How to Transition from Residential to Commercial Title | Ep 32

In a world where change is the only constant, Mo Shamil stands at the forefront, guiding title professionals to not just grow their businesses, but to master the art of innovation. With every episode, you're handed the keys to unlock unparalleled growth and stay ahead of the curve. Get ready for a transformative journey. Hello, everyone, and welcome to the Talent Agents Podcast, where we bring you insights and strategies to help you grow your title business. I am your host, Mo Shamil, CEO of Alltech National Title.

Before we dive in, I would love your support. Please subscribe to our YouTube channel or your favorite podcast platform to listen to our episodes and new ones in the future. And please give us a pop-star review and make sure to share this episode with your friends and colleagues. In today's episode, it's all about taking the mystery and complexity out of commercial transactions. If you're a residential title professional curious about expanding to the commercial space, you do not want to miss this conversation with Elena Gallo, head of our commercial division here at Alltech National Title.

Get ready to gain clarity, confidence, and actionable insights to make your transition seamless. Welcome, Elena, to the show. As we typically start the show with, can you please give us a little background about yourself, where you grew up, education, work career, all that fun stuff. So I have been in Chicago for 25 years by way of New York, where I grew up. And my career landed in Chicago after going to school in Michigan.

I got my first job here after going to law school. That was the first place that I really settled in my career. And about eight years ago, after having a really successful practice, I transitioned to the title side of things. So I can use all of the knowledge that I gained while being a lawyer and apply that in the title industry, because I know all sides of the transaction. I have that hands-on experience and also all the problem-solving roles that come with being head of the commercial division at Alltech.

So what attracted you to real estate or real estate law in general? I think it was in my blood. My dad was a developer, and we, well, my sister and I actually both, worked for his construction company. So we got our first- That's in New York? It was in New York, yeah.

And I got my first taste of that industry from acquisition to development and all of the contracts that came into play and all the teams that had to be organized. And I really liked it. I mean, it was exciting seeing a project go from a blank canvas to this major shopping center or residential high-rise. And so I knew that I would do something in real estate, but I didn't want to be on the development side. I wanted something where I can apply, like I'm a really logical person.

I love reading and problem-solving, and I think that's what led me to my first career in law and now in the title industry. I know early on with us, you were focused more on residential transactions. What initially drew you to focus on commercial transactions, and what do you find more rewarding about working in a commercial versus residential? The complexity of a commercial deal is- I don't want to scare our title audience. No, no.

The whole point of demystifying commercial. It's so exciting. Commercial deals, they're great. You have happy clients in the end, and you're getting them into their first homes or their forever homes, but with a commercial deal, there's just so many more people that you're working with to get the deal done. Everybody has a really focused role, and you do your part, but you can't get the closing done unless you collaborate and work together.

I also think people find commercial deals scary because they're unfamiliar, and every deal is different. If it's an industrial property versus a hotel closing, so many moving parts, but they're not really scary. The contract spells it all out for you. It creates the deadlines for you. You have a really focused workflow.

You just need to put the pieces together to get to closing, and so I like the methodical nature of a commercial transaction. I think also the zeros in the sales price may scare people. We get residential title agents used to doing $300,000, $400,000, $500,000 transaction. All of a sudden, doing $10,000, $20,000, $30,000, $100,000 transaction can be scary with that many zeros. Yeah, of course it can be scary, but in the end, you're doing the same thing.

You're getting a deal closed, so that fear should dissipate, and if anyone is interested in making the transition from residential to commercial, start dabbling in it. Start getting familiar with it, and you will see it is not that scary. What are the key differences title professionals need to understand when transitioning to commercial from residential? The process is slightly different, and the players are slightly different. The property types are different.

A home or a condo versus an office or a retail center, an industrial property, there's different caveats that you need to be familiar with. The due diligence versus the attorney review in a residential transaction. Attorney review just focuses on an inspection, where in a commercial deal, the due diligence process requires not only a property inspection, but environmental inspections. You're more focused on zoning, and there's just more to it. Financing for a residential transaction is a little bit easier to obtain.

Financing on a commercial deal, you have multiple types of financing structures that it's not just traditional lender financing. You have other avenues. The market is different. The market for residential is driven by the personal needs of your buyers and sellers, and the local inventory where commercial deals are driven by business growth and the risk. The risk.

