Real Estate Accounting

186 Pages·2016·1.93 MB·English

Real Estate
Accounting
#6970B
COURSE MATERIAL

TABLE OF CONTENTS
ASSIGNMENT 1 1
Chapter 1: Introduction to Real Estate 3
Types of Real Estate Assets 3
Common Industry Terms 9
Chapter 2: Forms of Real Estate Organizations 17
Sole Ownership 17
Common and Joint Ownership 18
Partnerships 18
Joint Ventures 20
Corporations 20
Limited Liability Companies 22
Real Estate Investment Trusts 22
Chapter 3: Accounting for Operating Property Revenues 25
Types of Leases 25
Revenue Recognition 30
Lease Classification 31
Additional Cost Recoveries 33
Operating Expenses Gross-Up 34
Contingent Rents 34
Rent Straight-Lining 35
Modification of an Operating Lease 39
Sublease of Operating Lease 41
Assignment 1: Test Your Knowledge 43
Assignment 1: Solutions and Suggested Responses 45
ASSIGNMENT 2 49
Chapter 4: Accounting for Operating Property Expenses 51
Operating Costs 51
Chapter 5: Operating Expenses Reconciliation and Recoveries 61
Most Common Recoverable Operating Expenses 61
Most Common Nonrecoverable Operating Expenses 62
Calculating Tenant Pro-Rata Share of Expenses 62
Chapter 6: Lease Incentives and Tenant Improvements 65
Lease Incentives 65
Tenant Improvements 67
Tenant Improvement Journal Entries 67
Further Comparison of Lease Incentives and Tenant Improvements 68
Differences in Cash Flow Statement Presentation 69
Demolition of Building Improvement 69
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Chapter 7: Budgeting for Operating Properties 71
What Is a Budget? 71
Components of a Budget 71
Chapter 8: Variance Analysis 75
Sample Operating Property Variance Analysis 75
Salient Points on a Variance Analysis 77
Chapter 9: Market Research and Analysis 79
Market Research Defined 79
Market Analysis Defined 79
Market Research: Practical Process 79
Chapter 10: Real Estate Valuation and Investment Analysis 87
What Is Real Estate Valuation? 87
Approaches to Real Estate Valuation 87
Assignment 2: Test Your Knowledge 99
Assignment 2: Solutions and Suggested Responses 101
ASSIGNMENT 3 103
Chapter 11: Financing of Real Estate 105
Equity 105
Debt Financing 105
Other Financing Sources 107
Types of Loans 108
Debt Agreements 108
Financing Costs 111
Relationship Between a Note and a Mortgage 112
Accounting for Financing Costs 112
Chapter 12: Accounting for Real Estate Investments and Acquisition Costs 115
Methods of Accounting for Real Estate Investments 115
Purchase Price Allocation of Acquisition Costs of an Operating Property 119
Chapter 13: Accounting For Project Development Costs on GAAP Basis 125
Stages of Real Estate Development Project 125
Postdevelopment Stage 132
Chapter 14: Development Project Revenue Recognitions 133
Full Accrual Method 133
Deposit Method 137
Installment Method 139
Reduced-Profit Method 141
Percentage-of-Completion Method 143
Cost Recovery Method 154
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Chapter 15: Audits 157
Audit Overview 157
Types of Audits 162
Assignment 3: Test Your Knowledge 167
Assignment 3: Solutions and Suggested Responses 169
Glossary 171
Index 175
NOTICE
This course and test have been adapted from supplemental materials and uses the materials entitled Real Estate Accounting
Made Easy © 2010 by Obioma Anthony Ebisike. Displayed by permission of the publisher, John Wiley & Sons, Inc., Hoboken,
New Jersey. All rights reserved.
Use of these materials or services provided by Professional Education Services, LP (“PES”) is governed by the Terms and
Conditions on PES’ website (www.mypescpe.com). PES provides this course with the understanding that it is not providing any
accounting, legal, or other professional advice and assumes no liability whatsoever in connection with its use. PES has used
diligent efforts to provide quality information and material to its customers, but does not warrant or guarantee the accuracy,
timeliness, completeness, or currency of the information contained herein. Ultimately, the responsibility to comply with applicable
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as a licensed professional.
© Professional Education Services, LP 2016
Program Publication Date 08/05/2016
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ASSIGNMENT 1
Assignment 1 Objectives
After completing this assignment, you should be able to:
• Identify characteristics of various real estate assets.
• Recognize characteristics of various forms of real estate ownership.
• Identify differences between types of leases.
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2 • Assignment 1
CHAPTER 1: INTRODUCTION TO REAL ESTATE
Real estate is generally defined as land and all things that are permanently attached to it. These
attachments include improvements made to add to the value of the land, such as irrigation systems,
fences, roads, or buildings. When buyers purchase real estate, in addition to acquiring the physical land
and its improvements, they acquire other specific rights related to that real estate. These rights include
the right to control, exploit, develop, occupy, improve, pledge, lease, sell, or assign the real estate.
