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Accounting Finance Investor Reporting

Private Equity Real Estate Fund Financial Statements

Fund financial statements
Fund financial statements

Real estate private equity firms use a variety of software applications for bookkeeping at the fund level. Some of the most common include Sage, Quickbooks, and Yardi. At small firms, the CFO may also be the bookkeeper. At large firms, many bookkeepers may report to a senior accountant, who reports to a manager, and so on. The day-to-day bookkeeping is best understood by reviewing a firm’s fund financial statements.

Balance Sheet

Fund financial statements seem simple on the surface. A typical balance sheet, aka statement of financial condition, consists of the following:

  • Cash
    • Called capital not yet committed
    • Money drawn from the line of credit not yet deployed
    • Cash distributed by properties to the fund and not yet distributed to investors (rare that you see a balance here)
  • Restricted Cash
    • Cash reserved for a specific use, such as tenant security deposits
  • Prepaids
    • Fair value of interest rate caps or swaps purchased by the fund
  • Deferred Costs
    • Financing costs for a fund-level line of credit
    • Any other financing costs for loans payable by the fund
  • Investments
    • Fair value of the investments, as described above (specifically, the equity or debt invested in real estate, not the full value of the real estate)
  • Credit Facilities
    • Outstanding debt amount on the line of credit (most real estate funds use a line of credit to reduce the number of capital calls required when managing several investments with varying capital needs)
  • Accrued Expenses
    • Accounting fees, placement agent fees, or other fees and expenses payable by the fund
  • Investment Management and Incentive Fees
    • Acquisition fees, a percentage of the total equity invested at acquisition, if applicable
    • Asset management fees, typically a percentage of committed capital until a certain threshold, and then a percentage of outstanding invested capital thereafter
    • Incentive management fees, income earned by the General Partner based on the waterfall structure
    • Debt placement fees, typically fees paid for debt placement services by the Fund, if applicable
  • Dividends Payable
    • Dividends approved by the Board or governing body of the fund but not yet distributed (you rarely see a balance here)
  • Partners’ Capital
    • Limited Partners (aka investors in the fund) capital outstanding
    • General Partner (aka manager of the fund) capital outstanding

Schedule of Real Estate

A typical schedule of real estate consists of:

  • Real estate investment name
  • Real estate investment location (city, state if in the U.S.)
  • Property type(s) of each investment
  • Cost as of the stated date
  • Fair value as of the stated date
  • Ownership percentage, if applicable

Note that this is for the real estate investment and is not necessarily the value of the property or properties within each investment. For example, if your fund had leverage on an investment or owned less than 100%, then the value and cost shown in this schedule will relate only to the portion of the investment owned by your fund.

Income Statement

A typical statement of operations (aka income statement) consists of:

  • Investment income
    • Dividends distributed to the fund
    • Acquisition and/or disposition fee income
    • Other income earned by the fund
  • Investment expenses
    • Interest expense, if applicable
    • Organization costs
    • Placement agent fees
    • Technology fees
    • Other expenses (dead deal costs, travel, etc.)
  • Investment management and incentive fees
  • Net realized and unrealized gains on investment

Your fund’s income statement will vary based on what your accounting and legal team deem allowable in accordance with your investor agreements.

Statement of Changes in Partners’ Capital

Finally, a statement of changes in partners’ capital may be provided at the fund and LP levels and consists of:

  • Beginning capital amount
  • Increases to capital, such as additional contributions
  • Decreases to capital, such as via distributions
  • Allocation of net income
    • Net realized gain or loss from investments
    • Net change in unrealized gain or loss from investments
    • Carried interest to GP
    • Ending capital amount

Once again, the structure of your statement of changes in partners’ capital will vary based on your fund structure.

After your fund financial statements lay the most important part: the footnotes. Your CFO, CAO, or Controller will ideally have loads of experience preparing footnotes. If not, then I recommend hiring a prominent Big 4 public accounting firm or a large regional firm with a strong reputation to advise you. Once you have a template, you can reuse it in the following years. Your auditors will provide any comments on missing or potentially inaccurate information.