The risk. Yeah. Risk and return. I mean, on a residential deal, lower risk, lower return potentially, but on a commercial deal, your exposure is that much more, and that's really where we come in as title professionals and all of the other legal advisors, business advisors that work together to ensure that your investment is secure and title is clean, and you get to use that property for what you intended. So, while real estate is real estate, there are significant differences between commercial and residential that you need to be aware of.

As you mentioned, due diligence is a key component of a commercial transaction, and it can be daunting as part of a commercial transaction. What are some critical steps or red flags title agents should be aware of during this process? First and foremost, know your buyer and know your seller. Their entity structures, with commercial properties, entities are purchasing the properties, not necessarily individuals, so you need to be very careful about making sure that their entity is in good standing, knowing who the signatories are for the purchases or signing the seller conveyance documents. Signing authority is spelled out in their organizational documents, and that person with signing authority may have limited authority for certain portions that they can sign off, or they could also be a person who is not a manager or a major shareholder of the company, and they're just assigned a responsibility.

are for the purchases or signing the seller conveyance documents. Signing authority is spelled out in their organizational documents and that person with signing authority may have limited authority for certain portions that they can sign off or they could also be a person who is not a manager or a major shareholder of the company and they're just assigned a responsibility to the to the entity so you have to very carefully comb through the organizational documents to make sure that their you know their structure is in place it's in good standing for compliance and regulatory reasons and that the person who is signing can actually bind that entity to in the purchase transaction you some other things that are really important to look at are you know the inspection reports the the zoning if the property this is a big one zoning is really important because you want to make sure that the property is zoned for the use you're intending for your perspective business to to go on make sure that zoning hasn't changed since the seller you know purchase the property maybe years before you also want to really look at the survey the survey will you know it will outline not only the boundaries of the property but it'll show you where the existing structures are if they're underground tanks or easements on that potentially you need to be insured for if there's an issue or if that structure shouldn't be there the survey will you know show you that I mean what if you have to remove it you know in order for a utility company to come in and make repairs these are really big things to be aware of where you know in a residential property you might deal with a shed that is over a property line it's it's not a fixed structure but it's more significant in a commercial deal to be like to thoroughly read through the survey environmental issues do come up you know especially when you're purchasing a gas station or on you know maybe if you're buying a property in Texas there are underground oil fields you know so there's all there's extra due diligence that you're doing in a commercial deal so how do you recommend balancing thoroughness and efficiency you know you have to have everything checked and all the T's are crossed and I's are dotted but at the same time balance that thoroughness with the efficiency with managing due diligence for complex deals I think everybody wants to close everybody as you know all the pressure from all parties yeah you the key is communication and collaboration you you know your workflow is already identified for you your deadlines are identified you know as a title professional you know what you have to clear before you can get to closing but if you are not you know if you're not in sync with all of the other people working on the transaction that is destructive. Can you take a quick pause here all parties like a commercial transaction whether that's a transaction you have a real listen agent sound agent and pretty much the loan officer pretty much on a commercial transaction there's more parties involved can you just elaborate more on that and what talking about due diligence? Buyer and seller each have an attorney in most cases majority of cases and sometimes they have teams of attorneys who specialize in different areas that they are relying on for advice. You have business advisors, investment advisors and sometimes you even have specialized advisors like aviation or SAA consultants or environmental attorneys or you know consultants that guide you through issues that might come up.

