Texas Real Estate Accounting vs. Property Accounting. What is the difference?

I had a conversation recently with a family member about her apartment complex in North Dallas.  She has had three or four management companies since she moved in three years ago.  We found out that the building was sold to a new owner last summer.  The new management company has made several upgrades the last owner/management company had on hold for several months.  We then got into a conversation about the differences between the owner and management company.  I have worked in property management and real estate for 25 years and explained the differences.  I then thought this difference also applies to how accounting is handled for the real estate owner as opposed to the property management company.

The reporting for real estate accounting is focused on tax strategies and exit strategies.  The reporting is more long term with a focus on the financial life cycle of the investment.  Below is what real estate accounting handles:

• Cost Segregation and Depreciation: the focus is to look at how to accelerate depreciation to offset taxable income. It is about making the tax code work for the building.
• Capital Expenditure (CapEx) Strategy: distinguish between a simple repair and a capital improvement. If you are putting on a new roof near the Galleria, it is not just an expense.  It is an investment that needs to be depreciated over time to maximize return on investment.
• Equity and Distribution Tracking: If there are multiple partners or a complex entity structure, the accountant tracks who owns what and manages the basis for each owner.  This ensures that when it is time to cut checks, the distributions are accurate and tax compliant.
• Debt Service and Covenant Compliance: most large properties have loans. The financial ratios (like Debt Service Coverage Ratio) must stay where the bank wants them to prevent the owner from defaulting on their financing.
• Disposition and Exit Planning: Eventually, the asset is going to sell. The adjusted cost basis is tracked from day one so that when the owner exits the investment, the  capital gains are properly calculated in order to minimize the final tax total.

Property management accounting is focused on the day to day operations of the asset.  It keeps the property functioning, the tenants satisfied, and the lights on.  The major points of focus are:

• Rent Roll Integrity: this is more than just seeing who paid. It is about tracking late fees, security deposits, and prepaid rents. It is making sure every dollar is accounted for so that cash flow is predictable and the records are accurate and complete.
• Operational Expense (OpEx) Control: from the landscaping bill to the emergency plumber at 2 AM, the goal is to ensure that operating expenses stay within budget so the owner’s net operating income (NOI) stays as high as possible.
• Tenant Ledger Management: this involves the history of every tenant’s charge and payments. If there is a dispute over a utility bill or a repair charge, the paper trail is already there, clean and ready for review.
• Vendor and Contract Oversight: these are the payments for the people who maintain the property. Whether it is a one time repair or a recurring service contract, property accounting makes sure vendors are paid on time.  It also includes making sure the vendors have submitted the proper W-9s and insurance certificates.
• Monthly Financial Reporting: at the end of the month, the financial statements are prepared.  These include an Income Statement and Balance Sheet at the property level.  The owner can see exactly how much cash is available for distribution after all the bills are paid and rent is collected.

Both Texas real estate accounting and property accounting focus on the building joining together to form a complete picture and both are equally important.  If you need a CPA to review your financial reports or to minimize tax liability, I am very experienced on the ins and outs of how transactions should be recorded for audit ready reports and to minimize tax liability.

If you have any further questions regarding your building’s reporting, visit my property accounting page.