These rights apply not only to the physical land and improvements but also to the ownership of all that
are below and above the ground. These ownership rights normally can be separately leased or sold to
interested parties; thus landowners can separately sell the space above a certain height on a particular
piece of land. This space is normally called an air right. However, it is important to note that the use and
transfer of air rights can be restricted or regulated by state and local laws.
TYPES OF REAL ESTATE ASSETS
Generally, a piece of land can be improved into different types of real estate assets. These improvements
can be classified into seven different types of real estate:
1. Improved nonbuilt land
2. Residential properties
3. Commercial office properties
4. Industrial properties
5. Retail properties
6. Hotels
7. Mixed use properties
Improved Nonbuilt Land
In economics and business, land is described as one of the four factors of production. (The other factors
include labor, capital, and entrepreneurship.) The value of land is derived from the demand for land for
production of goods and also for the demand for goods and services created from improvements made
to land. For example, the demand for rice requires the cultivation of the seed in farmland to grow the
rice. Likewise, the demand for cars requires the need to build factories to produce the cars, and land is
needed to build these factories. Therefore, even an empty land is an asset with measurable and in many
cases significant value. Thus, a vacant land can be improved through proper irrigation and access roads
for farming or with structures for the production of goods and services.
Residential Properties
Shelter is a basic necessity of life. In order to obtain it, residential properties must be constructed. The
Chapter 1: Introduction to Real Estate • 3
type of residential properties predominant in a particular area depends on factors such as availability of
developable land, population and population growth, zoning laws, local government policies, and access
to transportation, among others.
There are primarily four types of residential property:
1. Single-family and small multifamily properties
2. Garden apartment buildings
3. Mid-rise apartment buildings
4. High-rise apartment buildings
Single-Family and Small Multifamily Properties. Single-family residential properties are found mostly
in suburban areas and usually are occupied by one family. Such houses normally would have a living
room, bedrooms, kitchen, bathroom(s), and maybe a family room. They are usually occupied by the
property’s owner or rented out to a tenant. This type of residential property is not usually found in a
central business district (CBD) because it requires more land space per family living unit than other
types of residential properties, and they are usually more affordable in a suburban area.
A small multifamily residential property is similar to a single-family residential property but with more
than one unit. Because of the multiple-unit structure, each unit is rented out to different individuals or
families. These small multifamily properties can be between two and four separate units. In some cases
the owner occupies one of the units and rents the other units to tenants. This type of residential property
is also predominant in suburban areas and sometimes is also found in urban areas. In some cases it can
be found near CBDs.
Garden Apartment Buildings. Garden apartment buildings usually are located in suburban areas and
contain individual attached apartment units. They usually are built horizontally and normally are made up
of three to four stories. In suburban areas, retirement homes and some condominiums and cooperative
houses are built in this form. A typical garden apartment complex can have between 40 and 400 units.
This type of residential property is more common in the suburbs because it requires significant land
space due to the horizontal nature of the structures.
Mid-Rise Apartment Buildings. Mid-rise apartment buildings are more commonly found in urban areas.
They are usually higher than 5 stories and can be up to 10 stories. In cities, mid-rise apartment buildings
can be structured as condominiums and cooperatives properties. Unlike garden apartment complexes
but similar to high-rise apartment buildings, mid-rise apartment buildings require relatively small land
space. But the cost of land, even relatively small parcels, often is very expensive.
High-Rise Apartment Buildings. High-rise apartment buildings are usually towers built in urban areas.
High-rise apartment buildings make effective use of the high cost of land in cities. High-rise buildings
are usually taller than 11 stories. In major cities, such as London, New York, Tokyo, and Toronto, it is not
uncommon to find 50-story high-rises. The construction costs of these towers are enormous. High-rises
contain significant numbers of apartment units, certainly more than mid-rise apartment buildings.
4 • Chapter 1: Introduction to Real Estate