Professional Documents
Culture Documents
the Office
and Reports
Group Members:
Danilo N Descartin
Russel Paras Manacap
CHAPTER - 9
Mary Grace Luga
Keywords
• Break-even analysis • Hardware
The location , organization , equipment , and staff of the management command post varies with
the scope of the operation . Initially , the office may consist of only a property manager and a
secretary . The most logical site for the manager's office is on the premises if most of the
management operations are conducted there . Even if a manager has a home office elsewhere , a
small office is often set up on the property for specific functions .
Establishing the management
office
• OFFICE AND DESIGN
Furnishes should be affordable, attractive, tasteful, uniform in style, and well arranged. The office
should be designed to accommodate several different areas for specific uses including the ff.
▪ 1. Attractive reception area for prospective clients and service personnel
▪ 2. Space for comfortable private interviews with clients, potential employees, and business
people
▪ 3. Accessible and private place for tenants to pay their rent, make service requests, or
negotiate lease renewals
Establishing the management
office
• OFFICE AND DESIGN
▪ 4. Office space for administrative functions such as time keeping, payroll, purchasing,
billing, accounts receivable, bookkeeping, collections and preparation of government
reports
▪ 5. Area large enough to prepare and store records for the properties
• FILES
Data should be sorted and segregated into separate files for easy collection, retention, and
retrieval of records. These paper files should be reviewed periodically and outdate material should
either be shredded or moved to a storage center off-site.
Establishing the management
office
• FILES (cont)
Whatever the size of the office, the records can be divided into five general filing categories:
1. Lease file
4. Financial file
5. Permanent file
Establishing the management
office
• FILES (cont)
1. Leases – the lease file should contain current lease instruments, as well as tenant credit
and reference data. Expired leases should be moved to a separate system and filed
alphabetically by tenant name. These files may be stored off site and discarded after
an appropriate time. Document containing personal information about the tenant must be
shredded to maintain privacy.
3. Work order bids – when placing service contracts and contracting for new construction,
the manager usually solicits work order bids from two or more contractors. These estimates
should be filed according to the property involved.
4. Financial files – check registers, canceled checks, receipts, and disbursement records are
usually retained for a ten-year period in a financial file organized by building. The file also
organizes budgets, monthly income and expense reports, yearly profit and loss statements, and the
other financial records for each building and its employees.
Establishing the management
office
• FILES (cont)
5. Permanent files – these files are rarely referenced, but they need to be easily identifiable in the
event of emergency. A permanent file holds the management contract, mortgage and title
information, labor contracts, a legal description of the property, and similar documents. Insurance
policies may be kept in this file.
Establishing the management
office
• EQUIPMENT
Office equipment's such as fax machines, copiers, postage scales, calculators, and computers are
fundamental, not optional, once the business begins to grow. All information about the machines, such
as training manuals and maintenance contracts, should be located where the information can be easily
accessed
• COMPUTERS
Computers simply provide more information on which to base decisions. Thus, the management
company must look carefully at each segment of the organization to determine the information it
requires and will actually use. Once the company begins to depend on the information supplied by the
software, it is essential that someone is responsible for backing up all the information at least weekly.
Establishing the management
office
• HARDWARE
Matthew Ferrera, a technology consultant, suggest taking the "Goldilocks approach" when buying
any technology. Some technology/tools are "too little", "too big", and "just right". Any technology
that has significant price markdown should be suspect because the low price might indicate
hardware that soon be out-of-date or lacking enough features to have an adverse effect on
productivity (too small).
Establishing the management
office
• SOFTWARE
Various software companies today, offer software specifically for property management to help
property managers their offices more effectively. A company that does not want to take risk buying
a software program only to see the program become more outdated can work with web-based
outsourcing companies. Web-based products are run on servers, and the property manager client
can access and use the products over the internet
Establishing the management
office
• SOFTWARE (cont)
With many options, managers should consider this steps in making purchase of a software
1. Ask other management companies what software they use. Do they recommend it? What they
don’t like.
4. Research the company to determine how helpful it will be if there are problems, and determine
how stable it is.
Establishing the management
office
• SOFTWARE (cont)
With many options, managers should consider this steps in making purchase of a software
5. is the product specific for property management, or it has been adapted from a general
accounting package?
