Variances can be shown in the monthly cash flow budget; however, a variance report is a narrative report that describes assumptions, amount, and plans for managing variances. It communicates to the owner that the real estate manager is aware of the variances and will take action a needed.
What is the reason for variance?
Were the forecasting techniques reliable?
Is the action necessary to correct the situation?
What actions can be taken?
The cash flow statement is a year-end report that recaps the actual inflow and outflow of cash and its related sources and uses. Only items that involve a cash transaction appear on cash flow statement.
The year-end income statement encapsulates the financial transactions for the fiscal period.
An income statement (sometimes called a profit and loss statement) gives a summary of the organization’s economic activity over a period of time, typically a year. It lists income, expenses, and net income (loss). The income statement is prepared after all journal entries have been posted to the general ledger.
Physical assets used for business, such as building and equipment, age and consequently lose value over time. Depreciation is the expense of using up an asset.
Interest is included in the income statement for external us. The figure for interest expense represents the amount the property paid in interest on its loans.
Income capitalization is the market valuation of a property based upon a one year projection of income. In other words, it relies on a single year’s stabilized NOI to estimate the value of property.
Put simply, the capitalization rate is the NOI divided by the sales price and value of a property expressed as percentage.
The lower the capitalization rate, the higher the value of the property, and vice versa.
The cash flow statement is usually updated monthly and can be included in the report to the owner. Cash flow budgets often include brief description of variances, and for that reason, they are a brief general recap of financial activity.
The Delinquency report is a report that tracks late payment of rent; it is updated monthly and included in the report to the owner. Items included in a delinquency report are: resident name, total amount awed, length of delinquency (0-30 days, 31-60 days, etc.), and what is being done to collect the late payment.
The Income statement is for internal use; it shows income and expenses for a certain time span. Unlike a budget, it shows actual figures. The year-end income statements is discussed later in this chapter.
A report is a recap of events. The purpose of a report is to portray past events accurately in an accessible format that communicates information readily to persons inside and outside the organization. Financial repost capture information about the income, expenditures, assets, and liabilities of property. Accurate information is the foundation of decision making, and reports to the owner should be comprehensive and accurate. The month (cash budgets) or the year (annual operating budgets). Comparing several budgets highlights trends at a property. Likewise, rent rolls, delinquency reports, and vacancy reports reflect continuing financial activity and are crucial parts of any report. The accumulation of all this information of all this information through reports adds up to a comprehensive picture of a property’s financial health. Normally, the report to the owner includes a narrative portion with a summary and a discussion of the extent to which the owner’s goals and objectives for the period have been achieved. The narrative should appear as the first page of the report or in a cover letter. The report r=to the owner is usually accompanied by a rent roll that provides details of lease arrangements with all residents to date as well as vacancies. Vacancy reports and delinquency reports clarify the information in the rent roll.
The following reports must be updated and distributed to ownership periodically as often as monthly.
The property may be required to add reserves for replacement or capital improvements expenses above the cash flow line.
The owner’s accountant usually makes the determination of the how to handle the capital improvements expenses in regards to BTCF. Some lenders, however, require that an amount be expensed above the NOI for routine replacements (e.g., carpets and appliances). The definition of what is a capital expense may vary according to the owner’s goals and the accounting practice for the property. When large payouts of capital expenses are being planned over a multiyear period, a line here may capture expenses incurred.
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