Real Estate Accounting Made Easy E-Book

Obioma A. Ebisike

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 297

Veröffentlichungsjahr: 2019

Beschreibung

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.

Leseprobe

Table of Contents

Cover

About the Author

Preface

1 INTRODUCTION TO REAL ESTATE

TYPES OF REAL ESTATE ASSETS

COMMON INDUSTRY TERMS

2 BASIC REAL ESTATE ACCOUNTING

HISTORY OF DOUBLE-ENTRY BOOKKEEPING

TYPES OF ACCOUNTS

ACCOUNTING METHODS

RECORDING OF BUSINESS TRANSACTIONS IN THE ACCOUNTING SYSTEM

JOURNAL ENTRIES

BASIC ACCOUNTING REPORTS

NOTES

3 FORMS OF REAL ESTATE ORGANIZATIONS

SOLE OWNERSHIP

COMMON AND JOINT OWNERSHIP

PARTNERSHIPS

JOINT VENTURES

CORPORATIONS

LIMITED LIABILITY COMPANIES

REAL ESTATE INVESTMENT TRUSTS

NOTES

4 ACCOUNTING FOR OPERATING PROPERTY REVENUES

CONTRACTS WITH MULTIPLE COMPONENTS

LEASE CLASSIFICATION

LESSOR ACCOUNTING OF OPERATING LEASES

TYPES OF OPERATING LEASES

ADDITIONAL COST RECOVERIES

OPERATING EXPENSES GROSS-UP

CONTINGENT RENTS

RENT STRAIGHT-LINING

MODIFICATION OF AN OPERATING LEASE

SUBLEASE OF OPERATING LEASE

NOTES

5 ACCOUNTING FOR OPERATING PROPERTY EXPENSES

LESSEE MEASUREMENT AND RECORDING OF OPERATING AND FINANCE LEASES

CONTRACTS WITH MULTIPLE COMPONENTS

LEASE LIABILITIES AND RIGHT-OF-USE ASSETS

INITIAL DIRECT COSTS

LESSEE JOURNAL ENTRIES OF OPERATING AND FINANCE LEASES

LESSOR OPERATING PROPERTY EXPENSES

OPERATING COSTS

NOTES

6 OPERATING EXPENSE RECONCILIATION AND RECOVERIES

MOST COMMON RECOVERABLE OPERATING EXPENSES

MOST COMMON NONRECOVERABLE OPERATING EXPENSES

CALCULATING TENANT PRO RATA SHARE OF EXPENSES

7 LEASE INCENTIVES AND TENANT IMPROVEMENTS

LEASE INCENTIVES

TENANT IMPROVEMENTS

TENANT IMPROVEMENT JOURNAL ENTRIES

FURTHER COMPARISON OF LEASE INCENTIVES AND TENANT IMPROVEMENTS

DIFFERENCES IN CASH FLOW STATEMENT PRESENTATION

DEMOLITION OF BUILDING IMPROVEMENT

NOTES

8 BUDGETING FOR OPERATING PROPERTIES

WHAT IS A BUDGET?

COMPONENTS OF A BUDGET

9 VARIANCE ANALYSIS

SAMPLE OPERATING PROPERTY VARIANCE ANALYSIS

SALIENT POINTS ON A VARIANCE ANALYSIS

10 MARKET RESEARCH AND ANALYSIS

MARKET RESEARCH DEFINED

MARKET ANALYSIS DEFINED

MARKET RESEARCH: PRACTICAL PROCESS

NOTE

11 REAL ESTATE VALUATION AND INVESTMENT ANALYSIS

WHAT IS REAL ESTATE VALUATION?

