also account for circumstances and conditions that don’t exist in residential real estate — e.g. party walls, shared stairways, environmental restrictions, or various leasehold interests.
Steps of a Commercial Title Search
- The Search. The title searcher scours public registries and other databases in search of records pertinent to the subject commercial property. The searcher must be thorough in their search of alternative registries and company name variations. (S)he may have to look up the history of the owner company to catch any name changes.
- The Title Report. The title searcher presents a report on their findings to the buyer and the seller. If the report meets the buyer’s expectations, the buyer can proceed towards closing. If it reveals unexpected information, the buyer can use the report as a tool to renegotiate — perhaps for the seller to cover costs to cure the title — or the buyer can choose to walk away from the deal. If the seller disagrees with the results of the title search, (s)he may purchase a competing title search.
- Title Insurance. This is an insurance policy that protects the covered party in the event of a mistake on the part of the title company. There are two kinds of title insurance policies — Buyer’s Title Insurance, which protects the investment made by the buyer (deposits, closing costs, etc.); and Lender’s Title Insurance, which protects the investment made by the lender (loan proceeds). Events covered by title insurance usually include:
- Boundary Disputes
- Environmental Impact Concerns
- Zoning Conflicts
- Title Defects
The state of the current commercial real estate market
From the experience of Pippin Title, orders for commercial title searches have been consistent, while residential orders have lagged. This tells us that people are still transacting on commercial property, whereas residential transactions have slowed down.
Why would this be? The housing market is more sensitive to interest rate hikes and inflation than the commercial real estate market. When mortgages become expensive, households often decide they can’t afford their first home (or a new home) and decide to wait.
Commercial property, on the other hand, generates income. Inflation tends to increase the income potential of commercial property. As long as the income justifies the expense, commercial property owners are willing to borrow at higher rates.
Rising interest rates do put upward pressure on cap rates, which usually translates to downward pressure on prices. However, a strong employment market has kept the demand for commercial real estate high, putting upward pressure on prices and keeping the deals flowing.
Where to go for a commercial search?
Remember, if the title search misses a document, “I had no idea” won’t save you. The record is probably still valid, even if the title search didn’t produce it. That’s why it’s critical to choose a qualified commercial title search agency.
Pippin Title serves commercial buyers and sellers all over the US, furnishing uniform and accurate reports with industry-best turnaround times. Our experienced team uses cutting-edge communication technology to ensure that you always know the current status of your title search. Reach out to us today — we’re ready to provide prompt and qualified assistance for all your commercial title search needs.