You now know the basics of private equity real estate fund financial statements. Go get ’em!

SHAMELESS PLUG ALERT: If you need more help, send me a note or book a consultation with me. If this blog post helped you, feel free to buy me coffee.

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Accounting KPIs Property Management

The Top 8 Real Estate Reports for Property Manager to Client Reporting

Top 8 PMC To Client Reports

Do you ever hear that voice in your head saying, “Did I send the right information to my client? Was it enough? Or was it too much?” Multifamily and commercial real estate managers have way too much on their plate to be worrying about client reporting. That’s why I’m writing this post. AND it’s why I created a free whitepaper with in-depth instructions. By knowing what to report, you can press the mute button on all those voices in your head. Today, I’ll show you the top 8 real estate reports for property manager to client reporting.

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The Top 8 Reports for Property Manager to Client Reporting

First, review the contract that you signed with your client. Make sure that you include all reports identified in the contract in your reporting package.  I will review the top 8 reports in detail, but if you don’t abide by the contract, then you may find yourself in a heap of trouble.

You should send your reporting package no less than monthly. In each month’s report, you will include up-to-date information based on the most recent month. You may include some year-to-date and period-over-period metrics, which I will describe in the whitepaper. Regardless of the details, you must keep your clients updated on your work at least once a month. And that’s the minimum! If you want to go above and beyond, you may want to provide updates on a weekly or bi-weekly basis.

In every reporting package, you absolutely must include your commentary on the property’s performance. Did you sign an incredible new tenant? Or if managing a multifamily property, did you crush your revenue targets while maintaining high occupancy? Every interaction with a client is an opportunity to sell yourself and your firm. Now is not the time to be bashful! Share how amazing you are and how your incredible efforts paid off for your client.

If you haven’t already, download my free whitepaper on the top 8 real estate reports for property manager to client reporting.

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SHAMELESS PLUG ALERT: If you need more help, send me a note or book a consultation with me. If this blog post and white paper helped you, feel free to buy me coffee.

If you like All About CRE and want to support my work:

😍 Plan a media partnership

🪄Book a one-on-one CRE tech coaching session

☕Buy me a coffee 

📧 Subscribe at jentindle.substack.com  

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Accounting Acquisitions Asset Management Capital Formation CRE Tech Finance Investor Relations Investor Reporting Property Management

Are You The CRE or Tech in CRE Tech?

Are You a CRE Pro or Techie?

Wondering if you lean towards commercial real estate, aka CRE, or tech in the “CRE tech” catchphrase? Take the quiz below to find out!

CRE Pro vs. Techie Quiz for CRE Tech Leaders

With each word presented below, pause for a moment to think about its meaning. Then, select the option that best aligns with your interpretation.

Engineer

🤔

A: A pro guiding real estate site development and securing necessary permits.

B: A coder crafting website or program code for computer use.

C: I thought of both.

Waterfall

🤔🤔

A: A project management style emphasizing a linear progression in a project.

B: A profit-sharing method among partners with uneven distribution.

C: I thought of both.

Database

🤔🤔🤔

A: An organized collection of structured information stored electronically.

B: A folder structure with mostly unstructured data like Word docs and PDFs.

C: I thought of both.

Traffic

🤔🤔🤔🤔

A: Customers entering a store.

B: People visiting a website.

C: I thought of both.

Development

🤔🤔🤔🤔🤔

A: Activities from renovating existing buildings to selling developed land.

B: Process for conceiving, designing, and maintaining software.

C: I thought of both.

Get Your Results!

Tally your score based on the points below.

Engineer – A: 0 points; B: 5 points; C: 10 points

Waterfall – A: 5 points; B: 0 points; C: 10 points

Database – A: 5 points; B: 0 points; C: 10 points (Consider various software databases here!)