APPROACHES TO REAL ESTATE VALUATION

NOTES

12 FINANCING OF REAL ESTATE

EQUITY

DEBT FINANCING

OTHER FINANCING SOURCES

TYPES OF LOANS

DEBT AGREEMENTS

FINANCING COSTS

RELATIONSHIP BETWEEN A NOTE AND A MORTGAGE

ACCOUNTING FOR FINANCING COSTS

NOTE

13 ACCOUNTING FOR REAL ESTATE INVESTMENTS AND ACQUISITION COSTS

METHODS OF ACCOUNTING FOR REAL ESTATE INVESTMENTS

PURCHASE PRICE ALLOCATION OF ACQUISITION COSTS OF AN OPERATING PROPERTY

NOTE

14 ACCOUNTING FOR PROJECT DEVELOPMENT COSTS ON GAAP BASIS

STAGES OF REAL ESTATE DEVELOPMENT PROJECTS

PRE-DEVELOPMENT STAGE

DEVELOPMENT STAGE

POST-DEVELOPMENT STAGE

NOTES

15 REAL ESTATE DEVELOPMENT REVENUE RECOGNITIONS

REQUIREMENTS FOR REVENUE RECOGNITION

REVENUE RECOGNITION JOURNAL ENTRIES

REVENUE RECOGNITION WHEN PERFORMANCE OBLIGATION IS SATISFIED OVER TIME

NOTES

16 REAL ESTATE BROKERAGE ACCOUNTING

REAL ESTATE BROKERAGE REVENUES

BROKERAGE COMMISSIONS IN REAL ESTATE DEVELOPMENT PROJECTS

REAL ESTATE BROKERAGE COSTS

NOTES

17 AUDITS

AUDIT OVERVIEW

TYPES OF AUDITS

NOTES

Index

End User License Agreement

List of Tables

Chapter 1

Exhibit 1.1 Types of Retail Properties

Chapter 2

Exhibit 2.1 Boston Properties, Inc. Consolidated Statements of Operation

Exhibit 2.2 Boston Properties, Inc. Balance Sheet (in thousands, except for sh...

Exhibit 2.3 Boston Properties, Inc. Statement of Stockholders' Equity (in thou...

Exhibit 2.4 Boston Properties, Inc. Consolidated Statements of Cash Flows

Chapter 4

Exhibit 4.1 Sample Rent Straight-lining Schedule

Chapter 5

Exhibit 5.1 Operating Lease

Exhibit 5.2 Finance Lease

Chapter 9

Exhibit 9.1 Variance Analysis, Six Months Ended June 30, 2009

Chapter 10

Exhibit 10.1 Potential Source Data on Population, Consumer Spending, and Emplo...

Chapter 11

Exhibit 11.1 Projected Net Operating Income

Exhibit 11.2 Discounted Net Operating Income

Exhibit 11.3 Simplified Sales Comparison Analysis

Chapter 13

Exhibit 13.1 Allocation of Purchase Price Difference

Chapter 14

Exhibit 14.1 Construction Cost Summary

Guide

Cover

Table of Contents

Begin Reading

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REAL ESTATE ACCOUNTING MADE EASY

Second Edition

Obioma Anthony Ebisike PhD, CPA

© 2020 John Wiley and Sons, Inc. All rights reserved.

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Library of Congress Cataloging-in-Publication Data is Available:ISBN 978-1-119-62681-7 (hardback)ISBN 978-1-119-62676-3 (ePDF)ISBN 978-1-119-62678-7 (ePub)

Cover Design: WileyCover Image: © dencg/Shutterstock, © PPstudio/Shutterstock

This book is dedicated to my parents, Richard and Josephine Ebisike, for giving me a wonderful life. I continue to admire the life they lived. They provided me and my siblings with a home and an atmosphere that inspires love, peace, and confidence. In so many ways they showed me the joy and power of a peaceful life. I couldn't ask for a better home.

I am very grateful to my brother, Sonny, for giving me one of the first real opportunities to pursue my dreams. I am also very indebted to all my other brothers and sisters for their everlasting love and care. They helped in many ways by providing an arena in which I continue to strive for success and pursue my dreams. From birth they gave me love and care beyond any imagination. I am a product of their generosity. My life is full and I feel rich just because of them.

I am also very grateful to all the members of Ebisike family. You are all a source of inspiration.

To all my teachers, I want to say thank you.

About the Author

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 & 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 began his professional career at the New York office of Deloitte & Touche LLP, the international accounting and advisory services firm, where he spent six years and rose to the position of audit and advisory services manager before leaving the public accounting sector. While at Deloitte & Touche he managed client audit and advisory services engagements in numerous industries, such as real estate, consumer businesses, private equity, fund management, technology, media, telecom, public relations, and advertising.

