BOMI Chapter 1-14 Key Concept Study Guide: Budgeting & Accounting Cumulative
6-6c How can a CPI increase be calculated for months prior to a lease anniversary date? (6-19)
1. Calculate the % change between the base index and prior year's index 2. Multiply the allowable increase % by the % change from step one. 3. Multiply the resulting % change by the base rent to arrive at the increase amount.
10-2a How can compound interest be calculated (3 ways)? (10-5)
1. Compound Interest table 2. Financial calculator 3. Formula below
6-1b. List the six steps of developing an income budget (6-4) TEST
1. Gathering Information (All data per current tenancy—abatement, TI etc.) 2. Budget Base Rent (Get Income Basis-all projected base rent for budget yr.) 3. Refine the Escalatable (Recoverable) Cost Pool (Need assessment of R&M for additional rent?) 4. Budget Additional Rent 5. Budget Other Income (Ex. OTHVAC) 6. Review Reasonableness (Are your income figures reasonable?)
9-6c. List the three steps for budgeting payroll (9-14)
1. Identify staffing requirement for the property 2. Reacquaint yourself with employees' tenure and review 3. Estimate for temporary help that may be required.
8-6. Explain the tracking procedures commonly used when dealing with purchase orders. (8-12-13) [Selecting vendors: Requesting Goods & Services]
1. POs require upper management approval. 2. Once approved and issued to the vendor. 3. Physically tracked until the order completed and paid. 4. Invoice paid must match PO total Copies of the PO Go to the Following: · Vendor · Building (Receiving Copy) · Accounting · Bldg. Manager(Numerically filed)
6-3. Briefly explain the four stages in budgeting base rent. (6-10) [Step Two: Budget Base Rent]
1. Schedule Monthly Base Rent for Existing Tenants 2. Increase Base Rent for Future Stepped Rent Increase 3. Identify Success Ratio in Renewals for Exp. Leases 4. Quantify Leasing Efforts Needed Market Vacancies
11-2. What might cause differences in cash balance as recorded by the bank and recorded on the property's books? (11-4)
1. Staff Does Not Record Receipt—bank balance will be HIGHER than the property's 2. Failure to Account Bank Service Charges---bank balance will be LOWER than the properties. 3. Bank Errors
6-4. What is required to schedule tenant base rent? (6-10)
1. Start with complete list of tenants 2. Obtain base rent PSF 3. Spread rent over months indicated by lease 4. Include scheduled escalations/other lease events
6-5. Which factors influence success ratio projections for lease renewals? (6-13)
Combine market conditions w/ the owner's objectives and an assessment of past performance when finalizing lease deals to arrive at an estimate of future success. This estimated success rate is presented as a %. Good Market=90-95% Bad Market=40-50%
5-5a. What is percentage rent? (5-9)
Commonly used with retail tenant and is calculated when tenant's sales climb above an agreed upon level—the owner receives % of the sales.
10-4d Define Present Value (10-12) TEST/Memorize
Comparison of the anticipated cash flow from an investment to the initial investment. At its most basic level: If that cash flow is greater than the initial investment, the expected rate of return is exceed, and the investment should be undertaken
10-1e. Define compounding (10-5)
Compounding=Future Value Intrest on Principal Amnt + Intrest Earned on Intrest Compounding is interest earned on interest VS. Simple is just interest earned each year, The higher the interest the greater the risk which is a disadvantage of compounding.
7-2a. What is the formula for determining a productivity rate?
Cost ÷ Hours of Work Performed = Productivity Rate
14-8. What considerations do both creditors and owners make when reviewing equity percentages for a company? How do you calculate it? (14-16)
Creditors like to see a high proportion of owner's equity b/c it acts as a cushion in absorbing losses. The greater the equity of the owners in relation to the liabilities, the greater the losses that can be absorbed. · Owner's Equity as % of Liabilities [Debt] 3:1 or higher 1. Total Liabilities + Total Owner's Equity= Total L&E 2. Creditor Equity Ratio Liability/Total I&E 3. Owner Equity Ratio Owner/Total I&E
5-9a What is the cut-off date?
Date marking the end of monthly financial activity. It's not the last day in the month b/c it needs to provide enough time for categorizing, verifying, and transferring date from the cash receipts journal to the GL.
14-7a. What is debt service and debt service ratio? (14-15)
Debt service: Cash required for the repayment of interest and principal on a debt for a period. Debt service ratio: The number of times debt service can be paid from income.
1-12c. What are accounts payable? (1-20)
Debts owed to other businesses. On the balance sheet, they are recorded as liabilities.
1-12d. Describe a cashflow statement (1-21)
Describes the changes in cash from one period to the next.
