RE Accounting Resources for an AM
Does anyone know of a good course on the basics of RE or PM accounting?
I'm working in asset management and we transitioned PM's midyear so our books were a bit confusing. This year I had a really hard time converting our PM reports into our year end investor reports (i.e. pure cash reports) and still don't feel like I have a good understand. The areas I struggled with were thing related to adjustments, reclasses, CIP/WIP, balance sheet catch up entries, etc.
I took a financial accounting class back my in college days but I'm hoping to find something specific to my work. Would love to hear if anyone has course/textbook recommendations or some other useful resources I can use to get a better understanding.
TIA
Based on the most helpful WSO content, here are some recommendations to enhance your understanding of real estate (RE) or property management (PM) accounting:
WSO Financial Modeling Courses: The WSO Elite Modeling Package includes foundational courses like the Excel Modeling Course and Financial Statement Modeling. While not exclusively RE-focused, these courses provide a strong base for understanding financial adjustments, reclassifications, and balance sheet entries.
Real Estate Master Program: This advanced program is tailored for real estate professionals and includes modules on RE-specific financial modeling, which could help bridge the gap between PM reports and investor reporting.
Private Equity Interview Course: While primarily designed for PE professionals, this course includes LBO modeling and other financial concepts that might overlap with your asset management needs.
Free Financial Modeling Lessons: WSO offers 9 free lessons covering financial statement modeling, DCF, M&A, LBO, and Excel modeling. These lessons could provide a quick refresher on accounting basics and modeling techniques.
Practical Tools: Consider leveraging templates like the Portfolio Summary Excel Model or Disposition Model mentioned in WSO threads. These tools are designed to track NOI, adjust reserves, and monitor debt/equity, which might align with your reporting needs.
For a more RE-specific focus, you might also explore external resources like textbooks or courses on RE accounting, but the WSO Academy offerings are a great starting point.
Sources: Real Estate Asset/Portfolio Management Tips and Tools, Real Estate Asset/Portfolio Management Tips and Tools, NEW Financial Modeling Training Courses, REIT or REPE for acquisitions?
When you say "pure cash books" are you talking the regular cash-basis accounting books or does your firm employ the old-school net cash flow book method where items like debt principal payments show up on the P&L statement?
"adjustments, reclasses, CIP/WIP, catch up entries, etc" - That covers a very large array of items. Hard to know where to start without starting to sound like college lecture or how your firm has set up their books. Do you have one or two specific examples?
Not to hijack but I'm in a similar position (AM wanting to know more about accounting) and how can I get up to speed on things like Retained Earnings and how they balance out to a P&L (this is probably pretty straightforward, but what even are Retained Earnings and why do they sit on the BS as equity?). What does it mean to "capitalize" A/R such that we're converting A/R to cash and how are contra accounts involved here? How does the P&L tie out to the Balance Sheet, generally?
A P&L doesn't balance out to RE,. Net Income sits on the balance sheet in the equity section until it rolls into RE at the end of the fiscal year. So RE is prior years Net Income (earnings).
Not 100% sure what capitalizing A/R is as you described it. It almost sounds like you're not wanting to write off a receivable but do want it off a rent roll. Or selling it to a financing company.
A balance sheet is ultimately where all transactions show up. Assets, Liabilities, and Equity are there obviously, and the P&L (Net Income) is there in the equity portion. A trial balance is like a combined BS and P&L.
This video is 10 hours long, but seems very thorough and the instructor is very good at providing explanations and contect. In some of the examples, try to mentally picture what that might look like in Real Estate field (bad commercial tenant can't pay rent, new loan/refi, etc). The one downside is this guy is an instructor/professor so he is explaining things to you the '100% right way' things should be done. It depends on how competent and on the ball your firm's accounting team. Private and/or smaller companies don't always need to record transaction the 100% right way.
