Past-Due Rent in Self-Storage and Its Effect on Facility Sales: Who Keeps It? Buyer or Seller?

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By Chris Hitler

“I wish buying and selling real estate was easier.” Many self-storage owners and investors feel this way during the process of acquiring or disposing of a property. Consummating a real estate deal is tough. Besides agreeing on the most salient transaction terms such as price, earnest money and financing, there are less prominent details to sort out, such as the issue of past-due rent. Who gets to keep it, the buyer or the seller?

There are a few approaches to resolving this challenge. The first two offer a clean break at closing. The other options focus on fairness while sacrificing transparency and expediency.

  • The buyer gives the seller a credit in a fixed amount at closing. The benefits of this approach are transparency and definitiveness. Both buyer and seller know exactly what will be credited at closing. The downside is the high potential of unfairness. One side gets compensated more than is actually collected.
  • The buyer gives the seller a percentage of past-due rent at closing. Although this approach is not quite as definitive as the previous (i.e., knowing exactly what will be credited to the seller), transparency is good. The buyer and seller know how the credit will be calculated, and this method reduces the risk of the seller being credited too much or not enough.
  • The buyer passes all collected past-due rent on to the seller. In this scenario, the seller gets only what has been paid. Unfortunately, the buyer has no incentive to collect the past-due rent since it will be given to the seller. Furthermore, the buyer may consider every tenant current as of the day of closing, simply choosing to ignore past transgressions and thus eliminating the chance for the seller to collect anything.
  • The buyer passes on to seller past-due rent collected within the first 30 days after closing. The buyer then keeps anything collected after the 30 days is up. Although the buyer has an incentive to collect past-due rent, this incentive may not necessarily help the seller because the buyer may wait until the 30 days are up before trying to collect.

There are numerous other approaches, and none are perfect. They all have benefits and tradeoffs. One way to mitigate the amount of past-due rent, assuming tenants are on a first-of-the-month rent-payment schedule, is to be strategic about the timing of the closing. A closing soon after the first of the month could mean a high percentage of tenants who still owe rent. A closing toward the end of the month will help to reduce the percentage of tenants who owe.  

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