1-13a. What are accounting internal controls (1-21)?
Efforts made to: · safeguard assets, · ensure accurate and reliable accounting data, · promote efficiencies · adhere to prescribed management policies.
9-4b. What should be used to estimate utilities if an operating history is not available? (9-5)
Engineering specifications: · Specific lighting specs of the bldg. adjusted to current occupancy · HVAC Capacity adjusted to current occupancy
11-4. How is the payment register used at commercial properties? (11-7)
For Tracking Cash Disbursements: · Tracking payments made · Organized primarily by check # Items w/ no # are listed below
11-3. How is the receivable summary report applied in the review of a property's records? (11-5)
For Tracking Cash Receipts: · Rent payments received · Other Income Received Reimbursements, Deposits, Other Collections
5-4. What conditions are commonly associated with rent abatements? (5-8)
Free rent used as an incentive to attract prospective tenants · Periods are often in addition to the terms of a lease Ex. If tenant has a 36-month lease and 3 months of abatement, they may occupy the space for 39 months · May apply to base rent only and not additional rent Ex. May not be inclusive of operating expense, electricity, CAM
4-5a Define Escalatable Cost Pool (4-10)
All expenses beyond base rent that may increase over time.
4-2a What is an operating expense escalation? (4-3)
Are expenses identified from the total operating costs that can increase and can be back billed to the tenant. Ex. Common Area maintenance fees (CAM), RE Taxes, Operating Expenses
12-7a. How do you list early payments, security deposits, and other credits or cash that must ultimately be repaid or not yet earned? (12-14)
As a liability on the balance sheet.
12-1c What is the balance sheet equation?
Assets = [Liabilities] + [Owner's Equity]
14-5b. What are quick assets? (14-12)
Assets that can quickly be turned into cash: · Cash · Note receivables · Account receivables · Marketable securities
14-8c What is an audit? (14-19)
A Formal review of an organization's financial records.
11-1k. Journal TEST (11-2)
A book where all transactions are entered in chronological order.
13-1c. What is a budget variance? (13-3)
A budget variance is when actual income or expenses vary from the budgeted amount.
1-1b. What does a budget reflect (1-2)?
A business' priorities and the resources needed to accomplish those priorities.
2-4a. What is BOMA International's Functional Accounting Guide? (2-8)
A chart of accounts specifically tailored to the commercial real estate industry INCOME is categorized by type of occupancy and by special activities (retail, office etc.). EXPENSE is broken down by function. (R&M, Landscaping etc.)
3-6(b5) What is a letter of credit? (3-14)
A check from the tenant's bank, with expiration dates that you (the PM) hold rather than cash until it is determined that a claim will be filed on the tenant's security or the termination of the lease w/ no outstanding charges.
1-8b. What is a trial balance? (1-18)
A component of the GL—which is a list showing the title and balance of each account on the GL as of a specific date. It can be used to check equality of debit and credit balances.
7-6a. What is a holding file? (7-12)
A computer file for all invoices on hold to confirm: · Vendor number, name, address · Account code, name · Proper Description, amount
14-5. When looking at the current ratio for a company, which adjustments might need to be made? (14-11)
A current ration of 2:1 is considered a good measure of a company's debt paying ability. This ratio may be adjusted by one of the following factors: · The nature of the company's business · The composition of its current assets · The turnover of certain of its current assets
11-4b. What is a check register?
A detailed summary of ALL CASH RECEIPTS AND DISBURSMENTS. Organized by check # w/ items not assigned check numbers (like bank service fees & authorized payments) listed below.
1-14b. What is a management agreement? (1-22)
A document that outlines the scope of the work required to · manage the property · the compensation · the reporting requirement
1-1d. What are transactions (1-3)?
A financial event that is recognized in a financial statement or report. They must be sorted into orderly, systematic, and logical classifications to properly convey financial information.
10-7. What are typical components for inclusion in a capital plan? (10-17)
A five-year capital plan factors in: · Aesthetic Improvements · Energy Efficiency Investments · Major Equipment Replacements
3-6g. What is a lease abstract? (3-22)
A form that reminds the reader of important clauses to review and flows well with the lease document.
11-5a. What is a general ledger? (11-11) TEST
A general ledger contains all active accounts from the chart of accounts in account number order. These accounts are ultimately used to generate financial statements.
3-6d. What is an option to renew? (3-19)
A lease clause that gives the tenant the choice to extend his or her current lease for a specified period.
5-8. What common means are used for notifying tenants of billings? (5-16)
A lease is a contract that legally binds a tenant to pay rent on a specified day. Managers may send monthly reminders of lease obligations, but these are not invoices nor are they required to obligate the tenants' payment.