7. Is it easy to learn?
Establishing the management
office
• BASIC SOFTWARE FUNCTIONS
1. DATA SHARING
3. TRACKING MAINTENANCE
Many software packages can integrate maintenance items with the appropriate and necessary
financial records. Data processing software program allow property managers to enter request for
maintenance, due dates, vendors, bids, completion dates, and more.
4. INTERNET
The internet is a global system of interconnecting computer networks. The internet has quickly
become a vehicle for advertising, marketing, and communication.
Staffing the management office
The most basic qualification for an employee in the field of property management is versatility ,
because few management organizations are large enough to support a staff of specialists . The
property manager and a secretary - bookkeeper may be the only staff during the early stages of a
business , but larger established management firms or departments often employ several people
in each of the positions described in the following sections . The most important point is that all of
the functions must be completed , whether by 2 people or 20 .
Staffing the management office
• PROPERTY MANAGEMENT EXECUTIVE
The chief property manager or property management executive must be knowledgeable and
experienced to control both the strategic and the operational aspects of property management .
During the growth years , the responsibilities can be classified as executive or administrative . The
executive function includes preparing budgets ; developing an advertising program ; leasing ;
inspecting properties ; communicating with tenants ; contacting owners ; contracting for services ;
hiring , training , and super vising both office and on - site employees ; directing major repairs ;
and supervising all administrative functions . As part of the administrative function , the property
management executive oversees collections , disbursements , payroll preparation , and recording ;
submits monthly operating reports ; and keeps records in all areas . As soon as the organization is
large enough to make it economically feasible , the management executive should hire and train
subordinates to assist with the work .
Staffing the management office
• PROPERTY MANAGEMENT EXECUTIVE (cont)
As soon as the organization is large enough to make it economically feasible , the management
executive should hire and train subordinates to assist with the work . Eventually , the property
manager executive will supervise others in order to devote full attention to setting the general
policy for the organization , developing new business , supervising operational costs and activities ,
and building employee morale and motivation .
Staffing the ORGANIZATIONAL FLOWCHART
management
office
• PROPERTY MANAGEMENT
EXECUTIVE
Figure 9.1 illustrates the staffing pattern
of a typical , large management firm
department . A very large firm may add
another level or two in the supervisory
hierarchy , whereas a smaller firm
may function as a one - person or two -
person operation .
Staffing the management office
• PROPERTY SUPERVISOR (FIELD MANAGER)
The property supervisor takes care of the general administration , directs the daily operation of the
property , and reports to the property management executive . Depending on variables such as
condition of the property , problems , distance from the management office , and number of
properties , one person can efficiently manage anywhere from 5 to 20 buildings , which should , if
possible , be concentrated in one neighborhood . Part of the supervisor's responsibility is to
establish a personal but businesslike relationship with the tenants and the owner .
The property supervisor usually has the added responsibility of comparing bids and obtaining
outside contract services for corrective maintenance , housekeeping , and new construction . The
supervisor monitors building and office employees , makes maintenance decisions, and approves
purchase orders for supplies and services. When maintenance job are completed, the supervisor
inspects the work and the materials
Staffing the management office
• ON-SITE MANAGER AND BUILDING PERSONEL
A carefully selected and qualified on-site manager is often authorized to hire custodians,
handymen, and other maintenance workers, but the property supervisor will want to retain the right
to approve the on-site manager's employment decisions. Often a leasing agent who has shown
initiative and promise is promoted to either an assistant on-site manager or to the manager
position.
Staffing the management office
• PURCHASING AGENT
The purchasing agent is responsible for all purchases made by or through the management
organization. Only large organizations can justify a full-time position or this function. In smaller
management offices, the property supervisor or an accountant usually performs the job of the
purchasing agent by compiling a list of preferred suppliers, contractors, products, and equipment,
and making purchases.
Staffing the management office
• OFFICE MANAGER (COMPTROLLER)
The office manager or comptroller interprets the income and expense reports, makes major
decisions regarding new procedures, and submits profit and loss statements to the owner. A single
comptroller is usually responsible for all of the properties managed by the firm. Because this is a
crucial function, the executive property manager in a smaller operation will usually assume
responsibility for it.