Since leaving the public accounting industry, he has held senior management positions at industry leading firms such as Douglas Elliman Real Estate, ICON Investments, and Hines Interests LP. Dr. Ebisike is also a faculty member at the NYU Real Estate Institute and the author of another book, The Fallouts: Banks and Financial Crises. He lives in New York City.

Preface

My goal in writing this book is twofold: to share with you my knowledge of the theories and practice of real estate from an accounting and financial perspective, and to provide a resource for easier understanding of the real estate industry. This book is a must-read for professionals and scholars interested in the real estate industry, especially investors, analysts, accountants, auditors, and students.

To make the subject easy to understand, the book starts at an introductory level. Subsequent chapters build on the first few chapters.

The first two chapters introduce real estate terms and products and discuss basic real estate accounting. These chapters are fundamental to understanding the industry and gaining the most out of this book. They cover common terms used in the real estate industry as well as basic financial information common to the industry. Chapter 2 also covers basic accounting aspects of real estate transactions.

Readers are introduced to the different forms of entities in which real estate assets are held in Chapter 3. The discussion goes from the simplest form of real estate ownership – sole ownership – to partnerships, joint ventures, and real estate investment trusts (REITs). The basic characteristics, as well as advantages and disadvantages of these forms of entities, are discussed in detail.

Later chapters discuss the various aspects of real estate. Chapters 4 to 7 focus on accounting for revenues, expenses, capital improvements and inducements, among other types of transactions. Chapters 8 to 12 contain in-depth discussions on budgeting, variance analysis, market research and analysis, valuation, and financing. Other types of transactions, such as accounting for real estate investments, development costs, real estate brokerage, and revenue recognition, are comprehensively covered in Chapters 13 to 16. Chapter 17 discusses the various types of audits to which real estate entities are subjected. Audit processes and procedures are explained to help auditors, accountants, and management understand their role and importance. Common items normally requested by the auditors are also described.

I am confident that this book will further your understanding of the real estate industry. My hope in writing this book is that I am able to contribute to your understanding of this industry.

Obioma Anthony Ebisike,

New York, New York

1INTRODUCTION TO REAL ESTATE

Real estate is generally defined as land and all things that are permanently attached to it. These attachments include improvements made to add to the value of the land, such as irrigation systems, fence, roads, or buildings. When buyers purchase real estate, in addition to acquiring the physical land and its improvements, they acquire other specific rights related to that real estate. These rights include the right to control, exploit, develop, occupy, improve, pledge, lease, sell, or assign the real estate. These rights apply not only to the physical land and improvements but also to the ownership of all that exists above and below ground. These ownership rights can normally be separately leased or sold to interested parties; thus landowners can separately sell the space above a certain height on a particular piece of land. This space is usually called an air right. However, it is important to note that the use and transfer of air rights can be restricted or regulated by state and local laws.

TYPES OF REAL ESTATE ASSETS

Generally, a piece of land can be improved into different types of real estate assets. These improvements can be classified into seven different types of real estate:

Improved non-built land

Residential properties

Commercial office properties

Industrial properties

Retail properties

Hotels

Mixed use properties

Improved Non-built Land

In economics and business, land is described as one of the four factors of production (the other three include labor, capital, and entrepreneurship). The value of land is derived from the demand for land for the production of goods, and also from the demand for goods and services created by improvements made to land. For example, the demand for rice requires the cultivation of farmland to grow the rice. Likewise, the demand for cars requires the construction of factories to produce the cars: land is needed to build these factories. Therefore, even an empty lot is an asset with measurable, and in many cases, significant value. Thus, a vacant lot can be improved for farming through the installation of proper irrigation and access roads, or made suitable for the production of goods and services with the construction of infrastructure.

Residential Properties

Shelter is a basic necessity of life. In order to obtain it, residential properties must be constructed. The predominant type of residential properties in a particular area depends on factors such as the availability of developable land, population and population growth, zoning laws, local government policies, and access to transportation, among others.