2-2a. What is a purchase order? (2-5)
A legally binding document requesting specific goods or services and conveying right to both purchaser and vendor under the Uniform Commercial Code (law governing commercial transactions recognized in all states but Louisiana.)
2-3b. What is a contract? (2-7)
A legally enforceable document between two parties.
12-7b What is a mortgage? (12-15)
A lien securing a note payable using real assets as collateral.
7-7a. How are invoices posted? (7-14)
At the end of an accounting period invoices are · transferred from the paid invoice file and · posted to the correctly assigned expense ledger
13-2b. How is the Average Square Feet per Office Tenant calculated for the EER?
Avg. Sq. Ft Per Office Tenant = Occupied Office Space Number of Tenants
4-8a What are base index and an anniversary index? (4-20)
Base Index: The value of a dollar of rent adjusted for inflation using the CPI during the month of the lease commencement. Anniversary Index: The value of a dollar of rent adjusted for inflation using the CPI most recently published on each annual lease anniversary date.
4-1. What are two categories of rent? (4-3)
Base Rent: Provides return on invested capital and includes scheduled rent increases. Recurring monthly charge. Additional Rent: Allows owner to recoup Opex (CAM, Operating Expenses, Pass throughs)
3-2a What are base rent, additional rent, and sundry billings? (3-3)
Base Rent: Recurring monthly charge. Additional Rent: Escalations, CAM, Operating Expenses Sundry Billing: Miscellaneous Tenant Charges (submeter electric, keys, etc.)
4-4c. What's the difference btwn a base year and an expense stop? (4-9)
Base year is the operating expense during the first year of the lease. An expense stop (base amount) is a set amount.
6-8. How should variances be communicated to the owner? (6-21-22)[Step 6: Review for Reasonableness]
Budgets simply estimates of future performance. Fine-tuned within a reasonable tolerance of error. · Explained monthly · 5% difference accepted b/f explanation needed · Clearly define/verify revenue assumptions · Consult w/ owners on expectations
4-7c What is a cap or a ceiling? (4-18)
A limit to operating expense pass-throughs usually expressed as a %. Items usually NOT included in a CAP: Utilities/RE taxes/ Insurance
7-7b. What is Petty Cash? (7-14)
A limited amount of currency and coin on hand to pay for COD (Cash on Delivery) purchases. It should not exceed a few hundred dollars.
2-4. What is a chart of accounts? (pages 2-8)
A list of line items or categories which classify accounts.
11-1g. Define Cash Journal TEST (11-2)
A listing of all expenditures and receipts for each business day and the resulting effect on the bank balance.
5-7. What procedures are associated with administration of the cash receipts journal? (5-13) TEST
A listing of revenues charged and received that are recorded daily (in our monthly reports). One-time charges are entered directly in the cash receipts journal in the month the charge occurs
11-1j. Cash Receipts Journal TEST (11-2)
A listing of revenues charged and received that are recorded daily.
10-1c Define Budgeting Capital (10-3)
A means of setting aside reserves for major expenditures.
2-6. What is a tickler system? (2-14)
A method used to remind PMs of key dates and deadlines. Ex. Yardi is a tickler system telling us of rent hikes, when COIs are expiring etc.
2-5b. Delinquency Report
A monthly summary of: · Overdue payments · Amounts · Actions taken to collect · Other pertinent information
8-1c. What is a variable cost? (8-2)
A non-fixed operating cost that has the potential to fluctuate. Ex. Cleaning, Income Taxes, Leasing, R&M, Utilities
10-5a Define IRR (internal rate of return) (10-13)
A percentage rate that equates the present value of the future benefits to the present value of the capital. The IRR is a measure of investment performance used for acquisition purposes. It is the rate of return on capital generated or capable of being generated on an investment (like equity yield rate). Note: Know definition—don't need to calculate
8-1b. What is a fixed cost? (8-2)
A preset operating expense that remains constant. Ex. Mortgage, Amortization/Depreciation, Insurance, Ground Rent, Interest Expense, RE Taxes
8-3. What are typical uses for a proforma? (page 8-7)
A projection of operating expenses over an anticipated holding period (time of ownership 5-20yrs) used to determine whether the asset will generate enough yield to warrant an investment
2-5c. What is a rent roll? (2-15)
A quick reference of the entire property that contains info about each tenant which includes: · Property name & address · Tenant name/Suite #/ SF Leased · Monthly Rent /Annual Rent/Rent PSF · Lease term (start & end dates) · Rent increase & Other Terms · Key Contacts · Security Deposit Held
13-2a What is the Experience Exchange Report (EER)? (13-8)
A report from national surveys by BOMA international, compiling PSF operating information from all property owners.
