At BGW, we understand that real estate accounting is far more than tracking expenses and income. It's not just regular bookkeeping. Real estate finance requires an accountant with knowledge of real estate operations, regulatory compliance, financial management, and the tax code for commercial real estate.
What Is Commercial Real Estate Accounting?
Commercial real estate accounting covers many of the same elements as accounting for other businesses. However, this specialized field of accounting includes additional areas of expertise. Your accountant must understand managing tenant revenues, dealing with capital expenditures, tracking operating expenses, ensuring regulatory compliance, and reporting accurate financial information, among other challenges.
What's Different About Real Estate Accounting?
Here are some of the distinctive elements of commercial real estate accounting:
Depreciation and Capitalization
Accurate financial reporting for your commercial real estate business requires a deep understanding of depreciation and capitalization. You must account for property improvement expenses, capitalization policies, and depreciation. Understanding how to calculate and track depreciation and what you can legally depreciate is crucial to your property's finances. You could lose thousands of dollars or face steep penalties if this is not done correctly. The stakes are too high to trust this to an accountant without expertise in commercial real estate.
Common Area Maintenance
Your office building needs a new elevator. Your housing complex's sidewalks need repair. The restrooms in your retail building require an upgrade. These are examples of common area maintenance, also known as CAM.
In most commercial leases, there is a mechanism for recovering some or all of these costs from your tenants. That may be through a fixed annual fee, a higher but all-inclusive full-service gross lease, or an annual estimate of expenses divided by each tenant's portion of the square footage. All of these require different tracking and reconciliation methods. Your accountant needs to understand CAM allocation and reconciliation.
Lease Accounting
Income from a lease is different than income from retail or industrial operations. Your accountant must be well-versed in managing lease agreements, understanding diverse lease terms, and handling income from leases.
Regulatory Compliance
Commercial real estate has specific regulations that don't apply to other businesses. The Financial Accounting Standards Board (FASB) is the designated body that sets accounting standards. It has particular requirements for real estate businesses.
Additionally, the Internal Revenue Service has guidelines and regulations for property-related companies. Understanding these can be a full-time job. Since you already have a job running your commercial real estate empire, you need an accountant whose full-time job includes staying abreast of the latest rules, guidelines, and requirements for commercial real estate.
Generally Accepted Accounting Principles
A set of generally accepted accounting principles (GAAP) applies to all financial tracking, reporting, and services. Commercial real estate has specific GAAP concepts. Adhering to these concepts is critical to keeping your business out of hot water.
You need to handle transactions uniformly and consistently across properties, years, and types of transactions. Recording expenses, recognizing revenue, and valuing your assets and liabilities should always align with the relevant GAAP. An accountant who specializes in commercial real estate can ensure you are consistently applying these principles. You might say they help you “mind the GAAP.”
Cash or Accrual Accounting
There are two ways of recording transactions: cash accounting or accrual accounting.
Cash accounting records a transaction when funds are exchanged. If you receive a payment of $1000 on June 1, you record it on June 1. This method tends to be the way smaller businesses handle their finances.
Accrual accounting records a transaction when it is incurred, which is not necessarily when money is exchanged. If you send a bill to someone on May 1 but don't receive payment until June 1, you record that transaction on May 1.
The same distinction applies to expenses. If you receive a utility bill on March 1 and pay it on March 31, cash accounting will record the transaction on March 31, the day it is paid. Accrual accounting records it on March 1, the day the bill is received and the expense is accrued.
Accrual accounting can be more complicated. However, it gives you a better understanding of the overall financial health of your business. Your accountant can help you understand which method is best for your business and how to stick with one method of recording transactions.
Risk vs. Reward
Your accountant should assist you in identifying areas of financial risk. What happens if the market shifts? How will your finances be affected if tenants default? What operational challenges could create significant strain? By assessing your business and potential threats, you can better mitigate against these possibilities. That could mean reevaluating your reserve fund amounts or diversifying your mix of tenants so that a blow to one industry doesn't have an outsized impact.
A good property accountant will get to know you and your real estate business before making recommendations. That way, they can ask the right questions to get at details you might not have considered. A deep understanding of your operations allows your accountant to point out pitfalls, make you aware of law or tax code changes that affect your situation, and caution you about gaps in your plans.
These are just some ways commercial real estate businesses require special accounting attention and knowledge. At BGW, we understand these distinctions and have accountants trained in this specialized field. If you need a commercial real estate accountant in Charlotte, NC, we'd love to earn your business.
In the complex world of commercial real estate, you'll appreciate the guidance of a BGW accountant. Our team has the specialized knowledge and experience required to keep you organized, ensure regulatory compliance, optimize your taxes, and save money.