There are four primary types of residential property:

Single-family and small multifamily properties

Garden apartment buildings

Mid-rise apartment buildings

High-rise apartment buildings

Single-Family and Small Multifamily Properties Single-family residential properties are mostly found in suburban areas and are usually occupied by one family. Such houses normally have a living room, bedrooms, kitchen, bathroom(s), and maybe a family room. They tend to be either occupied by the property's owner or rented out to a tenant. This type of residential property is not usually found in a central business district (CBD) because it requires more land space per family living unit than other types of residential properties. They are thus usually more affordable in a suburban area.

A small multifamily residential property is similar to a single-family residential property but with more than one unit. Because of the multiple-unit structure, each unit is rented out to different individuals or families. These small multifamily properties can be between two and four separate units. In some cases the owner occupies one of the units and rents the other units to tenants. This type of residential property is also predominant in suburban areas and sometimes is also found in urban areas. In some cases it can be found near CBDs.

Garden Apartment Buildings Garden apartment buildings usually are located in suburban areas and contain individual attached apartment units. They are usually built horizontally and are three to four stories tall. In suburban areas, retirement homes and some condominiums and cooperative houses are built in this style. A typical garden apartment complex can have between 40 and 400 units. This type of residential property is more common in the suburbs because it requires significant land space due to the horizontal nature of the structures.

Mid-Rise Apartment Buildings Mid-rise apartment buildings are more commonly found in urban areas. They are usually higher than five stories, but can rise up to ten stories. In cities, mid-rise apartment buildings can be structured as condominiums and cooperative properties. Unlike garden apartment complexes, but similar to high-rise apartment buildings, mid-rise apartment buildings require relatively small land space. But the cost of land, even relatively small parcels, is often very expensive.

High-Rise Apartment Buildings High-rise apartment buildings are usually towers built in urban areas. High-rise apartment buildings make effective use of the high cost of land in cities. High-rise buildings are usually taller than 11 stories. In major cities, such as London, New York, Tokyo, and Toronto, it is not uncommon to find 50-story high-rises. The construction costs of these towers are enormous. High-rises contain significant numbers of apartment units, certainly more than mid-rise apartment buildings.

Commercial Office Properties

Commercial office properties are properties constructed for commercial office activities. These properties can be found in both urban and suburban environments and are occupied by businesses for conducting business activities; however, they are predominantly found in CBDs. Office properties are usually classed either as A, B, or C. These classifications have no specific rules or criteria, and classifications in different cities vary; thus, what is classed as a Class A building in Dallas might have a different classification in Washington, D.C. However, some of the factors that affect a building's classification include amenities, type and condition of the elevator, lobby finishing, electrical and mechanical engineering efficiencies, adoption of modern energy concepts, design of the building, age, proximity to transportation, and tenant mix.

Generally, a Class A building is better, in terms of the factors listed above, than a Class B building in the same market. Class A buildings tend to be close to major transportation hubs; are new, or relatively new, and have modern designs; have modern electrical and mechanical engineering systems; have modern heating, ventilation, and air-conditioning (HVAC) systems; and usually have major companies as tenants, among other attributes. Class B buildings tend to have fewer amenities than Class A buildings. They may have older electrical and mechanical systems and may be located farther away from main transportation hubs. Class B buildings also may have a mixture of major companies and lesser-known companies as tenants. Class C properties are much older buildings that have not undergone any major renovations for a long time. They also have older electrical and mechanical systems that lack current technological efficiencies. Most often Class C buildings are occupied by numerous, less-well-known companies with relatively small spaces rented to many tenants.

Industrial Properties

Industrial properties include manufacturing plants and warehouse facilities. These properties are usually built horizontally and are very large in size. Sometimes they are custom built to meet the specific needs of tenants due to the nature of the manufacturing process or the type of equipment used.

Industrial properties tend to have simple structural designs with open space and high ceilings. Some might have unique floor, wall, HVAC, or roofing specifications. The actual structure depends on the needs of the tenants. It is not unusual to find a manufacturing facility of up to 1 million square feet of horizontal space or a warehouse facility of the same size.

Industrial properties are usually located away from residential areas and urban cities. Due to the amount of land required to construct these structures, and also due to zoning restrictions, they are mostly located in areas in which land costs are relatively cheap. In some cases, the waste from these facilities can be unfit for normal living environments. In some areas, only certain locations far away from residential areas are zoned for industrial activities.