Traffic – A: 0 points; B: 5 points; C: 10 points

Development – A: 0 points; B: 5 points; C: 10 points

Your Score:

0-10 points: You’re a true commercial real estate pro! Brush up on tech talk for seamless communication with your techie pals.

15-30 points: You’re a techie extraordinaire! Spend more time with your real estate buddies to soak in their industry insights.

35-50 points: You’re BILINGUAL in CRE and tech! Cheers to your versatile expertise. Share your knowledge with the world – we need you! 🌟

If you like All About CRE and want to support my work:

😍 Plan a media partnership

🪄Book a one-on-one CRE tech coaching session

☕Buy me a coffee 

📧 Subscribe at jentindle.substack.com  

I hope you use your score to better understand how you can learn from your CRE or tech peers. Let me know if you have any questions or edits. I always love hearing from you.

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Accounting Acquisitions Asset Management Capital Formation CRE Tech Finance Investor Relations Investor Reporting Property Management

Who Should Be In Charge of Proptech Strategy?

You decided that you want to focus on proptech (aka CRE tech), but you don’t know who should be in charge of your proptech strategy. As someone who’s run CRE tech for a real estate firm and sold software as a CRE tech vendor, I can help you decide. Here’s my two cents. Hint: it’s not IT.

Ideally, your CRE tech  decision-maker should be in a role that drives revenue for your organization. In a property management firm, this means the Head of Marketing (or Revenue Management). With owners, this means either your Chief Investment Officer or Head of IR/Capital Formation. In a tenant rep organization, this means your Head of Client Solutions.

Otherwise, your proptech strategy may as well have the same priority as deciding what dishwasher to put in your common area kitchen… very few will care. Those who do will care passionately, for sure. But it won’t drive the success of your CRE business.

The more I’ve seen of CRE owners’ cultures, the more I’m convinced that investments (which includes asset management) or IR would be the safer space for a head of CRE tech to flourish. The unfortunate reality is that many CRE owners consider non-deal roles to be “back office”. For CRE tech to influence your firm strategy, your decision-maker must be on the revenue-generating side of the firm.

If you’re large enough, then you should 1000% hire someone specific to this role. My current favorite title for this role belongs to Ilene Goldfine, Chief Digital Strategy Officer at Hines. You will also see this title framed as a Head of Innovation or similar.

Want to learn more about who should be in charge of your proptech strategy?

 Check out my Substack on this very topic here. 

If you like All About CRE and want to support my work:

😍 Plan a media partnership

🪄Book a one-on-one CRE tech coaching session

☕Buy me a coffee 

📧 Subscribe at jentindle.substack.com  

I hope you use your newfound knowledge on how to choose commercial real estate tech to improve your processes. Let me know if you have any questions or edits. I always love hearing from you.

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Accounting Acquisitions Asset Management Capital Formation CRE Tech Finance Investor Relations Investor Reporting Property Management

How to Choose Commercial Real Estate Tech

What VCs think the CRE tech market looks like vs. what CRE firms think the tech market looks like
What VCs think the CRE tech market looks like vs. what CRE firms think the tech market looks like

After seeing so many VCs post versions of these “CRE tech market maps”, I couldn’t help but think to myself, “Are you kidding me? What real estate firms truly have the time and budget for all of these tools?!” Okay, fine, the big guys do. But we’re talking about an industry comprised largely of Davids with a small number of Goliaths. Most real estate firms struggle with tech overload. Here’s how to choose commercial real estate tech among the plethora of options.

For more, read my Substack posts on the psychology of why these decisions are difficult and a detailed version of my CRE tech decision-making framework.

How to choose commercial real estate tech in 6 steps

Below, I give you a 6-step framework for decision-making. I used this framework as a buyer of commercial real estate tech (aka CRE tech) and as a tool when I was selling software to real estate firms. Without further ado, here’s the framework:

1. Create a healthy culture around decision-making.

Ensure your culture AND compensation structure does not penalize individuals for making mistakes in tech choices. You must also review the success of your CRE tech and structure strict rules around your review process.

