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Cost adjustments and the slow road to a property sale

All parties to a sale (brokers, property managers, buyers, sellers and lawyers) must be prepared...

All parties to a sale (brokers, property managers, buyers, sellers and lawyers) must be prepared for the process necessary to calculate occupancy cost adjustments at sale closing.

If you’re selling multi-tenant commercial real estate, the final statement of adjustments that your lawyer provides could take a couple of months to complete.

Let me explain.

Just one occupancy cost example

Typically, at the beginning of the calendar year, a property manager or owner will estimate the occupancy costs tenants must pay for their proportionate share of the property.

This estimate is based on the previous year’s expenses. One example is that property taxes for the upcoming year are not yet finalized when that estimate is prepared.

Let’s assume a sale takes place on June 31. The property manager or lawyer must wait until all invoices for Jan. 1 to June 31 have been received.

Expense items such as utility charges, yard maintenance, repairs, etc., can vary monthly and are therefore impossible to project with certainty.

Once all invoices have been collected, an adjustment is made in favour of either the buyer or seller for the subject period.

At year-end, the buyer must total the invoices, compare the occupancy cost estimates to actual numbers and reconcile with each tenant.

Other issues can complicate matters

We recently experienced another issue that complicated matters even more.

A multi-tenant retail property had been recently subdivided.

The seller was also the business owner and occupant of a freestanding building at the end of the parcel of land. The seller completed the subdivision of the freestanding building and sold the remaining multi-tenant tenant building to an investor.

Even though two new titles had been raised and the sale was able to complete, the city had not yet completed its reassessment.

It now appears that assessment will be finalized about six months after the sale closed.

While it is possible to make an educated guess of how the taxes might be adjusted afterward, there is no way of knowing with certainty. That final statement will have to wait until the assessor’s department has completed its process.

Many headaches can be avoided if all parties to the transaction are well-informed of these processes ahead of closing.

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