Retail Properties

Retail properties in general are built near residential neighborhoods and commercial districts. There are different types of retail properties; the most common types are:

Convenience centers

Neighborhood shopping centers

Community shopping centers

Regional shopping centers/malls

Super-regional shopping centers/malls

Specialty centers

Lifestyle centers

Power centers

Off-price outlets and discount centers/malls

Strip commercial

Highway commercial

The main differences among these types of retail properties are the size of the buildings and the nature and type of tenants. On one extreme are the convenience centers, which usually span fewer than 30,000 square feet; on the other extreme are the regional and super-regional malls, which can contain over 1 million square feet of shopping space. Exhibit 1.1 summarizes the attributes of each of these types of retail properties.

Hotels

There are numerous types of hotel properties, and they are classified based on the level of service, amenities, and size of the property. The four most common classifications are:

Full-service hotels

Boutique hotels

Extended-stay hotels

Motels

Full-Service Hotels Full-service hotels provide guests with a variety of services, such as room service, restaurants on site, valet parking, spas, swimming pools, gymnastics centers, meeting rooms, and convention facilities. Some full-service hotels also have retail shopping and gift stores. Some examples of full-service hotels include the Mandarin Oriental, Waldorf-Astoria, Marriott, and Hilton Hotels, among others. These hotels are usually large in size; some are 100,000 square feet or more. Many full-service hotels are well known due to their advertising budgets, services they provide, and amenities. In some cases these hotels are hotel franchises.

Boutique Hotels Boutique hotels provide limited services as compared to full-service hotels. They are mostly small in size and do not offer services such as convention facilities, restaurants, room service, or other amenities found at full-service hotels. Boutique hotels usually are less well known and have smaller advertising budgets than full-service hotels.

Exhibit 1.1 Types of Retail Properties

Source: Fanning, S. (2005). Market Analysis for Real Estate: Concepts and Application in Valuation and Highest and Best Use. Chicago: Appraisal Institute, p. 192.

Type

Tenantry

Size

Trade Area

Convenience center

Stores that sell convenience goods (e.g., groceries, pharmaceutical); not anchored by a supermarket

Less than 30,000 sq. ft.

Less than 5-minute driving time

Neighborhood shopping center

Stores that sell convenience goods and stores that provide personal services (e.g., dry cleaning, shoe repair); a supermarket is often the principal tenant

30,000 to 150,000 sq. ft. of gross leasable area; 4 to 10 acres

Less than 5-minute driving time; 1 to 1 1/2-mile range; 5,000 to 40,000 potential customers

Community shopping center

Stores that sell convenience goods, personal services, and shopper goods (e.g., apparel, appliances); a junior department store or off-price/discount store is often the principal tenant; other tenants include variety or super-drugstores and home improvement centers

100,000 to 300,000 sq. ft. of gross leasable area; 10 to 30 acres (includes mini-malls)

5- to 20-minute driving time; 3-to 6-mile range; 40,000 to 150,000 potential customers

Regional shopping center

Stores that sell general merchandise, shopper goods, and convenience goods; one or more department stores are the principal tenants

300,000 to 1,000,000 sq. ft. of gross leasable area; 30 acres; contains one or more department stores of at least 100,000 sq. ft.

20- to 40-minute driving time; 5- to 10- mile range; 150,000 to 400,000 potential customers

Super-regional shopping center

Stores that sell general merchandise, apparel, furniture, home furnishings, and services as well as recreational facilities

Over 800,000 sq. ft. of gross leasable area; contains at least three major department stores of at least 100,000 sq. ft each

In excess of 30- minute driving time; typically 10- to 35-mile range; over 500,000 potential customers

Specialty, or theme center

Boutiques and stores that sell designer items, craft wares, and gourmet foods; a high-profile specialty shop is often the principal tenant; festival malls and fashion centers are types of theme centers

Same range as a neighborhood or community shopping center

Similar to that of a regional shopping center

Lifestyle centers

Stores that sell upscale home furnishing, women's fashion, department stores, and restaurants

300,000 to 500,000

Similar to regional shopping center

Power center

A minimum of three, but usually five or more, anchor tenants that are dominant in their categories

Typically open-air centers of more than 250,000 sq. ft.; almost all space designed for large tenants

A minimum of 15 miles – typically a 20- minute range and a population of 400,000 to 500,000

Off-price outlet and discount center

Name-brand outlet stores and/or wholesale grocery and hardware stores

60,000 to 400,000 sq. ft.