Staffing the management office
• CASHIER-BOOKKEEPER
Bookkeepers spend most of their time preparing rental bills, receiving and recording rent
payments, keeping an account of monthly income and expenses for each property, and handling
accounts payable and receivable. Regardless of the competence of the bookkeeping staff, it is wise
for a management office to have an outside accounting firm audit its books semiannually or
annually.
Bookkeepers also handle the payroll and maintain operating cost records for the management
firm's operating costs. Depending on the owner's demand for detail and the type of accounting
system in use (manual or computer), a single bookkeeper can usually handle eight to ten
properties. This person may be able to handle more properties in a large management firm
because the assumption of more properties justifies a more sophisticated accounting system,
which requires less time and labor per property.
Staffing the management office
• CLERICAL PERSONEL
Clerical personnel can be divided into two major groups, secretaries (or administrative assistants) and
service request clerks.
Secretaries are responsible for answering telephones, maintaining contact between the held managers
and the central office, and handling the general correspondence of the management organization.
General reception for the main office can be performed by these employees or by a special receptionist
Service request clerks accept phone calls from tenants, easing the burden on the secretarial staff. These
clerks provide a team of persons ready to respond promptly and patiently to tenant requests and can
also act as liaisons between the main office and the building. They can notify the custodian of a service
request, write the purchase order for items needed by the on-site staff and have it approved by upper
management, then route the requisitioned material to the appropriate building when it arrives.
Staffing the management office
• BRANCH OFFICES
As the management organization grows, branch offices may be opened in outlying areas to handle
newly acquired business more efficiently. Traditionally, each outlying office is run by a property manager
and a salesperson in charge of new accounts, assisted by a receptionist, bookkeeper, secretary, and
possibly two accounting clerks (one for accounts receivable and another for accounts payable). Isolated
apartment properties should have a manager's representative on-site, if only part-time. To avoid the
problems of complete centralization, management functions integrally related to the neighborhood can
be performed at branch offices, leaving the main office to take care of more standardized activities.
Centralized accounting systems require only a property manager, a secretary-receptionist, and a
salesperson who solicits local accounts at each branch. This arrangement can reduce the staffing needs
of a branch office by 40% or more, actually increasing the overall efficiency and profit margin of the
management company.
Staffing the management office
• LICENSING
The management company should determine which licenses it is required to obtain. Local
ordinances may require that the company obtain a business license to operate. The state real
estate regulatory agency may require that individuals performing certain activities, such as
negotiating leases or collecting rents, hold either a property management license or a real estate
license. In such circumstances, the ability to obtain a license could be a requirement when hiring
certain personnel.
Staffing the management office
• MERGERS
In today's economic climate, many property managers are joining forces with other real estate
professionals to increase their competitiveness. For example, property management firms may
merge with real estate brokerages or auction firms.
DETERMINING MANAGEMENT FEES
When setting management fees, the pertinent variables must be evaluated and assigned an order
of importance. Business will be lost if the estimated percentage rate is too high and is not
competitive with the market rate. Before any management fees can be set, the management
executive must first know how much it costs the organization to provide its management services. A
budget that includes the direct and indirect costs of operation will show the total cost of doing
business. Each management firm has the right to set its fees according to its needs. However, care
should be taken so that setting of fees does not even appear to be in collusion with other firms,
which would be in violation of antitrust laws
DETERMINING MANAGEMENT FEES
❑ DIRECT COSTS
All costs incurred by an individual manager or management firm can be considered direct costs. If
management operations are a division of a real estate agency, however, direct costs would include
all expenses incurred during the performance of the management business that are not charged to
or shared by another department of the parent company. General office expenses included in
direct costs are the payroll for the management staff; depreciation on office furniture and
equipment; equipment maintenance or rental; insurance premiums; legal, auditing, and other
professional fees; stationery and postage; utilities; taxes; office supplies; and office rent. Business
promotion and automobile expenses are also considered direct costs.
DETERMINING MANAGEMENT FEES
❑ INDIRECT COSTS
Indirect costs are incurred when a management department shares facilities and expenses with
other divisions of the parent company or real estate agency. Although they may amount to 25% or
more of the total cost of operating, they are less visible than direct costs and, therefore, are often
ignored when drawing up a management department's budget. A proportionate share of
occupancy costs, general office overhead, and accounting overhead should be assigned to the
management department as its indirect costs.
