Estoppel Letters

We are purchasing a park, the sellers bought it and 2 other parks in the area, sight unseen, a few years ago. They managed to bankrupt one of them so they moved the manager of that park to this one about a year ago…ya see where that’s going, don’t ya? They have sent us the current rent roll along with the deposits they have. They don’t show deposits for all of the tenants. Would you send an estoppel letter to the tenants to see if they agree they don’t have deposits? These sellers are extremely hard to deal with and are withholding information every chance they get. We’ve had to practically beat the information we have gotten out of them. They have threatened to keep the deposits on the tenants that are behind in their rent when we close, I have talked to Frank and he informed me they can’t do that. I am concerned that they be withholding information on the deposits and I don’t want to get stuck owing deposits I didn’t collect.Thanks for your help,Leighnae Fabian

If you can get estoppels, that’s great. But the customers will never willingly sign anything and return it, so if you send out 50 you’ll be lucky to get 5 back. Even if you go door to door, you’ll be lucky to get up to 20. You know that the seller is witholding deposits and may not be accurate on much else, so you have got to buy this with a high cap rate. Also, who is doing the financing, the seller? Banks are not as forgiving on these items as you may be.

Usually you would turn to the contract of sale for guidance on this matter – whether the sellers can or can’t may be addressed there. Your attorney may have some insight or explanations as well.Assuming that the contract is silent, however, we frequently used a “credit at closing” mechanism for our sales. Let them keep the deposits, but take the deposit amount (and assume 100% compliance) as a buyer credit and deduct from the proceeds at closing. So if you have 100 residents with $100 deposits (assuming 100% compliance) then you deduct 100 x $100 = $10,000 from the sales price and deposit that difference into your “security deposit account”. That way, you know that the account is 100% funded and in compliance with whatever state regulations are required. [Edited for clarity: Let’s say the cost of the park is $100,000 and included in that is $10,000 in security deposits from 100% of the residents. $100k from buyer to seller, and the “ownership” of the security deposit account changes, but the buyer has no further obligations for the security deposits unless there’s misrepresentation or discrepancies that arise later. However, the buyer doesn’t know what’s in the account, and currently faces the risk of paying $100k and then having to pay additional money to settle any security deposit conflicts down the road. Under the “credit at closing” scenario, the buyer pays the seller $100k minus security deposits at 100% participation. The out of pocket is still $100k, but $90k of that goes to the seller and $10k of that goes to the bank to fully fund the security deposit account. The buyer has no further obligations except any misrepresentations that may be found in the leases. When a resident leaves without deposit documentation, the buyer can either require some type of proof, or generously refund whatever deposit they should have paid from monies set aside at closing. The losers here are the sellers, who get less than they would have because they can’t provide documentation. Buyers should always fully fund security deposit accounts because the bank or the state will want to see that accounting.]I have also heard – and the real experts should chime in here – that you could charge an monthly overage for folks without deposits, until they’ve paid whatever security deposit you require. Again using $100 as an example, you might charge people $5-10/month until they’ve hit $100 in your security deposit account. I’ve never done this, however, and would recommend you consult with someone better informed.Will

Deposits are tightly controlled by most states, so I would talk to your state MHA before doing anything to make sure it’s legal.

Thanks for the replies. Frank, We’re getting a good deal on the park (not sure exactly what cap rate) but it is bank financing. The quick formula, lot x rent x 70 (in this case) I believe is a 12 cap, comes up with a purchase price of $551,000, we are paying $510,000. If we send out estoppel letters stating that we are being told by the sellers that the lot rent is $180 a month and they are saying that you have no deposit on record and the tenant doesn’t reply then they can’t come back at a later time and say something different, right? And, do we have to mail the letter certified or can we send it regular mail, or would we be better off to put it on their door? How would you prove you sent it without certified mail or knocking on doors?Thanks,Leighnae Fabian

Those are questions for a local attorney, as we don’t use estoppels. I don’t want to give you the wrong answers.

Maybe I asked the wrong question…62 lots, 54 occupied, on the rent roll they are showing 13 lots with no deposits. How do you verify that they didn’t collect a deposit? Or, do you just not worry about it and eat it when the tenants move out? And if you find out they don’t have a deposit do you do like Will mentioned and let them pay it out for a few months?Thanks,Leighnae Fabian

We run into this problem all the time. In many parks, the deposit is only $100. So your total risk – if the seller is lying – would be $1,300 (13 x the deposit amount). In reality, almost nobody ever gets their deposits back because the forfeit them by 1) not giving adequate notice up front or 2) leaving the property a total mess (of which $100 is not going to dent cleaning it up, normally). So the bottom line is that I would not worry about it too much. If it was a 100 space park with $250 deposits, however, then it would be a much more serious issue to figure out and hedge the risk on.