Similar to super-regional center

Strip commercial (a continuous row or strip along a main thoroughfare)

Convenience stores, fast-food restaurants, car dealerships, and service stations

Varies according to trade area

Neighborhood or community

Highway commercial

Motels, restaurants, truck stops, service stations; may stand as a single establishment within a cluster of other highway-related service facilities

Varies

Passing motorists in need of highway-related services

Extended-Stay Hotels Extended-stay hotels aim to be a home away from home. Each unit is designed with a larger room to feel homey, and they usually contain small kitchens complete with utensils. Customers often choose this type of hotel when they plan to stay for weeks or longer. Some examples include Hampton Inn & Suites, Embassy Suites, and Comfort Suites.

Motels Motels are usually small lodging properties whose doors face a parking lot and/or common area with small rooms, with free parking targeting business travelers and tourists looking to spend a few nights. Motels offer very limited services; their rates are usually cheaper than all other types of hotel accommodations. Most motels are located close to major highways and attraction centers. Motels usually do not provide services such as convention centers, spas, room service, or restaurants.

Mixed Use Properties

Mixed use properties are innovative concepts in real estate development. They contain a combination of two or more of the different types of properties mentioned earlier. Such properties can be hedges during down cycles in a particular real estate market. A mixed use property may have a residential component, a retail component, and a hotel component all in one. Some mixed use properties contain an office component, a retail component, and a hotel component. A mixed use property could be made up of any combination of the different types of real estate that are appropriate for that particular market. Mixed use has been very popular recently, especially in urban areas such as London, New York, Chicago, Washington, D.C., and Tokyo.

COMMON INDUSTRY TERMS

As we move from this introductory chapter of the book, we will encounter numerous new terms that are mostly familiar to professionals in real estate. To facilitate easier understanding for folks new to the industry, it is prudent to offer definitions of some common terms used by professionals in the real estate industry. Obviously this list is not all inclusive, but it is a great start to become familiar with the industry.

Accounting

 The process of identifying, measuring, recording, classifying, summarizing, and communicating financial and economic transactions and events to enable users to make informed decisions.

Accounts Payable

 A type of liability arising from the purchase of goods and services from suppliers or vendors on credit.

Accounts Receivable

 A type of asset arising from the sale of goods and services to customers on credit.

Amortization

 An accounting term used to describe the periodic writing off of an asset over a certain timeframe or the periodic repayment of a loan over a specified timeframe. Example: A landlord incurred $60,000 of attorney fees for drafting a tenant lease with a lease term of 5 years. Accounting principles require that the amount should be capitalized and amortized into expense over the lease term; thus, the monthly amortization expense would be ($60,000/60 months) $1,000.

Appraisal

 An opinion about the market value of a property at a specific date. Appraisals are usually determined by licensed professionals.

Assets

 They can be thought of as properties and resources owned by an entity. Assets can be tangible such as land, buildings, furniture, and equipment or intangible such as acquired copyrights, trademarks, and patents. Assets are further classified as current or noncurrent depending on whether they can be converted into cash or used up within one year or one operating cycle, whichever is longer.

Balance Sheet

 A financial statement that shows an entity's financial position at a point in time, such as at the end of a month, quarter, or year. A balance sheet has three main parts: assets, liabilities, and owners' equity. The components of these three main parts are listed on the balance sheet based on their relative liquidity. For example, cash balances are listed before accounts receivable, and accounts receivable are listed before inventories.

Bankruptcy

 A term used to describe a party's inability to pay its liabilities as they become due. A bankruptcy is granted through a court proceeding and is filed under various bankruptcy codes, such as

Chapters 7

,

11

, and

13

. Each of these chapters has very different implications.

Budget

 A formal plan set by management for forecasted business activities in future periods against which actual business activities will be evaluated. It enables the actual operations of an entity to be compared to management objectives.

