Real estate accounting made easy

E1INDEX 06/16/2010 11:46:5 Page 192 E1FFIRS 06/16/2010 16:7:46 Page REAL ESTATE ACCOUNTING MADE EASY E1FFIRS 06/16/2010 16:7:46 Page E1FFIRS 06/16/2010 16:7:46 Page REAL ESTATE ACCOUNTING MADE EASY Obioma Anthony Ebisike John Wiley & Sons Inc E1FFIRS 06/16/2010 16:7:47 Page Copyright # 2010 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-7622974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com ISBN: 978-0-470-60339-0; 978-0-470-64889-6 (ebk); 978-0-470-64891-9 (ebk); 978-0-470-64894-0 (ebk) Printed in the United States of America 10 E1FFIRS 06/16/2010 16:7:47 Page This book is dedicated to my parents, Richard and Josephine Ebisike, for giving me a wonderful life I continue to admire the life they lived They provided me and my siblings with a home and an atmosphere that inspires love, peace, and confidence In so many ways they showed me the joy and power of a peaceful life I couldn’t ask for a better home I am very grateful to my brother Sonny for giving me one of the first real opportunities to pursue my dreams I am also very indebted to all my other brothers and sisters for their everlasting love and care They helped in many ways by providing an arena in which I continue to strive for success and pursue my dreams From birth they gave me love and care beyond any imagination I am a product of their generosity My life is full, and I feel rich just because of them I am also very grateful to all the members of Ebisike family You are all a source of inspiration To all my teachers, I want to say thank you E1FFIRS 06/16/2010 16:7:47 Page E1FTOC 06/16/2010 16:37:30 Page Contents About the Author Preface Chapter Chapter Chapter Chapter xi xiii Introduction to Real Estate Types of Real Estate Assets Common Industry Terms Basic Real Estate Accounting 17 History of Double-Entry Bookkeeping Types of Accounts Accounting Methods Recording of Business Transactions in the Accounting System Journal Entries Basic Accounting Reports 17 18 21 23 24 26 Forms of Real Estate Organizations 37 Sole Ownership Common and Joint Ownership Partnerships Joint Ventures Corporations Limited Liability Companies Real Estate Investment Trusts 38 38 39 41 41 43 44 Accounting for Operating Property Revenues 47 Types of Leases Revenue Recognition Lease Classification 47 52 53 vii E1FTOC 06/16/2010 16:37:30 viii Chapter Chapter Chapter Chapter Chapter Page Contents Additional Cost Recoveries Operating Expenses Gross-up Contingent Rents Rent Straight-Lining Modification of an Operating Lease Sublease of Operating Lease 55 56 57 58 61 65 Accounting for Operating Property Expenses 67 Operating Costs 67 Operating Expenses Reconciliation and Recoveries 77 Most Common Recoverable Operating Expenses Most Common Nonrecoverable Operating Expenses Calculating Tenant Pro-Rata Share of Expenses 78 78 79 Lease Incentives and Tenant Improvements 83 Lease Incentives Tenant Improvements Tenant Improvement Journal Entries Further Comparison of Lease Incentives and Tenant Improvements Differences in Cash Flow Statement Presentation Demolition of Building Improvement 83 85 85 Budgeting for Operating Properties 89 What Is a Budget? Components of a Budget 89 89 Variance Analysis 95 Sample Operating Property Variance Analysis Salient Points on a Variance Analysis 95 98 Chapter 10 Market Research and Analysis Market Research Defined Market Analysis Defined Market Research: Practical Process 86 87 87 99 99 99 100 Chapter 11 Real Estate Valuation and Investment Analysis 107 What Is Real Estate Valuation? Approaches to Real Estate Valuation 107 108 Chapter 12 Financing of Real Estate Equity Debt Financing Other Financing Sources Types of Loans Debt Agreements 119 119 119 122 123 123 ... 192 E1FFIRS 06/16/2010 16:7:46 Page REAL ESTATE ACCOUNTING MADE EASY E1FFIRS 06/16/2010 16:7:46 Page E1FFIRS 06/16/2010 16:7:46 Page REAL ESTATE ACCOUNTING MADE EASY Obioma Anthony Ebisike John... E1FPRE 06/16/2010 11:45:27 Page 15 REAL ESTATE ACCOUNTING MADE EASY E1FPRE 06/16/2010 11:45:27 Page 16 C01 06/16/2010 Page 1 INTRODUCTION TO REAL ESTATE Real estate is generally defined as land... 99 100 Chapter 11 Real Estate Valuation and Investment Analysis 107 What Is Real Estate Valuation? Approaches to Real Estate Valuation 107 108 Chapter 12 Financing of Real Estate Equity Debt