Real Estate Accounting Fundamentals

Real estate accounting plays a crucial role in the financial management of investment properties. Whether you’re engaged in property management or are an investor seeking insights into the intricacies of real estate accounting, it’s important to be aware of several unique aspects. From monitoring tenant leases and expenses to ensuring accurate reporting for monthly and annual taxes, this information is essential for evaluating the investment’s performance and optimizing returns to the fullest extent.

Tenant Leases

In the realm of real estate, tenant leases take center stage in the accounting process, given that all income stems from this.

When entering into a new lease contract with a tenant, there are various elements to be aware of, including:

• Concessions being provided by the leasing team such as free rent or tenant improvement packages
• Monthly rent amounts and any annual rent increases
• Security Deposit amounts to be held separately, not reported as rent income and
• Common Area Maintenance (CAM) reimbursements from the tenant to the landlord
  This covers expenses like property taxes, HOA dues, and general repair costs, calculated based on each tenant’s pro-rata share annually.

Lease Types
Since real estate accounting revolves around various lease types, each requires distinct accounting treatments. Unlike traditional accounting, real estate accounting involves the meticulous recognition of lease terms, such as operating leases and finance leases. The new lease accounting standards, such as ASC 842, have brought significant changes to lease accounting, impacting how leases are recognized and disclosed on financial statements.

Rent Revenue
The timing of recognizing rental income is critical. Lease payments may vary, with some agreements incorporating variable rents or lease incentives. Real estate accountants must navigate these intricacies, ensuring accurate revenue recognition and compliance with real estate accounting standards.

Reporting Requirements

Reporting requirements stem from the federal and state government levels, lender requirements, and the ownership team’s internal requirements. Some examples include:

• Annual tax returns for the property to the federal government
• Monthly sales tax reporting to the state governments, and
• Quarterly financials sent to the lenders
  In addition to quarterly financials, some lenders reserve funds for items like real estate taxes, insurance, and tenant improvement packages. To access these funds when needed, it is important for the accounting team to send proper documentation to the lenders and request the funds be used to pay those items before the due date.

Monthly Financials and Annual Reporting Tasks
Communicating financial information to ownership teams involves assembling a comprehensive monthly financial package. At Excelsior, we utilize our investor portal to share this information, ensuring our investors are well-informed. This reporting package includes Balance Sheets, Profit and Loss Statements, Accounts Receivable statements, Bank Reconciliations, Rent Rolls, Accounts Payable reports, and Management Fee reconciliation reports. These reports provide a holistic view of assets, liabilities, income, expenses, tenant payment statuses, and management fees.

Takeaway

While this is not an exhaustive list of all functions that property accountants take care of, it’s a good starting point for investors to get a sense of what goes on behind the scenes and what to keep an eye out for when investing in real estate. As the industry continues to evolve, staying abreast of accounting standards and industry trends is key.

We always recommend working with an experienced team that can help you navigate the nuances of real estate accounting. For more information and to explore our services further, feel free to reach out to us with any questions.