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DCPM > 2. Accounting Systems > Flashcards

2. Accounting Systems Flashcards

1
Q

The purpose of Accounting Systems:

A

• To make projections about the property’s performance, both short term and long term (see
Analysis of Income and Expenses below)
• To keep track of the property’s actual performance compared to budget (see Reports and Records
below)
• To prepare for building system’s improvements or replacement (see Capital Expenditures and
Escrow Accounts below)
• To understand fully the rental obligations of each tenant as described in their lease (see Lease
Administration below)
• To insure that the funds collected from the tenants are handled properly (see Fiscal
Responsibilities below)
• To assist in creating value for the owner through effective and efficient fiscal management (see
Asset Management below)

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2
Q

The purpose of the Budget is to:

A

develop a means to both track the property’s performance and to organize the various types of income (such as rent, miscellaneous income, etc.) and expenses (such as utilities, insurance, payroll, etc.) in a meaningful way.

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3
Q

The maximum amount of income that a property can generate from all sources. It represents the total potential income from all units or spaces being fully occupied and all amounts owed by the residents/tenants being collected in full.

A

Gross Potential Rental Income

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4
Q

In certain types of leases, particularly commercial leases, tenants can also be billed for some or all of the property’s operating expenses, real estate taxes and insurance. This income source is commonly referred to as:

A

Pass-Through Income, Expense Reimbursements or Recoveries

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5
Q

Since vacant spaces do not produce any income and sometimes residents/tenants do not pay for all of their lease obligations, actual income can be less than the Gross Potential Rental Income

A

Vacancy and Credit Loss

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6
Q

Income collected from all other sources including income from coin-operated laundry equipment, vending machines, pay phones, and late fees, etc. is commonly referred to as:

A

Miscellaneous Income

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7
Q

Calculation for Effective Gross Income

A 
Gross Potential Rental Income
\+ Expense Reimbursements
- Vacancy and Credit Loss
\+ Miscellaneous Income
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
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8
Q

If an apartment building has twenty 1 bedroom units which rent for $800 per month and thirty 2 bedroom apartments which rent for $1500 per month, what is the Gross Potential Rental Income per month and per year?

A

Gross Potential Rental Income per month calculation
($800 x 20) + ($1500 x 30) = $61,000 per month

Gross Potential Rental Income per year calculation
$61,000 x 12 = $732,000 per year

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9
Q

If the Gross Potential Rental Income is $800,000, the Expense Reimbursements are $100,000, the Vacancy and Credit Loss is 10% of the Gross Potential Rental Income and Miscellaneous Income is $25,000, what is the property’s Effective Gross Income?

A 
Gross Potential Rental Income $800,000
\+ Expense Reimbursements + $100,000
- Vacancy and Credit Loss - ($800,000 x 0.1)
\+ Miscellaneous Income + $ 25,000
= Effective Gross Income = $845,000
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10
Q

In a 150,000 SF commercial building, the rental rates are $20/SF and it is 5% vacant. What is the property’s Effective Gross Income?

A

Gross Potential Rental Income calculation
150,000SF x $20/SF = $3,000,000.

Vacancy Loss Calculation
$3,000,000 x 5% = $150,000.

Effective Gross Income Calculation
$3,000,000 - $150,000 = $2,850,000

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11
Q

These are all examples of what:
Utilities, Repairs & Maintenance, Grounds Maintenance, Snow removal, Trash removal, Janitorial, Real Estate Taxes, Insurance, Management Fees, Administration and Payroll

A

Operating Expenses

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12
Q

If a commercial property is 100,000 SF and its annual electricity costs are $225,000, what is the electricity cost per
square foot?

A

$225,000/100,000 = $2.25/SF

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13
Q

Building A is 75,000 sf. Its Operating Expenses are $180,000 for electricity, $30,000 for repairs & maintenance
and $150,000 for real estate taxes.

Building B is 200,000 sf. Its Operating Expenses are $400,000 for electricity, $55,000 for repairs & maintenance
and $400,000 for real estate taxes.

Which building has lower Operating Expenses per square foot?

A 
Building A Annual Cost Cost per Square Foot
Electricity $180,000 $2.40
Repair & maintenance $30,000 $0.40
Real Estate Taxes $150,000 $2.00
Total $360,000 $4.80
Building B Annual Cost Cost per Square Foot
Electricity $400,000 $2.00
Repair & maintenance $55,000 $0.28
Real Estate Taxes $400,000 $2.00
Total $855,000 $4.28
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14
Q 
A 200,000 square foot property, with an Effective Gross Income of $4,000,000, has the following expenses per
year:
Landscaping $50,000
Snow removal $10,000
Trash Removal $5,500
Insurance $0.05/sf
Real Estate Taxes $210,000
Management Fee 3% of Effective Gross Income

What are the total annual Operating Expenses and what is the cost per square foot of each individual expense?

