THE BOOM IN MIDTOWN!
Alec Pacella Reviews the Midtown Cleveland Annual Report.
Reporting for Duty
Each month, this column focuses on various real estate property management concepts and topics. While it’s important for a property management company to employ these various items, it’s critical that they also communicate important information to their client, typically the property’s owner, on a regular basis. This month, we are going to focus on an overall concept known as management reporting. The discussion will include the most common categories for reporting, some specific examples and some thoughts on the timing and format of reports.
Budget to Actual and Variance Report
This concept can be thought of as the heartbeat of the property. It illustrates how the property is actually performing compared to how it is expected to be performing. Prior to heading into a new year, a budget should be prepared, containing details of the anticipated income and expense line items. As the new year progresses, it is important for an owner to not only be regularly informed regarding how the property is actually performing, but also why any variances (good or bad) against what was budgeted have occurred.
One of the main sources of variances are unexpected changes in the tenancy at a property. Perhaps a tenant that was thought to be a lock to renew decides instead to vacate. Or maybe a less than ideal vacant space is leased sooner than expected. It’s important for the owner to receive a leasing update on a regular basis. This report usually includes items, such as the status of any outstanding proposals and lease negotiations, number and nature of prospect showings, update for any upcoming lease expirations and any specific strategy or initiative related to leasing, such as a planned tenant incentive package or an open house.
Income, Expense and Cash Flow Report
If the budget to actual report is the heartbeat of a property, then the cash flow report is the blood flow. It is critical for an owner to understand not only the cash position of the property on a regular basis, but also how that cash position is being established, such as what are the specific income and expense items, as well as how it is trending. Continued in attached article.
By Alec Pacella, CCIM
Managing Partner at NAI Daus
Several years ago, we focused on the concept of cost recovery (also known as depreciation) in a couple of columns. This month, we are going to dig a little deeper into this concept, but before you tune out and flip to a different part of the magazine, ask yourself two questions. First: do you/your company/your clients pay taxes? And second: do you/your company/your clients care more about how much you make or how much you keep? If the answer to these questions is “yes,” I would recommend that you read on.
Cost recovery is an acknowledgment by the IRS that real estate is subject to wear and tear over time. To offset this, they allow an owner to recognize cost recovery. The general concept is that the owner’s original basis in the real estate is reduced each year as a result of the deprecation of the improvement portion of the real estate. This can be a clear benefit to the owner, as the cost recovery taken each year is deducted from any income each year. The result is a shelter for the owner, as they will be subject to tax on income after recognizing cost recovery, not before. I have simplified this concept and there are numerous nuances associated with the process. This month, we will focus on a specific nuance that occurs at the very beginning of the process – establishing original basis.
Basis is both an accounting and a tax concept. It is the benchmark value that is subsequently used to determine the amount of cost-recovery deduction, amortization deduction and gain or loss when the property is sold. Basis is established at the time of acquisition and must be allocated between the portions of the property that are attributable to land, improvements and, if applicable, personal property. Allocating the original basis is important because land is not subject to cost recovery. But, similar to many things in my life, we’ll put that in a box on the shelf and deal with it another day. The focus this month is on the nuances associated with establishing the original basis. Click here to continue reading article.
Reviewing the Northeast Ohio Industrial Market.