Buying an Apartment Building: Setting Up the Books From the Closing Statement, Prorations and Transferred Deposits

What do an apartment building's books need on the day you buy it?

Opening balances taken from the closing statement: the building, the loan, the lender escrow, the tenant deposits now owed, the property tax owed, and the cash the owner put in. Plus a rent roll dated the closing day.

The books start on the closing day, from the closing statement. If they start from the first bank deposit instead, the building, the loan and the deposits owed to tenants are missing, and the first month never ties out. Day 1 is the starting point for apartment building bookkeeping.

How do you read the closing statement for an apartment building?

Read it as 2 lists. Charges are what the buyer pays for: the price, the closing costs and the escrow deposit. Credits reduce the cash due: the loan, deposits transferred, and prorated rent and tax.

Here is the statement for Birch Way. The buyer closed on day 16 of a 30-day month, so the buyer owns 15 of the 30 days.

The closing statement, Birch Way, invented data

Cash from the buyer at closing: $6,569,500 less $5,040,825 is $1,528,675. Every line on the 2 lists lands in the books. The rest of this page goes through them.

How do you record the price, the loan and the closing costs of an apartment building?

Record the building at its purchase price, the loan at its full amount, and each closing cost on its own line. Keeping the costs apart lets the CPA decide how each is treated.

Price, loan and closing costs, Birch Way, invented data

The building goes in at the price on the statement, $6,480,000, and the loan at its full amount, $4,860,000. The $19,500 opening deposit to the lender's escrow is not a cost. It is the building's money the lender holds, so it goes to 1200 Tax and insurance escrow, held by the lender. The 2 closing costs stay on their own lines instead of being folded into the price. How the purchase price and the closing costs are treated for tax is your CPA's decision.

The account names used here come from the chart of accounts for an apartment building. The loan line only starts the loan balance. How each payment on the new loan is split is in recording a multifamily loan payment.

How do you record prorated rent when you buy an apartment building?

The seller collected the month's rent before closing. The buyer's share, for the days after closing, comes as a credit. Record it as rent income in the month of closing.

At Birch Way the seller collected the full month's rent, $68,150, on the 1st. The buyer owns the building from day 16, so 15 of the 30 days belong to the buyer.

Prorated rent, Birch Way, invented data

No rent reached the bank. The $34,075 arrived as a credit that lowered the cash due at closing. It is still rent income for days 16 to 30, recorded in the month of closing. From the next month on, rent comes in the usual way.

How do you record prorated property tax when you buy an apartment building?

The seller's share of a tax bill not yet paid comes as a credit. Record it as property tax owed. When the buyer pays the full bill, that amount clears first.

Property tax is billed after the months it covers. At closing, 2.5 months of the current bill belonged to the seller and had not been paid. The seller settled that share as a credit.

Prorated property tax, Birch Way, invented data

The credit is not income. It is money the buyer now holds to pay the seller's share of the bill, so it sits as property tax owed. When the full bill arrives and the buyer pays it, the first $11,500 clears that line. Only the rest is the buyer's property tax cost.

How do you record security deposits transferred from the seller of an apartment building?

Record each tenant's deposit as a liability for its unit on the closing day. The credit lowered the cash due at closing, so the buyer then moves the same amount into the deposit account.

1. 1Record each tenant's deposit as a liability for its unit, dated the closing day. At Birch Way that is 47 lines of $750 in 2100 Security deposits held, $35,250 in all.
2. 2Move the same total, $35,250, from the operating account into the deposit account. The credit lowered the cash due at closing and no deposit money arrived, so the building has to fund the account itself.
3. 3Check the ledger total against the seller's deposit list and against the credit on the statement. All 3 read $35,250.

Deposits transferred at Birch Way, invented data

The seller never hands over deposit cash. The seller hands over a credit, and the buyer pays that much less at closing. The tenants are still owed $35,250. That is why the transfer into the deposit account comes right after closing. How the ledger is kept after day 1 is in security deposit accounting for apartment buildings.

How do you record rent that apartment tenants owed before closing?

List it by unit. Record it as owed to the building only if the purchase contract gives it to the buyer. Rent that belongs to the seller is passed on and is never the buyer's income.

The seller's rent roll shows which units owed rent on the closing day. List them. If the contract gives that rent to the buyer, record it as rent owed by those units. If it stays with the seller, the buyer passes on whatever the tenant later pays and records none of it as income. Who gets rent owed before closing, and how the deposits must be handed over, are contract and state law questions, so ask your attorney.

What is the opening entry for an apartment building purchase?

One entry dated the closing day. What the building owns and paid for goes on one side. The loan, deposits owed, tax owed, prorated rent and the owner's cash go on the other.

Every line of the closing statement is now in one place. Here is the whole entry for Birch Way. The 2 sides total the same, $6,569,500, which is also the total charges on the statement.

The opening entry, Birch Way, invented data

The owner's cash is $100,000 of earnest money plus $1,528,675 at closing, $1,628,675. Right after this entry, $35,250 moves from the operating account to the deposit account, as the deposit steps say.

What goes on the first rent roll of an apartment building you just bought?

The rent roll on the closing day: every unit, its tenant, its rent, its deposit and any balance owed. Its deposit column must equal the deposits credited at closing.

• Unit. All 50 at Birch Way, the 3 empty ones included.
• Tenant. The name on the lease the seller handed over.
• Rent. The lease rent for each unit.
• Deposit. $750 for each of the 47 occupied units. The column totals $35,250, the credit on the closing statement.
• Balance owed. Any rent the unit owed on the closing day, from the section above.

Date the roll the closing day. It is the record the first month's rent is checked against. What each column means is in the rent roll for an apartment building.