Capitalization Rate (Cap Rate)

 The rate at which future cash flows are converted to a present value amount. This amount is usually expressed as a percent. This rate is sometimes used in the valuation of real estate. A cap rate is commonly calculated using the formula:

Central Business District (CBD)

 The central commercial and business center of a city. CBDs are usually where the major firms are located and are densely populated. CBDs tend to be more accessible with better transportation systems than other parts of a city.

Condominium (Condo)

 A collection of individual home units in which the units are owned individually but there is joint ownership of common areas and facilities. A residential condominium can be viewed as an apartment that the resident owns instead of rents. Usually there is no structural difference between a condominium and an apartment. Thus, by looking at a building you can't differentiate whether it is a condominium or apartment. The key difference between them is mostly the legal structure that defines a condominium as a form of ownership. Note also there are nonresidential condominiums as well, such as hotels, industrials, commercial, and retail condominiums.

Contract

 An agreement between two or more parties that creates enforceable rights and obligations.

Controller

 An entity's chief accounting officer. The controller of an organization supervises the accounting, internal control, and financial reporting activities of an organization.

Cooperative Property (Co-op)

 A property that is owned by a legal entity; each shareholder is granted the right to occupy one unit of the real estate. Shareholders pay rent to the corporation. They do not own the real estate but own shares of the real estate ownership entity.

CPA Certified Public Accountant

 A person holding this designation has passed a qualifying examination and met all the educational and work experience requirements of the profession to practice as a public accountant.

Creditor

 An entity that is owed money.

Debt Coverage Ratio (DCR)

 The ratio of net operating income (NOI) to the annual mortgage payment. This ratio is normally used in evaluating an entity's ability to fulfill its debt obligation.

Debtor

 An entity that owes money to others.

Debt Service

 The periodic repayment of a loan by the borrower to the lender. Periodic debt service may include only interest or could be interest and principal, depending on the loan agreement.

Deed

 A written instrument that evidences the transfer of title from one party to another. The party transferring the title is called a grantor; the party receiving title is called the grantee.

Default

 A party's failure to fulfill its obligation under any agreement. Examples include nonpayment or late payment of rent by a tenant, landlord's failure to provide agreed-upon services to the tenant, and debtor's failure to make agreed-on debt service payments.

Dividend

 A return received by a shareholder on an investment. Dividends can be paid in the form of cash, shares, or properties. Dividends paid in the form of cash are referred to as cash dividends, dividends paid in the form of shares are referred to as share dividends, and those paid in the form of property are referred to as property dividends.

Economic Life

 The period over which an asset is expected to be economically usable by the users.

Effective Gross Income (EGI)

 The expected rental income to be collected after adjusting for vacancies and reserves for uncollected rents.

Eminent Domain

 The right of the government to take private property for public use upon payment of fair compensation to the owner. This right is regarded as the inherent right of the government. With this right the government can take over people's homes for purposes that qualify as public use.

Equity

 Represents ownership interest in a real estate asset or securities. In real estate ownership financed with debt, the owner's equity is the difference between the real estate value and the loan balance.

Fair Value

 The price at which an asset would be exchanged by able and willing market participants at a place and point in time.

Financing Costs

 Costs incurred by a borrower in obtaining a loan. Examples of loan costs are application fees, origination fees, loan points, and filing fees.

Foreclosure

 The legal process in which the mortgagee (lender) exercises its right under the loan agreement to force the sale of a mortgaged property upon a default by the mortgagor (borrower). A foreclosure proceeding is conducted through the legal system.

Fund from Operation (FFO)

 A commonly used term by real estate investment trusts (REITs) to measure cash flow from the entity. It is also used as a measure of operating effectiveness of a REIT and regarded in the real estate industry as a better measure of performance than earnings. It is calculated as: net income plus depreciation and amortization minus gain from sales of real estate.

Future Value

 The value in the future for funds deposited today. Example: The value one year from today of $905 deposited at a bank earning an interest rate of 10 percent is $1,000.

Gentrification

 The remodeling of old homes to modern concepts and the conversion of properties from one use to another in a particular neighborhood. Examples include the conversion of rental apartments to condominiums, conversion of hotels to condominiums or to cooperative properties, or vice versa.

Gross Building Area (GBA)

 The total area of all floors measured from the exterior of the building and including the superstructure and the substructure basement.

Gross Rentable Area (GRA)