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.