  • No finger pointing.

  • Maintain a zero-regrets mentality. You made the best decision you could with the information available at the time.

  • If you chose a CRE tech tool that failed, identify what part of your process needs to be tweaked to prevent a similar situation. A bad system will beat a good person every time.

Lastly, and perhaps most importantly, avoid death-by-committee. Give the decision-making reins to a competent resource (or three, if you’re a larger organization).

2. Identify pain points where your firm needs to improve.

To define pain points, create small functional groups of 8 or fewer people to discuss 5-10 areas for improvement. Not all pain points require technology to solve. You’ll be surprised how often a change in procedure will suffice.

As a counterargument to myself, Henry Ford once said, “If I had asked people what they wanted, they would have said faster horses.” He implied that relying on consumer input here is quite risky. So let me caution you. I am not suggesting that you ask your team for input on solutions, only pain points. You must determine what your team will want before they figure it out.

3. Rank pain points. Then, select one pain point to solve at a time.

I can’t prescribe exact actions to weigh one pain point versus another. Our industry is too broad, and each company bespoke. Trust your judgment.

Focus on solving one pain point at a time. Dr. Andrew Huberman, a famous Stanford neurobiologist (at least, he’s famous to us podcast-listeners) warns against the mythological siren of multitasking.

4. Ask for help.

Connect with your peers to find out what tools solve their similar pain point. Ask for details about their experience.

Sure, you run the risk of a competitor-peer being untrue, but most people are good people who are just as lost as you and looking for answers. It’s less risky than relying solely on VCs or advisors, who are incentivized to get you to use their products. Always keep in mind the incentives of whom you speak.

5. Read reviews and case studies.

Try Reddit’s r/CommercialRealEstate or r/RealEstateTechnology and the company’s LinkedIn posts to see if they have comments or likes. DM folks that commented or liked to get their feedback. And if you’re in multifamily, you can try Revyse.

Of course, check out the CRE tech’s company website. They should have free resources and case studies where you can learn about their product or problem they solve in more detail.

6. Make a decision, and sign as short of a contract as you can.

Shorter terms require you to re-evaluate more frequently. Yes, it’s more expensive. Think of it as buying an insurance plan. You can extend it for a longer timeframe after the first period if you want to continue.

But beware of the commitment and consistency principle.

If you’ve really gone through all the steps above and every single review, referral, etc. are exactly the same… then flip a coin. If they’re exactly the same, then it clearly doesn’t matter what you choose. All that matters is that YOU CHOOSE SOMETHING. You must set deadlines to force your hand.

If you subscribe to this framework on how to choose commercial real estate tech, making a decision is better than no decision. The regret of commission will sting, but trust me, the feeling of success is worth it. Start now.

If you like All About CRE and want to support my work:

😍 Plan a media partnership

🪄Book a one-on-one CRE tech coaching session

☕Buy me a coffee 

📧 Subscribe at jentindle.substack.com  

I hope you use your newfound knowledge on how to choose commercial real estate tech to improve your processes. Let me know if you have any questions or edits. I always love hearing from you.

Categories
Accounting Asset Management Finance Investor Reporting

Do You Know The Most Common Commercial Real Estate Valuation Methods?

Firms often choose one of three common real estate valuation methods for fair valuing their properties. Do you know what they are? If not, you should.

The most common real estate fair valuation methods include the income approach, sales comps, or the bid on value (BOV) method. Most opt for the income approach, which gives you a clear estimate of the specific investment’s value based on actual net operating income and recent sales.