Your title team is instrumental in in the closing process and usually the buyer and seller because they're you know they're sophisticated and it's probably not their first acquisition they are also heavily involved where you know compared to in a residential deal the either the attorneys or just title and lenders coordinate and there's very little involvement from you know the brokers except that they deliver the contract and then you know they they may help with inspection and things like that access to the property but they're mostly hands-off so you have many more people collaborating on a commercial deal. Can you share an example of the situation where due diligence revealed an unexpected issue and how it was resolved? I mean this comes up all the time mainly it comes up with you know encroachments or you know boundary issues and usually you can work through them you know of course there are endorsements that you can add to your title insurance policy that provide extra protections for these types of encroachments but you know aside from you know here's what I think anything can be worked through if an issue arises either you know you're working on getting an endorsement to further protect you or you negotiate removal or some kind of credit so that or a repair to fix the issue anything is workable and so you know a specific every deal has issues if I had to start talking about all of them I could probably sit here all day and name them but for the most part you never had a smooth one simple easy smooth transactions most of them are smooth but put it in perspective they're always smoothish yeah that's the right word so let's let's move to financing complexities in commerce transactions so as you know commerce transactions have involved more complex financing structures compared to residential what unique challenges does this pose for tile Asians who can't pose for tile Asians if you're not familiar with a particular type of financing then it's something that you need to quickly learn about you have to be able to read through the loan documents make sure all of the vesting matches the title structure and one kind of financing I guess that you know I had to learn about was mezzanine financing subordinate financing most times you're dealing with SBA loans or traditional commercial loans hard money loans can be a challenge sometimes because not all of the documentation that you get is thorough especially if it's not an experienced hard money lender so you're not just dealing with Fannie Mae Freddie Mac things like that you you're you're dealing with you know your mortgage could be a hundred pages long in a commercial deal what one of the good things about commercial transactions is you have a lot of guardrails the lender most of the times have an attorney as well correct yes so all these attorneys you're where you as the commercial escrow officer you act as more as a quarterback get instructions from all these parties all these attorneys and your job is to kind of just follow the instructions and they they act as a really it's a great guardrail because you have so many eyes looking at it everybody's trying to protect themselves and your job is to collaborate and cooperate yes exactly and I can I can tell you a situation where a lender's attorney was heavily involved in the transaction it was a hotel sale and if the hotel was like in a mall area where there were significant deed restrictions and one of the deed restrictions allowed the shopping center management company to initiate foreclosure proceedings for failure to pay annual maintenance fees and the lender fought pretty hard to have an additional restriction or to have that restriction lifted that was a situation where I significant deed restrictions, and one of the deed restrictions allowed the shopping center management company to initiate foreclosure proceedings for failure to pay annual maintenance fees. And the lender fought pretty hard to have an additional restriction or to have that restriction lifted. That was a situation where I had to, like it did delay closing, you had to get the development company and the ownership of the shopping center involved, and that posed a challenge.

Ultimately we got it done, but I see why the lender has the attorneys. They need extra protections built into their documentation. There's so much money involved that if you want to lend somebody 10, 20, 30 million, you want to make sure you get it protected to the best of your abilities and have attorneys looking at it. Yes, for sure. Let's move to title insurance and commercial transactions.

That's what we do. It's our core business, our core service. How does the underwriting process differ from commercial policies compared to residential policies? High level. I think there's a stricter scrutiny.

You're relying on your underwriters and underwriting counsel to review all of the endorsements that the lender requires, that the buyer may require. You're dealing with a much, since there's more risk, you need to rely heavily on the underwriting team to make sure that we are not giving more protection than we are able to foresee might come up as an issue in the future. You want to make sure that the level of protection has to be supported by something that you've been able to put in the file. For example, if you're asking for a zoning endorsement, you need a zoning certificate that supports the use. We can't protect a buyer from zoning changes if we don't have everything in place before the closing.

What a good thing. A majority of transactions, if not all of them, they're going to fall above your underwriting limits. So you need the proof from the underwriter anyway, which is a good thing. You cannot bypass the underwriter, which is a good thing. Yeah, they protect the underwriting company as a whole, but we rely on them to protect us as well as the agent.

Yeah, we're gonna go a little deeper and really geeky, talk about endorsements. What are the most common title insurance endorsements that come up in commercial transactions and why are they important? Okay, so I keep talking about zoning, but you know, a zoning endorsement comes up in every single commercial deal. It ensures there's no violations, the property complies with the local zoning laws, and the property is zoned for its current use. If somebody buys a property and they can't use it as they intended, then they have this extra protection built into their title insurance policy that, you know, if it goes to litigation, it protects them from losing money for failure to be able to use the property as they wish.

Access endorsements are very common. You need to be sure that the property has legal access to a public road or a thoroughfare. If you can't get to the property legally, if you have to cross other people's lots to get there, you're landlocked. The property becomes valueless. You know, survey coverage, you know, it ensures that the survey accurately reflects the boundaries of the property and any improvements or encroachments, other physical features, and those findings have to match the title description.

