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!
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