11-1b. What is cash disbursement? (11-2)
A report listing cash activity PAID OUT on a monthly basis.
11-1d. Define Cash Disbursement TEST (11-2)
A report listing cash activity paid out monthly
11-1h. Define Cash Receipts TEST (11-2)
A report listing cash activity received on a daily or monthly basis.
11-1f. Define Cash Flow Statement TEST (11-2)
A report that describes the changes in cash from one period to the next.
14-3b. What is a Common-size comparative statement? (14-9) TEST
A statement assigning net sales a 100% value and then expressing each income statement item as a percentage of net sales. The 100% sales amount is assumed to represent one sales dollar. Cash/Assets Note: Probably won't need to do the math, understand the concept.
11-1e. Define Cash Expenditures Report TEST (11-2)
A summary of all cash items disbursed, matched with the corresponding chart of accounts code.
11-1i. Cash Receipt by Category TEST (11-2)
A summary of all cash items received, matched with the corresponding chart of accounts code.
2-5a. What is a vacancy report? (2-11)
A summary of property vacancies. It includes: · Number and types of vacancies · Relevant dates & other details a/b space · Total dollar amount of vacancy loss · Steps taken to fill vacancy (advertising, concessions etc.)
3-6(b8) What is a sublease? (3-17)
A type of lease created when the lessee agrees to lease his or her space to a third party.
7-7f. List the employees on a typical building payroll (7-16)
A typical building may have the following on their payroll: · Property Manager · Assistant Property Manager · Building Secretary/Receptionist · Chief Engineer/Assistant Engineers · Day Porter · Security Personnel · Parking Attendant · Accounts Payable Clerk/Accounts Receivable Clerk · Project Accountant
13-1a. What is a material exception? (13-2)
A variance in excess of a certain dollar limit or % difference against the benchmark.
13-7. What alternative strategies might a building professional use to review data presented in the EER? (13-19)
Building professionals whose buildings do not use the BOMA Standard Chart of Accounts should ensure that the summary and expense detail line items correspond with the info accumulated for their bldg.
1-8a. What are the three sets of books that companies typically keep (1-17)? TEST
General Journal All transactions recorded in chronological order as they occur Cash Journal/Cash Receipts · Cash journal is receipts for each business day · Cash receipts includes all transactions of the business (more detailed) General Ledger Detailed transactions by ledger of account.
3-3. Identify the types of gross leases. (page 3-5)
General idea—all or most expense included in base rent, landlord is responsible for any changes in the bldgs. expense from year to year. · Gross Lease · Modified Gross Lease (semi gross)
14-6a. What does a high inventory turnover indicate?
Good merchandising and a smaller investment in inventory. In this case LOW is good.
1-5b1. Explain the 4 Steps in the Expenditure Cycle for the Acquisition of Goods and Services. (1-7)
Goods and Services are: 1. Requested from vendor via PO or monthly contract. 2. Received and documented by receiving document or service record. 3. Vendor invoice is coded, approved, & processed for payment. 4. Check issued to vendor to pay invoice.
4-5c. Define Tenant's Pro Rata Share (4-10)
Calculation or set percentage of how much the escalatable cost pool is charged to tenant.
4-7. What are methods of reporting escalatable costs? (4-14)
Cash Method: Accounting where income and expense are recorded only when they are received or paid out (1801) Accrual Method: Records revenue and Expenditures related to the period for which they are applicable, whether cash has been transferred. (1575)
1-13. What are common accounting methods used for recording financial transactions? (1-21) TEST
Cash method: Income and expenses are recorded only when they are received or paid out---Most Basic. Accrual basis accounting: Records revenues and expenditures related to the period for which they are applicable, whether trash has been transferred. Note: In the modified accrual, or hybrid accounting system, BOTH accrual and cash methods are used.
1-7. How are debits and credits applied to the fundamental accounting equation? (1-11-12) [In Terms of Owner's Equity]
Cheat Sheet: Increase revenue (asset)---credit Increase expense (liability)---debit For Assets & Owner: Opposite of what you'd think *** For Liability: Increase a liability (credit it) *** Decrease a liability (debit it) Remember: Double Entry Accounting
1-13a1. Give specific examples accounting internal controls (1-21)?
Collections: Periodic reviews and tickler system Cost Controls: Budget prep and monthly budget variance reviews Other Controls: Mgmt. agreement and several layers of review/supervision
10-4 When determining the capitalization rate for an investment in a property, which variables should be considered? (10-9) TEST
I= RV I=Net Operating Income R= Capitalization Rate (%) V= Value of the Bldg
3-6(a1). What should the policy be concerning late charges on tardy rent payments? (3-12)
If the rent is late and the lease contains a provision to asses late charges, then they should be assessed.