Keeping explanations simple
2. Converting A/R to cash - When you bill someone and record revenue you are not actually collecting cash, you are recording revenue and creating an accounts receivable (A/R). At the end of the year, you bill a client a 1,000,000- record 1,000,000 in revenue and create a AR receivable of 1,000,000. It doesn't mean you will actually see the money. When you actually receive the cash, the receivable goes away/gets reversed. Without any other expenses that 1,000,000 revenue/AR receivable shows up as +1,000,000 net income on your income statement. It is one of the ways companies can show year of year profits, but suddenly declare bankruptcy. They were billing and recording revenue, but the AR just kept increasing and they were not actually collecting all the cash. Converting AR to cash means that people that you had previously billed been paying you.
3. Most people are more familiar with an Income Statement. Revenue - Expenses = Net Income (Profit). It is easy to visualize and digest. However, technically speaking most activity starts at the balance sheet level and filters down to the Income Statement. Balance Sheets last forever and never die, Income Statements are 1 year snapshots in time that revert to 0.00 every Jan 1. The Net Income on an Income Statement connects to the Balance Sheet via the Retained Earnings item.
Assets = Liabilities (Debt) + Equity. From Example 1, keep debt constant. Net Income +400k means equity is +400k, Assets will be +400k (typically as either cash in the bank account or increased Accounts Receivable). Year 2, Net Income +200k means equity is +200k, Assets will be +200k (on top of the +400k they rose in year 1).
4. "Capitalize" - typically means cash has come in or gone out, but you are not taking the full benefit or full drawback. It is capitalized or realized over time. In the case of Real Estate Asset Managers, an example would be you just spent 2m on capex and unit upgrades. The project only took 6 months, all the vendors have been fully paid, you saw 2m in cash leave your bank account. You look at your income statement and you only see 500k in expenses. Where is the other 1.5m that went out the door? It is capitalized on the balance sheet, you will gain the benefit of the expenses in future years through depreciation expense.
Thanks for the breakdown and video! Gonna give it a watch. I have some questions that your comment stirred up so just gonna put em here and feel free to answer whichever you care to.
How do distributions/contributions factor in with the Retained Earnings? Are they just other line items on the "equity" portion of your BS? And expressed as negative equity if distribution and positive equity if contribution?
With your statement about capitalized expenses sitting purely on the BS, I just realized that the operating statements I've been looking are combined Income Statement + Balance Sheet: the operating statement goes down to "Net Income", but then there's a section beneath that with your Assets, Liabilities, and Equity. And under the assets sits your capitalized items like large capital projects, HVAC replacements, etc. "Capex" doesn't get capitalized and sits above Net Income, and presumably these are expenses that don't have a useful life and therefore are not depreciable, which is why they don't get capitalized. Am I thinking about that correctly?
Also, why do leasing commissions get capitalized (at least at my firm)? I always thought we only capitalize expenses that can be depreciated - if so, does the IRS/GAAP really say we can depreciate leasing commissions?
Might be similar situation with loan costs/fees - I believe those get amortized over a set period (I think the life of the loan)? Similar to LC's, why would we be allowed to depreciate those? Is this one of the many examples of real estate being uber tax efficient?
Finally, what is the difference between depreciation and amortization? We amortize those loan costs over the life of the loan and do so monthly, while also depreciating those costs (also monthly or?) - and why?
Sorry for the dump but thank you!
Distributions are practically never rolled into RE. You're supposed to, but I've never seen it done in Multifamily. Maybe they do in CRE.
A couple of things could be going on here. It sounds like either a custom report or a really poorly formatted cash flow statement. If it really says Net Income twice then it's a custom report. If it says Net Income towards the top, and then change in cash flows at the bottom, it's a cash flow statement.
This is due to the "matching principle" concept that is the basis of accrual accounting. You're matching the expense of the commission over the life of the lease to match the income.
You depreciate real property (a car, building), amortize intangible assets (commission, prepaid insurance, loan cost). Functionally they do the same thing (debit expense, credit asset of some sort) but that's the difference.
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