A

Insurance Cost Calculation
200,000 sf x $0.05/sf = $10,000

Management Fee Calculation
$4,000,000 x 3% = $120,000

Landscaping $50,000 $0.25
Snow Removal $10,000 $0.05
Trash Removal $5,500 $0.0275
Insurance $10,000 $0.05
Real Estate Taxes $210,000 $1.05
Management Fee $120,000 $0.60
Totals $405,000 $2.0275
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15
Q

It represents the money that remains after Operating Expenses are subtracted from Effective Gross Income.

A

Net Operating Income (NOI)

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16
Q

An apartment building as three studio units that rent for $1000 per month, six 1 bedroom units that rent for $1400 per month, and three 2 bedroom units that rent for $2000 per month. For next year’s budget, the property manager is projecting to have 1 studio vacant for 6 months and operating expense are forecast to $125,000.

What is the projected Net Operating Income for the budget?

A

First calculate the Gross Potential Rental Income per year:
$1000 x 3 units x 12 months = $36,000
$1400 x 6 units x 12 months = $100,800
$2000 x 3 units x 12 months = $72,000

Gross Potential Rental Income = $36,000 + $100,800 + $72,000 = $208,800 per year

Then calculate the Vacancy Loss
$1000 x 1 unit x 6 months = $6,000
Vacancy Loss = $6,000

Gross Potential Rent $208,800
- Vacancy Loss $ 6,000
= Net Effective Rent $202,800
- Operating Expenses $125,000
= Net Operating Income $ 77,800
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17
Q

Since most properties generally are acquired with a mortgage, the ______ ______ also must be accounted for. _____ _______ includes both the interest and principal reduction and is subtracted from Net Operating Income.

A

Debt Service

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18
Q

_______ _______ is the amount of money that remains after Debt Service is subtracted from Net Operating
Income.

A

Cash Flow

Gross Potential Rental Income
\+ Expense Reimbursements
- Vacancy and Credit Loss
\+ Miscellaneous Income
= Effective Gross Income
- Operating Expenses
= Net Operating Income
- Debt Service
= Cash Flow
19
Q

A property manager is analyzing a 100,000 square foot shopping center that has a Gross Potential Rental
Income of $2,500,000, a vacancy rate of 10%, Operating Expenses of $5/sf, and monthly Debt Service of
$30,000. What is the projected Cash Flow?

A

Gross Potential Rental Income $2,500,000
- Vacancy Rate (10% x $2,500,000) - $250,000
= Effective Gross Income = $2,250,000
- Operating Expenses ($5/sf x 100,000) - $500,000
= Net Operating Income = $1,750,000
- Debt Service ($30,000/mo x 12 months) - $360,000
= Cash Flow = $1,390.000

20
Q

Cash Flow is often used to determine the owner’s:

A

Return On Investment (ROI)

Annual Cash Flow/Initial Cash Investment = Return on Investment

21
Q

An investor is considering the purchase of a hotel property for $5,000,000 that will be paid with a $1,000,000 down payment and a $4,000,000 mortgage. The annual Cash Flow is projected to be $90,000. What is the investor projected Return on Investment?

A

Annual Cash Flow/Initial Cash Investment = Return on Investment

$90,000 / $1,000,000 = 9%

22
Q

The same investor is also considering purchasing a medical office building for $3,500,000. The investment would
require a 25% down payment and the balance would be financed by a mortgage. The medical building’s cash
flow is projected to be $120,000 per year. Which investment would produce a better return – the hotel or the
medical office building?

The previous investment
$90,000 / $1,000,000 = 9%

A

Annual Cash Flow/Initial Cash Investment = Return on Investment

Initial cash investment = $3,500,000 x 0.25 = $875,000

$120,000 / $875,000 = 13.7%

The medical office building is the better investment

23
Q

Defined as an improvement or betterment to a property that extends its useful life:

A

Capital Expenditures

24
Q

Examples of:
• Improvements to a property that update its appearance, such a renovating an office building lobby
• Replacement of major mechanical equipment, such as boiler
• Replacement of a major building system component, such as a roof
• Renovating a space, such as building offices for a new tenant
• Replacing old appliances in an apartment

A

Capital Expenditures

25
Q

Capital Expenditures differ from Operating Expenses in the following ways:

A
  • Capital Expenditures are not recurring. They typically occur every 5 to 20 years, or more. Operating Expenses occur at regular, short intervals (i.e. daily, weekly, monthly).
  • Capital Expenditures are treated differently under the tax code than Operating Expenses. Typically, Capital Expenditures are depreciated, while Operating Expenses are deducted for tax purposes.
26
Q

In order for the owner to prepare for significant Capital Expenditures, it is common to establish an:

A

Escrow or Reserve Account. An Escrow or Reserve Account enables the owner to prepare financially for large expenditures by regularly putting aside smaller amounts in a separate bank account (i.e. monthly or yearly)

27
Q

This report serves a report card on the performance of the property and the manager. It normally contains all of the property’s actual income and Operating Expenses for the month and compares it to the Budget.

A

Operating Statement

28
Q

LEASES:
The property owner pays for all Operating Expenses. A derivative of this format is a Gross Lease with a base amount (or base year). The property owner pays all Operating Expenses up to the specified amount (the base) and the tenant pays for all Operating Expenses above that base amount. This is commonly found in office building leases.