11-7a. Considerations when completing a field review should include: (11-18)
In the Cash Basis Income Statement: · Are expenses properly classified and reflected? · Are there any inappropriate codes or inaccurate income/expense totals? · Reflect exactly what occurred in the financial operations for that month to owner?
3-6(a2). How are late charges calculated? (3-13)
In the manner stipulated in the tenants' lease. They may be... · A percentage of the outstanding balance · A percentage of the monthly amount due · A flat fee. They may also include interest.
13-6a. Explain the expense detail section of the EER. (13-18)
In this section only an average figure is given along with the number of buildings reporting the category. All Average figures represent Total Building Rentable Area.
1-5b. Define Expenditure Cycle (1-6)
Includes the functions that: · Acquire property, goods, services, and labor · Pay for them · Classify, summarize, and report----what is acquired and what is paid for? Ex. Labor-internal & external, Supplies, Utility Services etc.
3-4c. Define Triple-Net Lease (3-6)
Includes: · Base Rent (NOT inclusive of Opex) Tenant pays separately: FOR ALL EXPENSES · Full share of OPEX & Repairs · Property Taxes · Insurance
3-4a. Define Single-Net Lease (3-5)
Includes: · Base Rent (inclusive of Opex) Tenant pays separately: · Property Taxes
3-4b. Define Double-Net Lease (3-5)
Includes: · Base Rent (inclusive of Opex) Tenant pays separately: · Property Taxes · Insurance
13-6. What are the functions of the mid-range data as it is presented in the BOMA Experience Exchange Report? (13-15)TEST
Indicates the middle 50% of data. You knock out the low 25% of data is the low mid-range and 25% above is the high mid-range.
13-5. Describe the calculations needed to determine the median as it is presented in the BOMA Experience Exchange Report. (13-14) TEST
Indicates the true measure of the midpoint of data. If # of data items odd--median is an actual number from a set of data. If # of data items even--two numbers on either side of the center are added together and divided by 2
4-6c. Define Indirect vs. Direct Expenses (4-13)
Indirect Expense · Indirect Bills like CAM are generalized and escalatable. · CAN put in escalatable cost pool Direct Bill Expense: · Repair/maintenance directly related to one tenant suite. · Expense is defined as direct an is not escalatable. · CAN'T put in escalatable cost pool
12-7. Which asset types are commonly amortized? (page 12-13)
Intangible assets having no physical existence. · Taxes · Insurance · Leasing Commissions · Tenant Moving Allowance
4-4b. Define Base Amount (4-9)
Is a set dollar amount: · Tenant only pays the pro rata share of the incremental increase over the base amount. · Base amount is expressed in dollars per sf.
1-1. Which key components make up the bookkeeping process? (1-2&4)
Is the process of recording and classifying transactions (a financial event that is shown within a financial statement/report)
12-5e. What is depreciation? (12-10) TEST
Is the process of transferring the cost of long-term assets TO the cash basis income statement over an estimated useful life.
10-8. What are the benefits of depreciation? (10-20)
It Reduces Your Tax Liability (Income Tax)*** Because it is subtracted from the net profits before arriving at taxable income.
6-5b How can the escalatable cost pool be identified? (6-15) [Step Three: Refine the Escalatable (Recoverable) Cost Pool]
It can be driven from the operating expense budget. · Costs are escalated to reflect occupancy of 95% or 100% depending on lease. · When occupancy determined--fill in the variable costs in OPEX budget.
10-5c What is the limitation of the payback period formula? (10-13)
It doesn't factor in the time value of money.
14-4. What are advantages of adequate working capital (14-10)?
It enables a company to... · Carry enough inventory · Meet current debts · Take advantage of cash discounts · Extend favorable terms to customer
2-5. What items are included in the tenant file? (2-11) TEST
It houses the most current (and sometimes original) correspondence, leases, and other documents, making it an authoritative resource on many issues. It includes the following: · Lease Copy · Least Abstract · Rent Roll Change Instructions (not really applicable anymore) · Commencement letter · Lease Amendments · Lease Escalation Reports/Letters · Correspondence · Floor Plans · Keys/Locks · Billings · Financial Reports
1-5a. Define Revenue Cycle? (1-5)
It includes the functions required to exchange products or services with customers for cash. 1. Signing: A tenant signs a lease for office space. 2. Administering: Lease administered, includes assessing charges for use of space 3. Collecting: Rent & Services Revenue is collected. 4. Recording: Collected Revenue is recorded. 5. Reconciling: Summary of accounts confirmed and reconciled to make sure they balance.