DETERMINING MANAGEMENT FEES
No standard method of setting a fee can possibly make allowance for every contingency.
Therefore, the per-unit fee often has to be adjusted to reflect the economics of a particular
situation. For example, one large building with 50 units may be cheaper to manage than five
separate properties of ten units each. The travel time involved in field supervision of separate
buildings is much greater, as is the total number of personnel and separate operational systems
that must be inspected.
DETERMINING MANAGEMENT FEES
Any factor that adds to the time spent in caring for the premises should be reflected in the per-unit fee. The following
illustrates some of the times that the fee should be increased:
2. For buildings with internal problems, a significant amount of deferred maintenance, or a pressing need for new
construction or repairs
3. For an owner who wants to be informed of every detail of operation (and this category often includes government
agencies) taking more management time
4. For properties located in depressed areas because of vandalism and related social ills
DETERMINING MANAGEMENT FEES
❑ PERCENTAGE RATE
The percentage rate can be calculated by using the per-unit fee, the total number of units in the
building, and the gross income of the property. First, multiply the per-unit fee as adjusted for the
property by the total number of units to obtain the dollar amount of the management fee that must
be recovered. Next, determine the gross collectible income for the property by subtracting a
realistic vacancy and loss rate from the annual gross income. Finally, divide the dollar amount of
the management fee by the gross collectible income. The resulting figure, when expressed as a
percentage, is the base property management fee expressed as an equation
DETERMINING MANAGEMENT FEES
For instance, a 20-unit building has a gross income of $36,500 per year. Using the per-unit fee of
$120, the amount to be recovered for this property is $2,400 ($120 x 20 = $2,400). Assuming a 5%
vacancy rate, the gross collectible income for the property would be $34,675 ($36,500 x .05 =
$1,825; $36,500 - $1,825 = $34, 675), so the percentage rate would be about 7% ($2,400 divided
by $34,675 = 0.069). the management fee for this property would quoted at 7% of gross income
DETERMINING MANAGEMENT FEES
The management pricing worksheet relies on the same principles as the per-unit cost method, but
the approach is completely different, as shown in Figure 9.2, a sample worksheet. The worksheet is
particularly useful when dealing with condominiums and cooperatives, groups that often insist on
many long and tedious meetings with the various owners on the board of directors and the
manager. By listing the various services provided and putting a value on those services, including
those meetings and travel time, the manager can more appropriately be compensated.
DETERMINING
MANAGEMENT
FEES
DETERMINING MANAGEMENT FEES
SECTION I The first section estimates how many inspections, visits, meetings, and the like will be
necessary for the particular property on a monthly basis. These figures, when multiplied by the
number of hours each activity will consume, including time spent traveling to the site and
preparing and checking reports, amount to the total number of hours the property supervisor must
devote to the property per month. Then the figures in the "Total Hours" column should be
multiplied by the cost of the property supervisor's time. In the example in Figure 9.2, the cost is
$30 per hour. The total cost for each category is recorded in the far right-hand column. The total of
these dollar amounts, plus travel expense, is the estimated total cost of the property supervisor ‘s
services.
DETERMINING MANAGEMENT FEES
SECTION II The next section itemizes the executive property manager's activities with regard to the
property. Total hours spent and total costs are calculated in the same manner as above, although
the executive manager usually charges a higher fee per hour. On the sample management pricing
worksheet, the fee is $100 per hour.
SECTION IlI and IV Section IlI allows the management firm to determine the total number of hours
that will be spent monthly in credit and collections, accounts payable and receivable, payroll,
preparation of financial statements, and related matters. The total number of hours spent in these
activities should then be multiplied by the average hourly wage of accounting and clerical
personnel ($15 an hour in the example) to calculate the total direct cost of these services. Section
IV is a subtotal of all direct management costs.
DETERMINING MANAGEMENT FEES
SECTION V This section deals with overhead and profit. The management firm should know by
experience what percentage of its income goes toward general overhead (office rental, utilities,
phones, supplies) and marketing. The firm must also select an acceptable profit margin, usually
from 10 to 20%. The next step is to multiply the percentage rates for overhead, marketing, and
profit by the subtotal of costs in Section IV. These dollar amounts should be recorded in the far
right hand column in Section V.
