The Texas Real Estate Market and Financial Reports
Are you in the process of applying for a Texas real estate loan? Is your lender questioning your financial records? You do not have to figure this out on your own. Consulting with a Texas CPA who understands real estate accounting is the best option to get through the loan closing process. The Texas real estate market is strong with industrial and multi-family showing stable growth, while office and retail are being reviewed by lenders with a very detailed eye. This means the bookkeeping and accounting for the financials, rent rolls, and operating assumptions of your Texas real estate LLC must be clean, realistic, and defensible. Given this information, it is important to have strong internal controls and accurate, detailed reporting for your real estate portfolio. I will delve into the lender financial requirements with a focus on Texas real estate accounting for underwriting.
Which Financial Reports Does the Lender Need?
The standard underwriting documents required for commercial real estate loan qualifications are the following:
- Business tax returns – 2 – 3 years
- Monthly bank statements – last 3 – 6 months
- Personal Financial Statements
- Balance Sheet for business
- Profit & Loss for business – Year to date
- Historical P&L statements for the property – last two years
- Current rent roll
Debt Service Coverage Ratio (DSCR)
The lender will review all required financial documents to determine if the real estate LLC is able to cover the loan payments. This is called debt service coverage ratio. They will not be able to determine the ratio if incomplete or inaccurate financial statements and reports are submitted which result in a stalled loan closing process.
Internal Controls for Your Texas Real Estate Accounting & Portfolio
The initial setup of your real estate LLC portfolio and ongoing internal controls set the tone for how lenders and underwriters view your qualifications. Whether you are using QuickBooks, Yardi, AppFolio, or do not have a complete set of financial reports, each real estate LLC must have its own separate entity in the accounting software. It is tempting to lump all rental payments into one account due to the bank fees associated with multiple bank accounts but proper multi-entity real estate accounting dictates that each entity must have a separate identification. Commingling funds can also put the LLC liability protection at risk.
How Do Lenders Compare Tax Returns to Submitted Financial Reports?
The lender will look at the tax returns because these are the official documents filed with the federal government. The review entails revenue, expenses, income, and assets reported to the IRS for the LLC loan applicant and those items are then compared to the financial reports such as the Profit & Loss Statement and Balance Sheet. This is where the real estate bookkeeping can derail the loan closing. If your tax returns vary wildly from the financial reports pulled from your accounting software, this is a red flag for the underwriter. It makes your financial reporting seem unreliable, which discredits your ability to make payments on time.
Why Is a Rent Roll Required for a Loan Application?
If rental payments for multiple real estate LLC’s are recording in QuickBooks, Yardi, or on the bank statement under one entity, the underwriter is not able to verify the credibility and cash flow of the real estate LLC. Unfortunately, this bookkeeping process will delay the closing. When an underwriter reviews the rent roll and P&L statement, the rental income must match. The P&L tells the underwriter how much rent the LLC is collecting. If the rent roll has different rent amounts, the underwriter cannot accurately determine the future rents and the ability of the LLC to make the loan payments.
Unrecorded Liabilities Masks Ability to Pay
The bank statements are reviewed for monthly incoming and outgoing payments. If recurring payments to a financial institution are on the bank statement, the lender will question the source of these payments. If the bookkeeper did not record the loan on the financial statements or the loans are not on the debt schedule, the DSCR cannot be determined. The balance sheet needs to show all liabilities including commercial mortgage loans, escrow payments, and notes payable.
How to Prevent a Delayed Texas Real Estate Loan Process
As a professional CPA licensed in the state of Texas, I review the same documents the lender reviews as part of my standard financial reporting process. Whether you need a set of reports created from scratch or the lender requires CPA prepared or reviewed financial reports, I am licensed and certified to handle this lender requirement for your Texas real estate portfolio.
If you have need to register your foreign real estate LLC in Texas or get your Texas LLC back in good standing, contact me and I will handle your Texas real estate portfolios with the diligence of seasoned real estate professional!
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