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The Income Approach

The income approach involves three crucial steps:

  1. Projecting Future Net Operating Income: Start by creating a discounted cash flow model to predict the net operating income (NOI) for the next 12 months. NOI, not to be confused with net income, is the linchpin of real estate valuations. It encapsulates the property’s cash flow by considering operating revenues and expenses.
  2. Determining Market Cap Rates: You must gauge the specific investment’s market cap rates. Cap rates, or “capitalization rates”, are typically calculated as the sum of forward 12 months’ NOI divided by the property’s purchase price or valuation. Cap rates differ greatly by market, property type, vintage, and more. You must research each property’s cap rate and consult third-party data sources for accurate, recent, and property-relevant cap rates.
  3. Calculating Property Value: Armed with NOI projections and cap rates, you can unravel the property’s true value. Divide the investment’s projected 12 months’ NOI by the market cap rate, and you’ve got the value of the property if it were to sell today.

Sales Comps

If properties sold recently near yours, then you could argue that your property would sell for around the same price. That said, you need to ensure comparability of properties via:

  • vintage,
  • construction,
  • size,
  • composition, and
  • other reasonable forms of comparison.

Typically, firms will gather as many recent comps (comparable sales) as possible. Then, they will divide each purchase or sale price by the property’s square feet, units, beds, etc.

Next, they will average the purchase price per square foot, units, beds, etc. and then multiply it by your property’s square foot, units, beds, etc. This allows you to calculate your property’s relative value.

Finally, this valuation method is tricky not because of the math, but because many states are what’s called “non-disclosure” states. In these states, parties to a real estate sale are not required to disclose price information. That makes accessing recent sale comps challenging.

BOVs

Another common real estate valuation method is BOVs, or broker opinion of value. I rarely see this method used in isolation to value a property. Normally, you request BOVs to support the sales comp method of valuation or your income approach valuation. That’s because a BOV is exactly what it sounds like: a broker’s opinion of your property’s value. Most brokers will provide you with a higher-than-actual BOV to entice you to sell. As such, it’s not considered as reliable as the other two valuation methods.

Great! We’re done now, right?

Not so fast.

Get the Full Details on Real Estate Valuation Methods

Want to learn more about real estate valuation methods? Amazing! You’re not alone.

I wrote this free white paper for you. Take it, expand on it, and let me know your feedback. 

(Put the price as $0 and then select “I want this!” after clicking the button below. Of course, if you want to buy me a $5 coffee, I won’t say no…)

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I hope you use your real estate valuation methods knowledge to make improve your valuations. Let me know if you have any questions or edits. I always love hearing from you.

Categories
Accounting Asset Management Investor Reporting KPIs

How to Prepare Real Estate Investor Reporting

It’s that time of year. You need to prepare your real estate investor reporting. Where to begin?

Investment structures and investor composition drive private equity real estate firm’s reporting. For example, the SEC requires certain filings based on your investment structure. Large, institutional investors require quarterly and annual reporting. This is typical regardless of whether they invest in a fund or syndication.

Recently, that reporting has expanded beyond financial projections and operations. Now, it often includes environmental, social, and governance (ESG) data. Many also include diversity, equity, and inclusion (DE&I) data.

Required investor reporting will likely continue to expand over time.

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Beyond Financial Statements: Real Estate Investor Reporting

Most of you could guess that you need to prepare financial statements for your investors. And loads of you probably know that you also prepare capital account balance statements by investor.

What you may not realize is that most successful real estate firms provide far more than the minimum required reporting.

Investors LOVE transparency. The more information you can provide on their investments – while still making your firm look excellent – the better.

Get the Full Details on Investor Reporting

Want to learn more about real estate investor reporting? Amazing! You’re not alone.

I wrote this free white paper for you. Take it, expand on it, and let me know your feedback. 

(Put the price as $0 and then select “I want this!” after clicking the button below. Of course, if you want to buy me a $5 coffee, I won’t say no…)

Get Your Free White Paper

I hope you use your investor reporting knowledge to make improve relationships with your investors. Let me know if you have any questions or edits. I always love hearing from you.

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