So things from the survey are built into your title insurance policy. Environmental, that provides protection against risk from, you know, harmful contaminants or major remediation. Liens and encumbrances, of course, you have to make sure that title is clean, clear, that, you know, there's no unrecorded, you know, mortgages or mechanic liens that could, you know, come into play later. So if you have, you know, the liens and encumbrances endorsements in place, if title doesn't show something that may or may not have been recorded timely, then, you know, you're afforded this extra protection because it should have come up or we missed it somehow. That's more protection for, you know, of course, the buyer.

You have a variable rate mortgage endorsement that comes up sometimes. That's pretty self-explanatory. It's more for the lender's protection. And, of course, I mean, you have your comprehensive endorsement that's typical on any policy. But those are the biggest ones that come into play.

What are the typically lenders are the ones who typically push in for more for endorsements or moving exceptions? What are the key ones they go after the most or want to either remove or add or it's adding protection they ask for? How do you balance that without deal writers? It's like it's a dance sometimes. Encroachments are a challenge sometimes because it's a huge risk to the underwriter and to us as a title agent.

And survey. Sometimes, you know, the lender is really adamant that they need a survey or a location endorsement, but we don't have a new survey. The parties agreed to use a survey that was a year old. So, in that case, you know, we need to go to the underwriters and see what their comfort level is with the existing survey in order to allow us to issue those endorsements. But typically, with the others, we don't have an issue with getting approval from the underwriter to issue them.

In your experience, what steps can title agents take to proactively address potential title insurance issues before they arise? Very carefully comes through the requirements and the exceptions. And make sure that you have some supporting documentation for every single one. Run title updates, you know, at least monthly through the transaction, especially if it's a longer time from contract to closing. And immediately before closing, before anything gets recorded, before disbursement, you pull one final title update and make sure nothing has changed so that you can, you know, you can give the protections that were requested.

And that we don't open ourselves up to additional exposure for anything we missed. I would like for us to move into, go back into entity formation and authority and go a little more in-depth at a majority, if not all, transactions involved. At LLC, corporation, or a trust, it's rare when it's an individual purchasing commercial properties because of high risk. So, one of the first steps of commercial deals is ensuring that the purchasing entity is properly formed and authorized. What are some common challenges title agents face in verifying entity authority?

Sometimes the person who is signing has authority to sign, correct? Right, yes. Sometimes corporate documents are outdated. You know, they could have formed the entity 10 years ago and maybe haven't created any amendments. So, when you have older corporate documents, it's really important to go back to, you know, the buyer or seller and ask them if they have made any changes.

Or, in fact, ask them to provide you with a current resolution or amendment to affirm that their corp docs haven't changed. You want to make sure that they filed their annual reports and they're in good standing with the state in which they're doing business. And you also could have foreign entities or out-of-state entities that are purchasing properties or selling properties, you know, in any of the states that we work in. And they also need foreign authority to do business in the state. So, you know, these are the documents that you look for.

Sometimes a foreign entity doesn't have authority to do business in the state in which they're purchasing or by regulatory standards or with the Secretary of State. or out-of-state entities that are purchasing properties or selling properties, you know, in any of the states that we work in. And they also need foreign authority to do business in the state. So, you know, these are the documents that you look for. Sometimes a foreign entity doesn't have authority to do business in the state in which they're purchasing or by regulatory standards or with the Secretary of State.

And you have to request that they file the application for authority before you can proceed. And, of course, clear signature authority. That's really huge. You want to make sure that, you know, the resolution that you receive at the time of closing matches the corporate documents. In cases where you have a corporation with members who are limited liability companies, now you're looking at two sets of documents or three sets of documents.

And that makes it more challenging because you're going through all of those steps that I just described. But now with multiple entities, you need to make sure everything matches up. What advice would you give title professionals who are reviewing entity formation documents for the first time? Familiarize yourself with, you know, the entity formation documents like operating agreements, articles of organization, things like that. You have to understand the purpose and the scope of the entity.

What was that entity formed to do? Was it formed, you know, to purchase properties? Was it formed for some other purpose? The purpose of the entity has to match the transaction that they're engaging in. You want to verify all of like the legal name of the company, whether or not they operate under trade names or fictitious names.

So you're going to utilize all of these online tools and websites that are available to you to cross-reference everything. You know, you wish that you could rely on the information that's given to you from the parties or the documents, but it's our job to verify. Trust and verify. Exactly. You know, look for any amendments or powers of attorney that have to be reviewed or if they're missing, you need to get them in place.

