Accounting: Services Real Estate Firms Should Expect From Accounting Professionals

By Stuart Eisenberg

Commercial real estate firms (such as property developers, owners, investors, managers and lenders) face unique income tax, development, and accounting issues. The best source for expert solutions to these issues are “one-stop” accounting and consulting firms that provide traditional accounting services as well as specialized experience in such areas as securitization, due diligence procedures, cost segregation, loan underwriting, market studies, and ways of accessing capital markets.

At a minimum, a commercial real estate firm should make sure that its accounting and consulting firm is familiar with income tax and financial reporting requirements relating to real estate, including complex income-recognition issues. Ideally, the accounting and consulting firm should have experience with the specific types of real estate and transactions that make up the core of the client’s business. Many real estate professionals may not be familiar with the three types of reports that can be issued by an accounting and consulting firm to comply with financial reporting requirements. The three types are as follows:

• An audit is the highest level of assurance and is usually required for public companies or in connection with financing arrangements.
• The next highest level is a reviewed financial statement, which consists principally of analytical review procedures and inquiries of management. Reviewed financial statements are common for other than closely held partnerships and less complex corporate structures.
• The third level is a compiled financial statement in which the accounting firm does not provide any level of assurance. It is normally used for closely held organizations with less stringent loan covenants relating to financial reporting.

Non-Traditional Services

Real estate companies today expect much more from an accounting and consulting firm than the services listed above. Summarized below are some of the “non-traditional” services that real estate firms look for.

• Investment securitization services, including loan file and underwriter package reviews, site inspections and financial analysis of various loans and properties in a securitization pool.
• Cost segregation studies to identify all construction-related costs that qualify for shorter federal tax lives. The result of reducing tax lives from 39 years (using straight-line depreciation) to 5, 7 or 15 years (using accelerated methods) can have a significant impact on a firm’s federal tax liability.
• Advice with regard to the formation or investment in real estate investment trusts, including UPREIT and DOWNREIT structures.
• Assistance in sale-leaseback transactions in which the owner sells property and simultaneously leases it back from the buyer.
• Evaluation of cross-border transactions.
• Business interruption and disaster recovery.
• Hospitality research.
• Business and real estate valuations.

Due Diligence Procedures

Due diligence services in connection with property acquisition, financing, or valuation has become a particularly important activity by accounting and consulting firms. Property-level due diligence consists of procedures for establishing “stabilized” results used to determine the value of the property in making the investment or lending decision. Such services typically include:

• Analysis of the historical operating results for the property to identify trends and provide explanations for anomalies between periods.
• Review of leases and other agreements with tenants to identify, among other things, the term of the lease, base rent, escalation provisions, contingent rental information (percentage rents), and concessions (e.g., tenant improvement allowances, rental abatements).
• Comparison of rental and vacancy rates relative to the market, and the operating results to published industry averages and comparable properties.
• Visits to the property to study the site, competitive properties and the neighborhood.

The bottom line is that the accounting and consulting professionals need the skills to respond to the needs of their real estate companies clients—whether the skills include engineering staff to maximize tax benefits through cost segregation studies or specialists capable of making a feasibility study to determine the need for a hotel, continuing care retirement facility or other specialized property.

Stuart Eisenberg is a Partner with the Real Estate and Hospitality Services practice in BDO Seidman’s New York office. He can be reached at (212) 885-8431.

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Alvin L. Arnold at (212) 885-8235.