6-6b. When does CPI increase become effective? (6-19)
It increases are effective on the anniversary date of the lease.
10-2How does compounding affect a capital investment? (10-5)
It increases the value of the capital investment by generating earnings, which are then reinvested or remain invested with the goal of generating their own earnings.
4-2. How is rent viewed from a legal perspective? (4-3)
It indicates that: · All revenues are collected by a landlord · Amounts are categorized · Rent is a primary component of the landlord's income.
1-8. Explain the relationship between the balance sheet and summary accounts. (1-15)
It is a statement of the financial position of the business entity at a point in time. For each type of account--assets, liabilities, or owner's equity--we can either increase or decrease the balance. (At C&W it's our operating statement)
11-5. What purpose does the expense distribution report serve? (11-8)
It is a summary of all CASH ITEMS DISBURSED, matched w/ corresponding chart of account codes. It shows vendor payment history like a payment register, but then categorizes it by similar chart of account codes.
1-3. What are the primary functions associated with accounting? (1-4)
It is a uniform and consistent system where financial data is: · Interpreted · Summarized · Communicated
1-1a. What is budgeting (1-2)?
It is an ongoing process coordinating resources and expenditures. It is comprised of: · Analysis of the past · Benchmarking (reviewing performance metrics) · Future Projections
2-1a. Why is attention to accounts payable important? (2-3)
It is important for facilitating good relationships with vendors.
12-8 What is journal entry? (12-18)
It is the process of transferring cash transactions made btwn the balance sheet and the cash basis income statement · Each transfer must affect both statements · Each transfer must have a debit and a credit Liabilities + Owner's Equity = Assets
12.4. What is amortization? (12-7)
It is the systematic allocation of the cost of an intangible asset from the balance sheet to an expense account on the cash basis income statement.
7-7. How is the unpaid invoice report used? (7-13)
It is used as an added checklist to ensure that invoices are paid promptly and coded correctly.
2-1. In what practical ways do building professionals use proper record keeping? (2-2-3) TEST
It is used for: · Providing raw data for stakeholder decision making · Planning for current and future budgets · Preparing year-end reconciliations · Billing Tenants · Defending expenses · Complying with tax and legal requirements
1-12a. Describe what a balance sheet is used for (1-20)
It reflects the balances of each asset, liability, and owner's equity account a point in time.
1-12. Describe what an income statement is used for. (1-20)
It shows revenues earned and expenses incurred, resulting in net income and net loss for that period.
5-2a. What purpose do a commencement letter serve? (5-7)
It specifies the exact lease commencement and expiration date. In terms of construction, it can also verify that the tenant accepts the landlord's construction work and certifies that the landlord has no further obligations to perform.
8-8a. What is Job Order Costing?
Job order costing or Job Costing is classifying or segregating large expenditures into logically similar or homogenous groups. Ex. Building Repositioning JC#s Elevator Mod, Security Upgrades, Lobby Updates
8-1a. Why is it important to control expenses? (8-2)
Keeping costs low provides additional cashflow and increase the value of the property and profit the tenants by having lower pass throughs.
5-5. What are typical monthly additional rent charges (pass throughs)? (5-9-10)
Landlords attempt to recapture the increased cost of operating the building. Examples Include: · Operating Expenses · RE taxes · CAM · Provisions for adjustments based on CPI · % Rent · Parking · Storage · Supplemental Services
10-5d Define life-cycle costing and when it's used? (10-15)
Life cycle costing is a more sophisticated method of comparing capital expenditures expected to produce benefits over a period greater than a year. May include: · Aesthetic improvements · Energy-efficiency investment · Equipment replacement
3-4d. Define Absolute-Net Lease (3-6)
Like a Triple-Net Lease, but tenant pays even more for items. Called a 'hell or high-water lease' meaning the tenant is responsible for all costs for owning, maintaining, and operating the bldg. (even roof and structure).
12-6. Which regulations exist regarding depreciation in the United States and Canada? (12-12) TEST
Modified Accelerated Cost Recovery System (MACRS)-US · Enacted in 1987 · Increased useful life of commercial property to 39 years Declining Balance Method-CANADA · Assets Assigned classes depending on type, structure, and purpose · Each class is assigned a depreciation rate.
1-12b. What are accounts receivable? (1-20)
Monies that have been earned, but not yet received by the company or business. They are recorded as assets on the balance sheet.
11-5b. What time period does the general ledger cover?