So there's a lot of checks and balances when you're dealing with, you know, corporate documents. And I would also suggest or recommend to, if you have an attorney in office, have them look at those documents or reach out to your end rider. And you know how big I am on AI. I would also upload documents and chat GPT. Like, hey, here is, I'm trying to close on this deal.

Can you please give me a summary? If it's a complex or sometimes those documents can be 70, 80, 100 pages. Give me a summary of this document and who has authority a little spelled it out for you. But you still need to verify and get a blessing from all parties and your end rider. So this is not legal advice, more efficiency advice.

For sure. Yes. Are there any best practices or tools you recommend for simplifying the process of confirming authority for commercial closings? Just confirming, I mean, again, you're just going to thoroughly review all the corporate documents. When in doubt, go to your underwriter and get their blessing.

You know, you can also seek out advice from the lender because they have already done a lot of the due diligence or all of their due diligence on the corporate entity structure. They're giving you drafts of what the signature block should look like. So you can even use that as a starting point, you know, and work backwards and do your own review. But when in doubt, go to the attorneys, go to the underwriter. Ultimately, the underwriter has to give you their blessing on, you know, on what's right.

But you should not undertake that responsibility on your own if you have any uncertainty. Commercial closings sometimes or often requires a mountain of documentation. What are your top tips for staying organized and ensuring nothing falls through the cracks? You have to have a very succinct workflow, a date management system, a document management and filing system. I heavily rely on our secure portal.

We use qualia. I mean, everybody in the show knows we talk about qualia often. How do you use qualia? I'm not endorsing or just what we use. How do you leverage qualia to your workflows and checklists and due dates and all that?

So, of course, you know, I have a standard workflow built in to qualia for the commercial transactions. And it also details due dates. And, you know, I can manipulate that based on how the transaction is progressing. And that keeps me really organized. My filing system in qualia is also very organized.

It's organized, you know, in from, you know, initial documents, you know, for every stage of the transaction. I have a separate set of files and sub files. And every time I get a new document or a revised document, I make sure that I immediately put it into the folders. It's labeled so that I can easily recognize what it is. And I can also easily share the information through the portal with any of the parties.

So, I mean, I really rely on qualia and how we have it set up to manage all of my files. Paperless as much as possible. That's awesome. What is one of the most unusual or complex commercial transactions you've been part of? And how did you navigate it?

I'm sure it was a lot of fun. Yeah, actually, I'm laughing. A lot of pull there. You know, so, last year, towards the end of the year, we closed on a private airport. This was totally new territory for me.

And it was a huge learning experience. I didn't even know where to start. Of course, you know, I knew, you know, the general process. I knew that I had to clear title. But, you know, I never had experience with dealing with easements for airspace.

I mean, what? You know, I had to learn about, you know, different kinds of leases that are involved. For example, an airport hanger. There's a specific lease for an airport hanger on the property. You need access through the run or over a runway sometimes to get to, you know, different buildings that are on the site.

I had to work with specific environmental consultants because, you know, there's fuel on the property. I mean, there's also, like, noise pollution regulations. Yeah. So, all of these things that I never had experience dealing with. I mean, I might have heard of them.

Most of it, I hadn't. And, you know, I had to do a lot of research. I had to really go to the underwriters and ask for their guidance specifically. But I was really lucky in that the seller, you know, it wasn't – the seller was an attorney. He was an aviation attorney.

And, you know, he also helped lead the process. So, anything that I didn't know, you know, we would talk through. And he, you know, he led me to the people that I needed to collaborate with in order to get it closed. And, you know, it's really exciting. I mean, we get used to closing on hotels, gas stations, you know, things that we're doing over and over again.

But – or shopping centers even. But this was – It was a lot easier than airports. For sure. There's just, you know, there's a lot more due diligence that's involved, especially, you know, in the environmental space. You need a lot of permits and approvals.

It was a great learning experience and a little scary because it was uncharted territory. But if I ever have to do it again, I mean, it could come up where I have to deal with airspace. Especially, you know, in the city of Chicago. If you're working on selling, you know, a high-rise apartment building, potentially there could be airspace issues. Or if it's a low, you know, a mid-rise surrounded by two high-rises, I mean, that could come up.

