Prorated rents at closing (gross VS net of collections)

Closing on my first park next week, unfortunately, while I plan to go to BC the opportunity came before I’ve had the chance. With the smaller properties I’ve purchased I’ll be honest, I never really paid too much attention to this issue, it didn’t matter much. But with this many units and this much in rent it makes a difference, Seems like the current owner is at about 90% collections. A week into the month he will have collected all the rent that is anywhere near on-time. Should the prorated rents I collect for October be based on gross scheduled rent or what he actually collected up to that point with me on the hook to collect the remainder? There is about a total of 3K in delinquent rents I will inherit prior to this month (not too bad for 75 units and no one is more than a months worth of rent behind) but I plan on waiving those and moving into a “no pay no stay” stance. How have you all worked it in your dealings?

We have the seller credit to us the collected rents- the rest are ours to collect. Now- you need to do a few things prior to any changes. 1) Read the lease and follow what it says for late payments. 2) Read the state statutes concerning late rents, and also the mobile home park act for the state. The laws might be a bit different for your park, and might even change more if your evicting a multi section home. This reading will also tell you how long you need a rule in place prior to enforcing it. You can not just walk in, set a rule and enforce it. There are state laws concerning distributing the rules, and seasoning prior to enforcement. 3) Write new rules, regulations, disclosures and leases. These need to be distributed and signed. Note in some states, after a certain percentage of tenants have signed the rules and regs- the seasoning period might be waved and you can enforce the laws from that mark forward. So in this situation I do not forgive the past due amounts. I offer right away a long term ‘STIP’ (stipulation to pay) agreement. So if they are $800 behind, I might ask they pay an additional $50 per month until caught up. Almost all of the tenants will agree to this, as an extra 50 per month is not worth moving for. If they are hit with a huge bill, they might move their home and walk from the park before you can get a RIT in place to keep the home there and collect your debt. Once your rules, regs and lease are in place- you can operate collections in your designed manor.  

Jim, if I understand what you are saying for example if you closed on Oct. 1, 2014 you would be entitled to rent from that day forward ok–but how would you be entitled to a time PRIOR to you taking possession and ownership of property??

Carl- that would be bad debt to the old owner, and accounted for accordingly in his books. The leases, well almost all leases, have clauses addressing a change of ownership, or entity, and as a new owner you step right into the old owners shoes. For instance, if the old owner was in the middle of an eviction- as the new owner you could assume the file and continue with the eviction. If someone paid yearly, you would be entitled to a credit at closing for the rents collected but not applied. I am sure, if your leases were written by a competent entity, you would see the sections in the lease I am referring too. The same clauses will be in your lease option contracts, rent to own contracts etc… 

GeorgeNiko, as a SC Real Estate Broker I would recommend that at your Real Estate Closing for the Mobile Home Park you should receive:-  Prorated Rent For The Remainder Of The Month For The Amount That Has Been Collected Thus Far By The SellerYou are responsible to collect all unpaid Rent from the Day that you Close to the end of the Month.Please make sure at Closing that all Security Deposit Amounts are transferred to you along with the Tenant Names and Amounts. In SC you have 30 Days to notify all the Tenants of the New Ownership Name & Mailing Address.In regards to collecting previous bad debt I would not recommend going forward with this approach (even if it is in the Lease).As Frank recommends you will want to create a New LLC for this Mobile Home Park.Thus, with your New LLC you should NOT assume any liabilities nor assets (such as bad debts) from the old Mobile Home Park.If you select to assume the good parts of the old Mobile Home Park (debt collection), what would stop an Attorney from trying to collect from you any liabilities from the old Mobile Home Park?  I am not an Attorney, but the world loves to file lawsuits these days and this seems like a lawsuit waiting to happen.I would go forward with your New LLC and only collect from the Day that you Close on the MHP and going forward.We wish you the very best!

Thanks Jim/Kristin, good insights. I think I agree with Kristin on bad debt in my case. There is going to be bad news for them, rent increase/water bill-back, stricter rule enforcement etc. so I figure perhaps a “clean-slate” fresh start for the people behind (with the clear “no pay-no stay” from now on declaration) looks both benevolent and takes the sting out. Couple hundred bucks is a fortune to some of these people I’d bet. I guess the flip side is the majority of people who pay on time will feel miffed but oh well. They’re the types who will likely value an improved atmosphere.  


