Real Estate Accounting Made Easy

Grasp the fundamentals of real estate accounting, finance, and investments

Real Estate Accounting Made Easy is just that—an accessible beginner’s guide for anyone who needs to get up to speed on the field of real estate accounting, finance, and investments. Beginning with the elementary aspects of real estate to ensure that you’re comfortable with the subject matter, it goes on to explore more in-depth topics in a way that’s easy to digest.

The book begins with discussions on introduction to the real estate industry and basic real estate accounting. Building on knowledge from the initial chapters, the book goes on to cover the different form of real estate organizations, financial statements such as the balance sheet, income statement, shareholders equity and the statement cash flow, and more.

• Provides theories and practices of real estate from an accounting, financial, and investments perspective

• Advanced transactions are discussed in an easy-to-understand manner

• Content reflects the FASB’s new standards on revenue recognition and lease accounting

• Accounting for operating property expenses, operating expenses reconciliation and recoveries, lease incentives and tenant improvements, budgeting, variance analysis are discussed in detail

• Covers types of financing for real estate acquisitions, accounting for real estate investments, project development costs, and real estate brokerage

• The book also walks you through the financial audit process

If real estate is a new territory for you, fear not! This book helps new auditors, accounting, finance, and investment professionals, and users of financial reports understand the fundamentals of the financial aspect of the real estate business.