SECTION VI The total of Sections IV and V, shown in Section VI, is actually the monthly management
fee, expressed as a flat rate. If a percentage rate is desired, the dollar amount of the monthly fee
must be divided by the average monthly gross collectible income less vacancy factor. The quotient
is the estimated per- centage management fee.
FINANCIAL REPORTS
Before preparing any financial reports, the manager must set up a method of accounting for funds
received and disbursed, keeping in mind the needs of the owner. Laws in most states prescribe
rules for handling trust and operating accounts of licensed brokers.
An accounts receivable ledger is preferable because all cash receipts can be posted to the
appropriate ledger card. Written orders should be issued for all purchases and purchase orders
should be matched to incoming invoices before payment is made.
The manager must be familiar with different reports:
1. Budget comparison statement
2. Cash flow report
3. Profit and loss statement
4. Operating budget
FINANCIAL REPORTS
The budget comparison for the property compares the actual results with the original budget
drawn up either at the beginning of that period or at the time the manager assumed responsibility
for the property. When maintained as an operating checklist, with ratios from the current period
checked faithfully against past performance, trends may be detected that call for the property
manager's attention. Without this comparison, they might go unobserved and uncorrected,
causing problems later. A sample budget comparison statement is shown in Figure 9.3.
FINANCIAL REPORTS
FINANCIAL REPORTS
▪ CASHFLOW REPORT
The monthly cash flow report explains in much greater detail the financial status of the property for
a given period as shown in Figure 9.4. The monthly report tells the owner the sources of income
and expenses, and net operating income and net cash flow, and is the single most important
financial report. It is usually accompanied by a note from the manager explaining any abnormal
items.
FINANCIAL
REPORTS
FINANCIAL REPORTS
INCOME The income portion includes gross rentals collected, delinquent rental payments, vending
contracts, utilities, storage charges, and sale of extra services to tenants. Then, any losses incurred
from evictions and from uncollected or delinquent rentals are deducted from the total gross
revenue. The resulting figure is the total adjusted income from the property.
As a control measure, some owners require a property manager to list separate categories of items
that are not producing income, such as
• Support space (for ex. The manager's office or residence maintenance or storage areas); and
All rental space in a project should be considered when computing the gross possible income. The
rental value of each space not producing income is deducted from the gross possible rental
income to equal the gross collectible (or billable) rental income:
Total rentable space - All space not rented = Gross collectible rental income
FINANCIAL REPORTS
Specialized maintenance services such as roof repair, utility charges, refunds, and capital
expenditures are variable expenses, and can be either recurring or nonrecurring. Decorating costs,
minor repairs or replacements, and replenishment of supplies will predictably occur at varying
intervals during the year. Landscaping and snow removal are examples. Variable operating
expenses capital improvements, additions, or repair of fire damage may or may not occur in any
given year.
The monthly cash flow report can be summarized in the following formula:
Gross rental income + Income from other sources- Losses incurred = Total income
Total income - Operating expenses = Net operating income before debt service
Net operating income before debt service- Debt service - Reserves = Cash flow
FINANCIAL REPORTS
▪ PROFIT AND LOSS STATEMENT
Owners expect a profit and loss statement monthly, quarterly, semi-annually, or annually. Monthly cash
flow reports provide the raw data for these statements. Most such statements list gross receipts rather
than itemized sources of income and the total of all operating expenses instead of individual
expenditures.
The entire amount paid for debt service (mortgage payments) cannot be considered an expense on the
profit and loss statement as it is on the monthly reports. Only the interest portion of each mortgage
payment is considered an expense. The equity portion of each mortgage payment is actually applied
toward retiring the total debt, thereby increasing the owner’s equity in the property and accruing to his
or her benefit. After the total mortgage payment has been deducted from the gross receipts, the
mortgage loan principal must be added back in to obtain the net profit on the profit and loss statement.
