05 Oct Commercial Real Estate Rents
A fundamental component of the financial performance of commercial investment real estate is the rent (rental income). Depending on the type of lease agreement (gross, modified, NNN, percentage, etc), rental income may include tenant base rent payments, liability insurance, common area maintenance (CAM), property taxes, percentage rent, gross-up and other charges. Also, there may be tenant deposits, which include security (damage) deposits and last-month rent deposits.
How are rents handled in escrow?
The document commonly used in commercial real estate to itemize the collection of rents is called the Rent Roll. This document is provided to the escrow officer by the seller or property manager, and is approved by the buyer and seller prior to the close of escrow.
Rents are customarily prorated at closing by one of two methods:
- Accrual method – All rents as if collected (this is the usual practice)
- Actual method – Rents that have actually been collected (with this method, the buyer assumes any delinquent rents
Tenant deposits are normally itemized on the rent roll, but these are not prorated. Instead, the total amount of the deposits is transferred to the buyer from the seller at closing. The seller is normally charged for the deposit total, and the buyer is credited. In some cases, the seller may be charged for the total, and a check may be issued to the buyer. Special instructions for this require approval by both parties.
The manner in which rents are prorated and deposits are transferred should be stated in the purchase agreement. Otherwise, the escrow officer will require approved special instructions from the seller and buyer.