Month to Date (MTD) and Year to Date (YTD)
10-5 What are the components of the formula for net present value? (10-12)
NPV=PV-I [Net Present Value] = [Present Value] - [Investment] If POSTITIVE---it reflects a RETURN on capital If NEGATIVE—not all capital has been returned Note: Know how to calculate on 10-12
11-6b What is the point of a budget comparison? (11-14)
Report breaks down MTD and YTD and costs versus budget. [Actual] - [Budget] = Variance PMs explain the variances as to why accounts are higher or lower than what was budgeted.
8-4b. What is another alternative when budgeted expenses exceed projections? (8-7)
Revise the budget to more closely conform to the projected operating expense by revising proposed capital expenditures or "wish list" items.
4-5b Define the Base Amount (4-10)
Set dollar amount established by lease that landlord pays before charges applied to tenant.
8-7a Describe the correct steps within the invoice approval and payment process? (8-14)
Should not be processed without: · Supportive contractual agreement · Required supervisory approval · Any adjustment requires supervisory approval · Mgmt. prescribes each tier of approval as it effects the bldg. as a whole
5-3. How is stepped rent used in the commercial real estate industry? (5-8)
Stepped rent is a lower than average first year rental rate that gradually increases throughout the least term. Commonly used: · Entice Tenants (In Soft markets) · Help Tenants Function (With Start-ups)
12-9 How is the cash flow statement used? (12-19) TEST
Summarize cash changes from one period of year to the next and help provide an overview of a building's financial status over time. Note: Know Appendix D for TEST
3-6(b4) What is ad valorem? (3-13)
Taxes levied (imposed) based on property value.
4-3c. Define Gross Lease (4-8)
Tenant pays one lump sum for rent (only base rent), from which landlord pays his expenses.
4-3d Define Modified Gross Lease (Semi gross) *
Tenant pays only for the expenses of building operations over a preestablished amount.
13-4. What is needed to determine true average as it is presented in the BOMA Experience Exchange Report? (page 13-14)
The BOMA EER uses a true average It measures the cost or income PSF w/o referring to the number or size of buildings contributing building data. The average is calculated by: Total Dollars = Avg. $ Per SF Total Sq. Ft
14-2. Which ratios are commonly used to determine a company's EARNING POWER (14-7)? TEST
The ability to generate income. · Earnings per share (Net Income/Common Shares) · Return on Equity (Net Income/Avg. Owner's Equity) · Common Size Comparative Statements (Cash/Total Assets)
14-3c. Which calculations are commonly used to determine a company's LIQUIDITY (14-10)? TEST
The ability to meet current obligations. · Working Capital (Current Assets--Current Liabilities) · Current Ratio (Current Assets/Current Liabilities) 2:1 · Quick Ratio/Acid Test (Cash + AR/Current Liabilities) · Days Sales AR—No more than 40 days 1. (AR + Total Net Sales/Days in Yr.) = Avg Day Sales 2. (AR/Avg Day Sales) · Inventory Turn Over (Costs of Goods Sold/Merchandise Inventory)
14-6b Which ratios help measure SOLVENCY? (14-4) TEST
The ability to meet long-term obligations. · Debt Service Ratio [Debt] 1. (Interest + Income b/f taxes= income available to pay debt service) 2. (income Available to pay debt service/debt service amt=#of times debt service can be paid) · Owner's Equity as % of Liabilities [Debt] 3:1 1. Total Liabilities + Total Owner's Equity= Total L&E 2. Creditor Equity Ratio Liability/Total I&E 3. Owner Equity Ration Owner/Total I&E · Fixed Asset Leverage Ratio [Owner's Equity & Fixed Assets] (Adding up all fixed assets you have debt on) Mortgage/Total Fixed Assets · Return on Fixed Assets [Owner's Equity & Fixed Assets] 1. (Net Income after Taxes + Interest Expense): Income b/f Debt Service 2. Income b/f Debt Service/Avg Fixed Asset
9-5. What are public expenses for which levy/mill rates (tax rates) are usually assessed for each property? (9-11)
The amount of tax payable per dollar on assessed property value of: · Schools (Usually the largest at ½ to 2/3 of the levy) · Road Maintenance · Sewer Maintenance · Public Health & Safety · Public Employees · Bond Interest & Sinking Funds Note: Contact local municipalities for upcoming mill rate changes (taxed/fixed rate)
2-4b. What are the levels of detail in the BOMA Chart of Accounts? (2-8) TEST
REMEMBER THIS TEST Appendix B Level 1= First 2 digit # (Functional—Prefix, Bldg etc) Level 2: Next 3 #s (Means & Methods) Level 3&4=Last 3 #s (Subsets for Detail)
12-2a. What is matching? (12-6)
Recording expenses incurred in earnings revenues regardless of whether cash has been disbursed in their payment. Note: Look at Case Example 12-6
12-5a. What is inventory? (12-8)
Recording supplies purchased in bulk for use in future periods as assets on the balance sheet.