The general formula for preparing a profit and loss statement for any type of property is as follows:
Gross receipts - Operating expenses - Total mortgage payment +Mortgage loan principal = Net profit
FINANCIAL
REPORTS
• PROFIT \
FINANCIAL REPORTS
▪ OPERATING BUDGET
After developing the profit and loss statement for a specific period, the manager should compare
the actual results with the original budget drawn up either at the beginning of that period or at the
time the manager assumed responsibility for the property.
The budget gives the owner an idea of the cash yield to expect from the property during a fixed
period, traditionally a year. The budget serves the manager as a guide for future operation of the
property and as a measure of past performance. If the projected budget for a period does not
agree with the actual monthly income and expense reports and the profit and loss statement for
the same period, appropriate adjustments should be made in subsequent operating budgets or in
operating procedures.
FINANCIAL REPORTS
ESTIMATE CONSERVATIVELY
The manager should resist setting unreasonably high goals for leasing agents or site managers to
reach. Unreachable goals are self defeating, if the organization morale suffers and competent
personnel quietly seek other employment. Wise managers should set realistic goals that will allow
the company to grow and prosper.
When preparing a budget forecast, the manager should use present rental rates for the estimates,
rather than anticipated increases in revenue. Then, if the profit and loss statement at the end of the
period shows a greater revenue than originally indicated on the budget projection, the manager
will be able to point out what he or she contributed to the increase.
FINANCIAL REPORTS
Before forecasting expenses for the new budget term, the manager should examine all
discrepancies between anticipated costs as projected in the budget for the preceding year, and
actual expenses incurred as shown on the income and expense reports from the same period.
Substantial differences indicate either problem areas for management or items for which the
projected estimates were unrealistic. If there is a decrease in the expected revenue, the manager
should be prepared to explain why.
FINANCIAL REPORTS
The owner can use the budgets and reports to judge the manager's skill in recognizing financial
and market patterns and in coping with problem areas. The books and records of the management
firm should be audited at least annually. Not only is this a proof of good faith, but many lenders
and other parties require an audit before they will execute mortgages and other legal documents
pertaining to properties under outside management.
REPORTS FOR TAX PURPOSES
The information given here is of a general nature because tax law is constantly changing. Property
managers should obtain the latest IRS circulars and copies of state and local tax regulations and
consult with competent tax counsel before filing any tax documents. Even if an accountant
prepares the owner's federal and state income tax returns, the property manager should at least be
familiar with the purpose of the various tax liabilities and tax records forms.
REPORTS FOR TAX PURPOSES
The income and expense statement adjusts the total net operating income from the property to
allow for depreciation of the premises during the year. In addition, any expenses, such as tenant
alterations that are considered capital improvements, are removed from the expense classification
and are added to the property's depreciation schedule.
REPORTS FOR TAX PURPOSES
DEPRECIATION
Depreciation accounts for the decline in value from physical deterioration, functional
obsolescence, and economic obsolescence. For tax purposes, only depreciation from physical
deterioration is deductible from the property's income. (Note that depreciation only applies to the
improvements or the buildings on the land; the land itself does not depreciate.)
The rate to be used depends on applicable tax law, which will vary according to the date the
property was placed in service. The property manager must consult with a qualified tax adviser
before preparing any tax return. Material presented in this book is for the purpose of illustration
only.
REPORTS FOR TAX PURPOSES
PRE-1981 PROPERTIES
Three (3) standard methods for computing the rate of physical deterioration:
1. Straight-line method
3. Sum-of-the-years'-digits method
REPORTS FOR TAX PURPOSES
For property placed in service on or after May 15, 1995, the new provision increased the recovery
period of nonresidential property from 31.5 years to 39 years. Subsequent capital improvements to
income-producing property may, with certain exceptions, be depreciated over the useful life of the
improvements. Leasehold improvements are depreciated over the life of the lease unless the life of
the property itself is extended by the improvements. In the case of extended lite of the whole
property, a longer schedule is required that reflects the true benefit of the improvements.
REPORTS FOR TAX PURPOSES
Section 42 of the Internal Revenue Code addresses these issues tor residential and multifamily
housing. Federal income tax credits are allowed for certain depreciable property investments, and
regulations vary for energy, antipollution, employee stock ownership plans, and other categories of
property investments. Both the 1986 tax revision and the 1993 tax revision provide for tax credits
to owners of low-income housing. If an investment tax credit is claimed and the property is sold or
disposed of before a certain period of time, the investment tax credit must be repaid to the
Internal Revenue Service.