A

Gross Lease

29
Q

LEASES: The tenant pays for some or all Operating Expenses in addition to base rent. Derivatives of this structure are Net – Net and Triple Net leases, where each “Net” refers to additional Operating Expenses that the tenant is required to pay for. For example in a Triple Net lease, a tenant would pay for all Operating Expenses including real estate taxes, insurance, roof maintenance, landscaping, etc. This is commonly found in industrial leases.

A

Net Lease

30
Q

LEASES:
The tenant pays rent based on a calculation that relates directly to the tenant’s gross sales. This is often in addition to base rent and it is commonly used in shopping center leases.

A

Percentage Rent

31
Q

Owning property entitles one to a bundle of rights. These include:

A
  • The right of possession – the owner of the property has title and can occupy of the property
  • The right of control – within the applicable laws, the owner controls the use of the property
  • The right of exclusion – the owner of the property can exclude others from using or entering
  • The right of enjoyment – within the applicable laws, the owner can enjoy the property
  • The right to sell – the owner can sell, transfer, give-away or will the property
32
Q

When an owner leases a property, it temporarily transfers to the tenant a portion of the right of possession.
The tenant then has a _______ ________ in the property.

A

Leasehold Interest

33
Q

A lease’s fundamental components

include:

A
  • Parties to the lease
  • Description of the property and the premises being rented
  • Term of the lease
  • Security deposit amount
  • Rental amount and late fee
  • When rent is due
  • What the premises will be used for (Use Provision)
  • Who insures the property
  • Who maintains the property
  • What happens if the property is damaged or destroyed during the lease term (Casualty Provision)
  • What happens if the tenant doesn’t pay its rent (Default Provision)
  • What happens if the tenant doesn’t vacate when the lease expires
  • If the tenant can sublease the premises or assign the lease (Sublease and Assignment Conditions)
34
Q

A _______ ___ _____ is a leasehold possession such that either the landlord or tenant may terminate the leasehold interest at any time by giving reasonable notice, which
is typically 30 days or it may be stated in the lease. It usually occurs in the absence of a written lease and can occur after a lease expires, but the resident/tenant continues to occupy the space and the landlord continues to accept the rental payment.

A

Tenancy at Will

35
Q

A ________ ___ _______ (or holdover tenant) occurs after the lease has expired and resident/tenant continues to occupancy the apartment or space without the landlord’s consent.

A

Tenancy at Sufferance

36
Q

Commercial leases typically include some language that enables the owner to be reimbursed for some or all of the property’s operating expenses, insurance and real estate taxes.

Examples would include reimbursements for utilities, landscaping, janitorial, real estate taxes, and repair and maintenance costs. By being reimbursed for these expenses, the owner reduces its risk for unexpected increases in costs.

A

Pass-Through Clause, Expense Reimbursements and Recoveries

37
Q

Typically, multi-year leases contain a provision for the owner to increase the rent on the lease’s anniversary date. This concept is referred to as an:

This also helps the property to
produce a higher Effective Gross Rent over time, which can increase the property’s value.

A

Escalator Clause

38
Q

It is also critical that the owner’s funds be kept separate from the property manager’s accounts. This is
called:

A

Separation of Funds

39
Q

The Asset Management function frequently consists of the following:

Collectively these items are focused on ways to maximize the Return on Investment (ROI)

A
  • Focuses on the property’s long term planning, leasing and asking rental rates
  • Often negotiates commercial leases on behalf of the owner
  • Evaluates the mortgage and opportunities to refinance the loan
  • Considers strategies to maximize value and when to market the property for sale.
40
Q

One common method to determine a property’s Investment Value is to:

A

Apply a Capitalization Rate to the Net Operating Income (NOI)

Net Operating Income / Capitalization Rate = Value

41
Q

The _________ __________ is determined by the market and depends on various factors, including the property type, economic conditions, interest rates, location, and the property’s condition. As a result, ____________ ________ are not static. They can vary significantly as the variables noted above change.

A

Capitalization Rate

42
Q

A shopping center is 15% vacant. Its Gross Potential Income is $5,000,000 and has Operating Expenses of
$2,275,000. Similar shopping centers recently sold for an 8% Capitalization Rate. What is the current value of the shopping center?

A 
Gross Potential Rental Income $5,000,000
- Vacancy Rate (15% x $5,000,000) - $750,000
= Effective Gross Income = $4,250,000
- Operating Expenses - $2,275,000
= Net Operating Income = $1,975,000
/ Capitalization Rate of 8% / .08
= Value $24,687,500
43
Q

If a shopping center recently sold for $10,000,000 and it had at Net Operating Income of $875,000, what was the
Cap Rate?

A

Net Operating Income / Capitalization Rate = Value

$875,000/$10,000,000 = 8.75%

44
Q

A comparable property to the subject property being managed sold last month for a 7.5% Cap Rate. If the subject property’s NOI is $1,340,000, what is its Investment Value?

A

Net Operating Income / Capitalization Rate = Value

$1,340,000 / 0.075 = $17,866,667

DCPM (4 decks)

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