The rent proration is the small line; deposits, prepaid rent, the CAM reconciliation and unpaid leasing costs move more money at closing.
Rents and expenses at a commercial closing are prorated by day: the seller keeps income and pays costs up to the day before closing, the buyer from the closing day on, and only rent actually collected is split. On an illustrative $48,000,000 multi-tenant property closing on 18 June, the buyer receives 13/30 of the $288,000 of June rent collected, $124,800, plus credits for deposits, prepaid rent, over-collected CAM and unpaid leasing costs, less the seller's prepaid taxes: a net reduction of $544,941 in the cash the seller receives, 1.14 per cent of the price.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Rent credit to buyer = rent collected for the month × buyer's days / days in month
Expense credit = annual cost / 365 × days owned by the other party
In Excel: =Collected*(EOMONTH(Close,0)-Close+1)/DAY(EOMONTH(Close,0))
| Item | Value, $ |
|---|---|
| June rent billed | 310,000 |
| of which unpaid at closing | 22,000 |
| July rent prepaid to the seller | 41,000 |
| Cash security deposits held | 185,000 |
| Annual property tax; first half paid through 30 June | 420,000 |
| CAM estimates collected this year | 612,000 |
| Recoverable CAM spent this year | 575,000 |
| Unpaid TI and commissions on leases signed before contract | 140,000 and 36,000 |
| Service contract paid for June | 9,000 |
Step 1, the days. June has 30 days. The buyer owns 18 to 30 June inclusive, 13 days; the seller 17.
Step 2, rent. Of $310,000 billed, $288,000 was collected. The buyer's share is $288,000 × 13/30 = $124,800.
Step 3, tenant money. The $41,000 of July rent and the $185,000 of deposits go to the buyer in full.
Step 4, taxes. The seller paid the first half, through 30 June. At $420,000 / 365 = $1,150.68 a day, the buyer reimburses 13 days: $14,959.
Step 5, CAM. Tenants paid $612,000 of estimates against $575,000 of recoverable cost. The $37,000 surplus belongs to the tenants and will be refunded by the buyer, so the seller credits it now.
Step 6, leasing costs and contracts. The $140,000 of TI and $36,000 of commissions the seller agreed to pay are credited to the buyer. The seller gets back 13/30 of the $9,000 June service contract, $3,900.
| Item | Credit to buyer | Credit to seller |
|---|---|---|
| June rent collected, 13 days | 124,800 | |
| July rent prepaid | 41,000 | |
| Security deposits | 185,000 | |
| CAM over-collection | 37,000 | |
| Unpaid TI | 140,000 | |
| Unpaid leasing commissions | 36,000 | |
| Property tax prepaid, 13 days | 14,959 | |
| Service contract prepaid, 13 days | 3,900 | |
| Totals | 563,800 | 18,859 |
| Net reduction in cash to the seller | 544,941 |
The seller receives $47,455,059 before repaying its debt, $544,941 less than the price. Only $124,800 of that is the rent proration people think of first. The larger items, deposits, unpaid leasing costs and the CAM surplus, are not prorations at all: they are money the seller holds or owes on the tenants' behalf. In diligence, each one should be tied to the leases, the bank statements and the seller's CAM ledger, not taken from the seller's draft settlement statement.
Tax timing can swing the answer. Where taxes are paid in arrears, as in several US states, nothing has been paid for the current year at closing, and the buyer is credited the seller's 168 days instead: $193,315, turning a $14,959 credit to the seller into a large credit to the buyer.
| Closing day | Buyer's days | Rent credit | Tax credit to seller | Net |
|---|---|---|---|---|
| 1 June | 30 | 288,000 | 34,521 | 683,479 |
| 10 June | 21 | 201,600 | 24,164 | 610,136 |
| 18 June | 13 | 124,800 | 14,959 | 544,941 |
| 30 June | 1 | 9,600 | 1,151 | 447,149 |
Moving closing from the 1st to the 30th puts $236,330 more in the seller's hands at closing, but it is not a gain: the seller keeps rent it earned and the buyer simply collects its own July rent a month later. A buyer's model should start the hold at the actual closing date so that the proration and the first month's income are not counted twice.
Delinquent rent collected after closing is usually applied first to the current rent owed to the buyer, then to the seller's arrears. If a tenant that owes June and July pays $30,000 in July, $22,000 goes to the buyer's July rent and $8,000 to the seller. Agreements that apply payments to the oldest arrears first transfer collection risk to the buyer.
Prorating billed rent instead of collected rent. On this closing it credits the buyer $134,333 instead of $124,800, $9,533 too much, and the buyer then also collects the arrears that were never in the seller's hands. The reverse error on the seller's side is forgetting the CAM reconciliation: the $37,000 surplus looks like income in the seller's accounts until the year-end statements go to the tenants, by which time the buyer is paying the refunds.
The closing checklist and the rent roll tests that feed this statement are in the free workbook for this book; the line-by-line tie-out of the rent itself is in how to audit a rent roll.
Usually not. Only collected rent is prorated; arrears are paid to whoever is owed them when collected, typically to the buyer's current rent first and then to the seller. On the worked closing, prorating the $310,000 billed rather than the $288,000 collected would overcredit the buyer by $9,533.
The buyer, as a credit on the closing statement or by transfer, because it becomes liable to return them under the leases. On the worked property the $185,000 of cash deposits is credited to the buyer in full, the largest single credit on the statement, ahead of $140,000 of unpaid TI and $124,800 of rent.
The seller credits the buyer for its days of the current tax year, because the buyer will pay the whole bill later. With a $420,000 annual tax and closing on 18 June, the seller's 168 days produce a $193,315 credit to the buyer, against a $14,959 credit to the seller where the first half was prepaid.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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