About the Author xi

Preface xiii

Chapter 1 Introduction to Real Estate 1

Types of Real Estate Assets 1

Common Industry Terms 8

Chapter 2 Basic Real Estate Accounting 17

History of Double-Entry Bookkeeping 17

Types of Accounts 18

Accounting Methods 22

Recording of Business Transactions in the Accounting System 23

Journal Entries 24

Basic Accounting Reports 26

Chapter 3 Forms of Real Estate Organizations 39

Sole Ownership 40

Common and Joint Ownership 40

Partnerships 41

Joint Ventures 43

Corporations 44

Limited Liability Companies 45

Real Estate Investment Trusts 46

Chapter 4 Accounting for Operating Property Revenues 49

Contracts with Multiple Components 49

Lease Classification 50

Lessor Accounting of Operating Leases 51

Types of Operating Leases 52

Additional Cost Recoveries 57

Operating Expenses Gross-Up 58

Contingent Rents 59

Rent Straight-Lining 60

Modification of an Operating Lease 65

Sublease of Operating Lease 67

Chapter 5 Accounting for Operating Property Expenses 69

Lessee Measurement and Recording of Operating and Finance Leases 70

Contracts with Multiple Components 71

Lease Liabilities and Right-of-Use Assets 73

Initial Direct Costs 74

Lessee Journal Entries of Operating and Finance Leases 75

Lessor Operating Property Expenses 81

Operating Costs 82

Chapter 6 Operating Expense Reconciliation and Recoveries 91

Most Common Recoverable Operating Expenses 92

Most Common Nonrecoverable Operating Expenses 92

Calculating Tenant Pro Rata Share of Expenses 93

Chapter 7 Lease Incentives and Tenant Improvements 97

Lease Incentives 97

Tenant Improvements 99

Tenant Improvement Journal Entries 99

Further Comparison of Lease Incentives and Tenant Improvements 100

Differences in Cash Flow Statement Presentation 101

Demolition of Building Improvement 101

Chapter 8 Budgeting for Operating Properties 103

What is a Budget? 103

Components of a Budget 103

Chapter 9 Variance Analysis 109

Sample Operating Property Variance Analysis 109

Salient Points on a Variance Analysis 112

Chapter 10 Market Research and Analysis 113

Market Research Defined 113

Market Analysis Defined 113

Market Research: Practical Process 114

Chapter 11 Real Estate Valuation and Investment Analysis 121

What is Real Estate Valuation? 121

Approaches to Real Estate Valuation 122

Chapter 12 Financing of Real Estate 133

Equity 133

Debt Financing 133

Other Financing Sources 136

Types of Loans 137

Debt Agreements 137

Financing Costs 141

Relationship Between a Note and a Mortgage 142

Accounting for Financing Costs 142

Chapter 13 Accounting for Real Estate Investments and Acquisition Costs 143

Methods of Accounting for Real Estate Investments 143

Purchase Price Allocation of Acquisition Costs of an Operating Property 148

Chapter 14 Accounting for Project Development Costs on GAAP Basis 153

Stages of Real Estate Development Projects 153

Pre-development Stage 154

Development Stage 156

Post-development Stage 161

Chapter 15 Real Estate Development Revenue Recognitions 163

Requirements for Revenue Recognition 164

Revenue Recognition Journal Entries 165

Revenue Recognition When Performance Obligation is Satisfied Over Time 166

Chapter 16 Real Estate Brokerage Accounting 169

Real Estate Brokerage Revenues 169

Brokerage Commissions in Real Estate Development Projects 174

Real Estate Brokerage Costs 176

Chapter 17 Audits 179

Audit Overview 179

Types of Audits 185

Index 191

OBIOMA ANTHONY EBISIKE is an economist, certified public accountant (CPA), and a chartered accountant. He holds a PhD in Economics (with honors) from The New School for Social Research, a Master's degree in Real Estate Finance and Investments from New York University, and a Bachelor's degree in Accounting (Magna cum Laude) with minors in Finance and in Economics from The College of Staten Island, The City University of New York.

Dr. Ebisike has extensive work experience and has held senior management positions at industry leading firms, such as Douglas Elliman Real Estate, ICON Investments, Hines Interests LP and was an Audit and Advisory Services Manager at Deloitte & Touche LLP.

Dr. Ebisike is a faculty member at the NYU Real Estate Institute. He is also the author of The Fallouts: Banks and Financial Crises. He lives in New York City.

Real Estate Accounting Made Easy offers an easy to understand solution on real estate accounting, finance, and investments. Even if you do not have a professional grasp of accounting principles and financial reporting, this book makes it all clear with accounting rules explained in terms anyone can understand. The book is up to date with recent accounting pronouncements and helps readers better understand the real estate sector from an accounting and finance perspective.

The real estate industry is complex, with many specific concepts and requirements that do not apply anywhere else. It can therefore be time consuming for accountants, investors, auditors, and others to develop a robust enough understanding of real estate to do their jobs. Real Estate Accounting Made Easy resolves this issue completely, providing an introduction to the real estate industry and a concise yet complete guide to its accounting principles.

Readers with no prior real estate experience will especially appreciate the first two chapters, which define key real estate terms and products and give a clear overview of the fundamentals of real estate. The subsequent chapters discuss a broad range of topics in real estate accounting, including various forms of ownership, accounting for property operation, real estate valuation and financing, and more.

One of the most valuable aspects of Real Estate Accounting Made Easy is its coverage of auditing, which will be useful both to auditors and those on the receiving end of audits. Readers will learn what real estate audits consist of, who are subject to them, and what materials auditors typically request. The details inside this book make it possible and even easy to achieve a clean real estate audit.

This Second Edition has been updated to reflect the new FASB lease and revenue recognition accounting standards. The updated standard has obsoleted many resources related to real estate accounting, but each chapter of Real Estate Accounting Made Easy is thoroughly revised and current. This how-to guide offers a wealth of practical information for putting real estate accounting principles to work.

An accessible guide to the fundamentals of accounting for the real estate industry

Distilling the details of real estate accounting into manageable essentials without omitting important specifics, Real Estate Accounting Made Easy equips you with the tools you need to perform financial and accounting operations related to the real estate industry. You will become conversant in a broad range of real estate accounting topics, even if you have zero previous experience in real estate.

Always practical and never over-technical, this helpful guide:

• Defines important real estate terminology
• Provides a thorough introduction to real estate accounting basics
• Demonstrates accounting for revenues, expenses, capital improvements, and inducements
• Discusses intermediate topics like budgeting, variance analysis, and market research
• Gives detailed, easy-to-follow examples of accounting operations

Author Obioma A. Ebisike offers workable information and clear examples using accessible terminology. Suitable for investors, analysts, accountants, auditors, and others interested in the real estate industry, Real Estate Accounting Made Easy is essential for a clear, concise explanation of real estate accounting and finance.