REPORTS FOR TAX PURPOSES
o AFTER-TAX CASHFLOW
The depreciation allowance is subtracted from the total net income from the property for
the year. The resulting figure is the basis for the owner's tax liability on the profit from the
property during that year. The actual tax due is taxable income times the appropriate
percentage rate determined by the owners tax bracket. Taxable income minus tax due,
minus the principal add-back, plus depreciation equals the after-tax cash return on the
property. The calculation of any report for an owner must conform to the owner's wishes.
The formats used in this text are presented as methods that have found general
acceptance; specialized situations will require adaptation.
REPORTS FOR
TAX
PURPOSES
o AFTER-TAX CASHFLOW (cont)
For example, an apartment building valued at $600,000
when new has a gross annual income of $100,000
and average annual operating expenses of $60,00o.
Mortgage payments amount to $30,000 annually, and
$20,000 of this amount is payment on the principal
balance. The property has a straight-line depreciation
rate of 2% and is one year old on the principal
balance. If the owner is in a 28% tax bracket, the cash
flow would be calculated as shown in Figure 9.5.
REPORTS FOR TAX PURPOSES
Beginning January 1, 1994, a taxpayer's rental real estate activities (RREAs) in which he or she
materially participates are not subject to limitation under the passive loss rule if the taxpayer meets
eligibility requirements relating to real property trades or businesses in which the taxpayer
performs services. Real estate investors who quality are now permitted to deduct their rental real
estate losses from their current commissions, wages, interest, and dividends.
Tax laws are complicated and constantly changing. A property manager should be aware of these
basic rules, as there is still misunderstanding among some owners and many would-be investors
seeking tax shelters.
REPORTS FOR TAX PURPOSES
o TAX RECORDS
Property owners who pay people to work for them may be considered employers for federal and
state income tax purposes and may be required to file certain reports with the appropriate
government agencies. Most states have precise specifications as to the minimum number of
persons on the job, total amount of wages paid, and working conditions that must exist before an
owner is classified as an employer.
REPORTS FOR TAX PURPOSES
The difference between an employee and an independent contractor is also significant in terms of
federal and state taxes. Workers are deemed to be employees if the person for whom they work
has the right to direct and control when, where, and how the work is done and to define the
desired end result of the work.
Independent contractors are able to control when, where, and how they perform the work and are
hired to produce an end result. An agreement between owner and independent contractor must
include a clause providing for the right of termination by either party on notice to the other.
REPORTS FOR TAX PURPOSES
o EMPLOYEE DOCUMENTATION
EMPLOYER IDENTIFICATION NUMBER (EIN)
If the workers at a building are employees under the law, the owner (or the property manager on the owners
behalf) must obtain a federal employer identification number from the IRS.
The second part of the form requires the employer to review and verify the employee's statements,
using documents furnished by the employee.
REPORTS FOR TAX PURPOSES
The manager's monthly income and expense reports, profit and loss statements,
and cash flow analysis help the owner decide whether the property is profitable
enough to keep. In addition, they form a basis for judging the manager's
competence. The owner and the manager may consider one or more of the
following three methods:
1. Break-even analysis
2. Return on investment
3. Capitalization rate
DETERMINING PROFITABILITY
• RETURN ON INVESTMENT
Another measure of profitability, is the ratio of the property's net income after taxes to the money invested in
the property (investment), called return on investment (ROI). In other words, this is what the owner paid, and
this is the owner's return. This ratio can be converted into a percentage return on investment and measured
against the owner's desired yield. In formula form, the return for a particular owner on the owner's investment
• CAPITALIZATION RATE
Another index of the profit on a particular property is the capitalization rate, an analysis of the projected net
operating income (NOI). For comparison and measurement purposes, return is expressed through capitalization rates.
Essentially, the capitalization rate converts future income to a present value; the rate is a number assigning a
relationship between income and value. It is capitalizing the past and buying the future.
The general formula for calculating the capitalization rate is as follows:
R =I/ Vx 100
R = Capitalization
T = Net operating income before debt service
V = Value of property
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