So, now I have a little bit of, you know, great learning experience and a little scary because it was unchartered territory but if I ever have to do it again I mean it could come up where I have to deal with airspace especially you know in the city of Chicago if you're working on selling you know a high-rise apartment building potentially there could be airspace issues or if it's a low you know a mid-rise surrounded by two high-rises I mean that could come up so now I have a little bit of you know experience but that's what I love about this you know every deal is different but when you get to work on a new type of property it just it reignites your fire that's awesome what advice would you give title professionals looking to expand their business in commercial transactions I would say get familiar with the different types of commercial properties start surrounding yourself and networking with commercial lenders commercial real estate brokers commercial attorneys and attend you know seminars even you know there's so much education available that that you can take advantage of and and gain at least a good foundation so that you can begin to embark on that transition green lead like these are like sustainability having those certifications is important because that's the you know that's our current and future I mean everything needs to be environmentally safe and so I think those are probably the key pieces of advice that that I would recommend how do you see technology and automation impact in commercial closings and now you know commercial has been typically old-school I know like the so it's just done differently how do you see like a technology affecting it or automation if any the AI is gonna take over the world and so I think that you know closings will become you know remote I think that signatures will be electronic and we're already starting to see a lot of that I think that we all spend a lot less time manually creating pro formas and updating titles and and requesting title compliance or clearing items it it will become more automated I think that you know policies can be updated in real time as you save new documents to the file or add notes then you know the technology will pick it up and you'll have up-to-date and you know of files at all times you know you know we don't want I also think that you know there there could be you know less margin for error when you have a proficient you know technology system constantly updating things for you in real time you have access to that information faster than you would if you were doing it manually so I mean I really see technology playing a major role in reducing risk you know reducing the time that we have to spend on tasks related to the commercial file and we can focus more of our attention on the transaction instead of you know what what you might call you know the administrative part of it yeah work is smarter not harder one of my mottos right yeah but as we're getting close to the the end of the show what's your favorite quotes would you have a favorite quote so I do and my favorite quote or one of them I should say is don't be afraid to give up the good to go for the great you know a lot of times we get complacent we get comfortable and you can't grow if you don't get out of your comfort zone in fact I mean you could regress because you're so comfortable that you stop seeing what's out there and so just keep going keep keep getting yourself out there and go for the great that's John D Rockefeller that's I love the man that was in New York his past weekend and I saw one of his buildings so do you have a favorite book or of all time or a favorite book you read recently so I have a book that I've read a few times and it's not a book for everyone it's called seat of the soul it's by Gary Zhukov and it's an older book it was written first in 1989 but the the principles really apply and when you're on this you know like journey we're always you know like for understanding people better becoming more present you know being more focused knowing yourself better so these are things that are important to me I'm on this constant evolution and this book really spoke to me because it it it gives you the idea that we have to move away from a perception of reality that's driven by only your physical senses you know like I need this now or I smell this but what's deeper than that you know you you need to look inside yourself like what did you know if you smell leaves in the fall what does that do to you don't just smell the leaves process it and so when when you stop the five senses are like it's very material surface but when you you know focus more on this multi sensory approach you know yourself better and knowing yourself better allows you to be more present when you're more present you can absorb more you deal with people better I mean so I I've read it three times I get something out of it each time I read it and if if you are on a you know a similar journey I would highly recommend it that's awesome that was very thoughtful and eloquent that's it that's who you are it's been an amazing episode thank you so much Elena it's been my pleasure I'd love to talk commercial title anytime yeah well thanks for tuning in to the title ages podcast a big thank you Elena Gallo for breaking down the ins and outs of commercial transactions if you enjoyed today's episode don't forget to subscribe and leave us a review and make sure to share with your fellow title professionals stay ahead of the curve and we'll see you next time for more insights to help you thrive in this competitive industry thank you so much Mo and that's a wrap on today's journey with Mo Shamil from the title agents podcast reminding you that mastering the art of innovation is key and the title industry's fast-paced world if you're finding it tough to keep up with the changes and challenges remember you're not alone our calendar is open for you find the link in the show notes and let's connect make sure to hit subscribe to not miss out on strategies that elevate and insights that empower together we'll navigate the future of the industry I look forward to our next meeting in the upcoming episode keep pushing keep innovating and see you in the next episode