COVID-19 is having a widespread effect on rental income and tenant’s ability to meet their rental payments. On a plus side for rent roll owners, this will be a temporary situation. You will feel the effect on your income for the next few months, even up to 6 months. But, know that it is only temporary. It will eventually right itself back to ‘normal’. History tells us that the market will recover stronger than ever. With decreases in rental income paid, you will see a short term decrease in management fees collected. What does this mean for those who have entered negotiations or contracts? How are rent decreases during rent roll settlement treated?
We thought we’d address this issue.
Side note: I am by no means a legal practitioner. However, from my experience, this is how to typically handle rent decreases during settlement.
How to Treat Rent Decreases During Rent Roll Settlement Period
How is the price payable per property on settlement determined?
The previous year’s net income is used for contract purposes. However, is not necessarily the amount that you will pay as a buyer or receive as a seller. It depends on the net income at the time of settlement. The final settlement amount can be higher or lower than the contract price. This depends on the rental income at the time of settlement for that individual property and any other factors such as lost and gained properties that differ from the original list.
Property is rented at $500 per week on settlement. It is managed by the Seller at a rate of 5% ex GST. The net income for that property is $1,300 pa.The contracted multiplier agreed between the buyer and seller is $3.00 per $1.00 of income. The amount payable for that property upon settlement is $3,900.
What if the property is rented for less on settlement?
The buyer pays the agreed rate per $1 of income that a particular property is receiving on the day of settlement.
The property was rented for $500 per week last year and is now leased at $400 per week upon settlement. The contracted multiplier is $3.00 per $1.00 of income. The calculation would be:
- $400 x 52 = $20,800 annual income
- Annual income x 5% management fee = $1,040 net income
- Agreed multiplier x net income = $3,120 due on settlement
How are variances calculated from one settlement to another?
Each transaction will differ. There are generally 3 settlements from the date the retention deposit is paid. If the property is leased for $500 per week on Settlement 1 and has a decrease of $100 between the first and second settlement, then there is an adjustment made back to the buyer to allow for the difference.
- Settlement 1 = Price Paid $3,900
- Settlement 2 = Price Decreased to $3,120
- Credit back to Buyer = $780
As always, we recommend you seek formal legal advice before entering into the contract for sale. This will ensure you are protected as a buyer or a seller.
If you have any other questions you’d like us to address, please email us.
Jane Morgan is the Licensee in Charge of Rent Roll Angels & Director at End of Month Angels. Jane isn’t just your average broker. She is an industry veteran with over 23 years in the industry, 15 years as a Property Manager and an active Real Estate trainer. She knows the pitfalls & successes of rent roll acquisitions like the back of her hand. Contact Jane today to discuss your rent roll requirements.