So Kristin bring up the very point that makes this argument. At the closing there is disposition of sorts. As a new owner, you might assume some contracts. For instance, lets say you bought a park with a private water or sewer system. Lets also say that system was not run correctly prior to your taking over- you still might have fines, fees etc leveled against you. As a new owner you might not be negligent in the past operations, but you might still be liable. Think of a fuel spill, or a tank that is leaking oil into the ground. As a new owner you get a phase 1 to guard you against a previous owners liability. You did not put in the tanks, and even if you did not know they existed, you might be required to clean up the mess. Also at the closing there is a transfer of on record and off record matters. On record- if homes were sold there is a contract and a payment history. There is a contract showing what people pay each month, and you also get the accounting for the contract. If you write down bad debt there are IRS requirements that go with this. You might be required to 1099 the buyer for the principal amounts you just forgave. You have provided the ‘buyer’ with equity they did not pay for under the contract. That contract is valued in the old owners books and needs to transfer to your books just like it looked on the previous owners books. Now that sales contract might be ‘filed’ making it a ‘on record’ matter. In some cases, a lease might be filed as well. If part of your park has a building that is leased to a long term tenant, there could well be a recorded lease.The off records matters, contracts for mowing companies, snow removal companies, alarm companies, telephone advertising companies, tenant leases etc… these are all contract types that ‘run with’ the sale. Lets say the old owner owed the yellow pages $10,000 in ad fees, and you assumed the phone number. Guess what- they will come after you because now you have the phone number. They just know they advertise that number in the phone book, and the owner of the number has benefit from it. The contracts for things like snow removal might be year to year- they might be longer term as well. You also ‘assume’ the leases. They are transferred to you and in most cases, except for special ownership changes, they should transfer to you with some sort of accounting record. If the tenant paid ahead, well as a new owner you can not charge them again. If they are behind, you should have an accounting for that as well. If you are playing with home ownership as a part of this contract transfer- say home credits- they transfer as well. At the closing, you need to ‘honor’ that contract even though you did not benefit from the past payments. This is why I do not use the home credit model. Upon transfer of the community, there is a diminished value because your tenants have ‘banked’ home equity a new owner is stuck providing. In these cases in order to account for the credits, you must exactly transfer the accounting. I am not sure you can just wipe down bad debt in these situations, great question for you CPA and your attorney- this is a very, very complicated issues, and I would guess there is almost no settled case law concerning it. So you are going to rely on someone that knows the fundamentals and can apply them to your situation. My CPA is the highest paid person on my team at this point. The laws we deal with here might have state guided implications and will certainly have federal guidance that needs to be looked at. This process is much more complex than just deciding to do something based on what you feel is right, it must be guided by your CPA and your attorney. A competent and current practicing CPA will be able to guide you  prior to making these decisions so you understand the implications for both you, and the people who’s debt you are playing with. I will end with a little about me… years back I also had a real estate brokers licence. Truth be told, I was a very good broker and I had several brokers and a staff under me. In general, when it comes to real estate I have about done it all- there are few shingles left to hang on my wall. That said- what I understand as ‘fact’, stuff I do not need professional guidance on concerning these issues is very limited. Oh I can guess, but in almost every case the issues are way more complicated than I thought they would be. I used to use the accounting system from one of the ‘guru’ people that ran around the country speaking at real estate clubs. Shoot- hundreds of people sat in the same class and bought the stuff. It served to do basic book keeping, and then when a CPA dug into it, someone that really knew what they were doing, it cost me thousands, (lots of thousands) to clean up. I had to refile back as far as the IRS looks to clean up the little things the guru program missed. If you are using a tax program- turbo tax maybe, and your books are not reviewed for errors prior to washing your quickbooks through the turbo tax program I will bet big money your doing things wrong. Maybe not bad wrong, but not audit proof. So I will close with this- no matter what you read here- from anyone- hire a CPA and a attorney and get advise going into each decision. Should you elect sub chapter S, cash or accrual accounting, how do things like leases transfer, how do home credits transfer, how do home sales transfer, do you send 1098’s, do you send 1099’s, do you pay your manager through your MHP or management company, can you write down or off debt, if you do- how is it reported etc… There are only 2 kinds of people in the world-those who have been audited by the IRSthose who will be audited by the IRS