What are Prorations (Rent/Utilities)?
The Short Answer
Prorations (Rent/Utilities) explained simply
When a business is sold, expenses like rent and utilities often need to be split between the buyer and seller. Prorations are how these costs are divided fairly. For example, if the closing happens mid-month, the seller pays for the first half, and the buyer pays for the second half. This ensures that each party is responsible only for the period they owned the business.
Real-World Example
The Coffee Shop Sale
Imagine a coffee shop closing on June 15th. The monthly rent is $3,000, and the utility bill for June is $600.
Rent Proration:
- The seller is responsible for 15 days of rent (June 1-15).
- Daily rent: $3,000 / 30 days = $100 per day.
- Seller's share: 15 days * $100/day = $1,500.
- The buyer will pay the remaining $1,500 for June.
Utilities Proration:
- Assuming the utility bill covers the entire month of June, the seller is responsible for 15 days.
- Daily utilities: $600 / 30 days = $20 per day.
- Seller's share: 15 days * $20/day = $300.
- The buyer will pay the remaining $300 for June.
At closing, these amounts are adjusted so that the seller credits the buyer for the portion of rent and utilities they already paid but won't use.
Why this matters
Prorations are important because they ensure a fair financial split of ongoing expenses between the buyer and seller. Without them, one party might end up paying for services or rent they didn't use, or the other party might get a free ride. It makes the closing process accurate and equitable for everyone involved.
Always double-check the proration calculations at closing. Mistakes can happen, and it's important to ensure you're only paying for what you owe and receiving credit for what you've already paid.
Always double-check the proration calculations at closing. Mistakes can happen, and it's important to ensure you're only paying for what you owe and receiving credit for what you've already paid.
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