10-1b Define Payback period (10-3)
Refers to the amount of time it takes to recover the cost of an investment. The time it takes to break even.
12-5d What is Cost Apportionments? (12-10) TEST
Reflecting transactions in their rightful place.
11-6. What process should be followed in the transfer of items to a general ledger? (11-11) TEST
When amounts are transferred to the GL: Cash Receipts---to INCOME accounts as CREDITS. Total Receipts—to CASH accounts as DEBITS Cash Disbursements---to EXPENSE accounts as DEBITS. Total Disbursements---to CASH accounts as CREDITS
4-6a. Define Expense vs. Capital Item (4-11)
When an owner identifies an expenditure as a capital item (or capitalizes on it), the expense can't be included in the escalatable cost pool. Thus, tenants cannot be charged for capital items.
10-5b What is the payback period and how is it determined? (10-13) TEST
When does the project pay for itself? The time that is required for the money saved and/or income generated by a project to equal its initial investment (determined by life cycle analysis). Ex: Light fixture initially costs $15,000. You'll save $3,000 a year. $15,000 ÷ $3,000= 3 (payback period) [Initial Investment] ÷ [Annual Cash Inflow] = [Payback Period] Note: Know Case Example 10-14
3-6c. What is holdover rent? (3-19)
When tenant occupies space beyond expiration date. Rent is increased for the holdover period by some multiple of the rent in effect at the end of the lease term.
10-1 What are the common objectives of capital improvements? (10-2)
The basic formula for increasing property values is to: 1. Increase Income 2. And/or Reduce Expenses Any capital improvement proposed should target one of these two objectives. You must spend money to make money.
8-2c. What is the best opportunity to control costs? (8-5)
The best opportunity to control costs is in the budgeting process.
10-4e Define Net Present Value (10-12) TEST/Memorize
The excess of present value of cash flow (revenue) generated by a project over an initial investment. The NOI that comes in after you buy a building. That's your net present value.
4-6. Define escalatable costs (4-11)
The expenses identified from the total operating costs that can increase.
12-5f. What is the goal of depreciation? (12-10)
The goal is to offset the cost of buildings, furniture, and equipment against revenue over a period of years and to properly allocate the cost of tangible revenue-generating assets to the revenue they generate.
9-3a. How is expense budgeting affected by the building's history? (9-7)
The longer and higher the quality of the historical data the more accurate the budgeting assumptions can be.
8-7. How are invoice approval levels determined? (8-14)
The magnitude of the expenditure dictates the level of approval, from petty cash expense approved by the on-site property manager to roof replacements by the owner.
12-5b What is charging out? (12-8)
The method used to transfer inventory from the balance sheet to the cash basis income statement.
8-2d. Why should explanations in the annual budget be as detailed as possible? (8-5)
The more detailed one is in the annual budget, the easier it is to explain and justify variances during the year.
10-2b Define the Time Value of Money (10-5)
The notion that a rate of return should be expected from capital invested over a period.
9-9. When thinking about leasing costs, what considerations should be given to the market? (9-18)
The occupancy of the building as it directly effects: · Number of employees needed · Increase of Utilities · Increase of Waste · Equipment used more—like elevators · Increase in cleaning and supplies
8-4a. What happens when budgeted expenses exceed projections? (8-7)
The owner's objectives will change, and they'll need to decide whether to sell the property. Budget approval is often delayed until the owner reevaluates the original investment objective.
3-1. Why is there a need for lease interpretation? (3-2)
The person who signs the lease is often not the person reading it day in and day out. · Tenants may only read part of a lease or not fully understand each clause · Brokers working with tenants do not always explain the implications of each clause · Tenants are not always involved in lease negotiations and are therefore prone to misinterpreting PMs should have a working knowledge of the lease.
7-7c. What is an employee payroll? (7-15)
The process of accumulating employee data such as: · Claimed exemptions · Wage raises · Benefit Selections Applying this information to the ongoing hourly information and generating paychecks periodically.
1-4. Specify functions incorporated in the budgeting process. (1-4)
The process of planning and coordinating resources (cash/deposits) and expenditures (money spent)
12-5c. What is capitalization? (12-9)
The process of transferring long term asset items purchased for use over an extended period · From the cash basis income statement · And recording them as assets on the balance sheet.
11-7. What considerations should the property or facilities manager make when completing a field review of financial statements? (11-18)
The review occurs after the accounting department has reviewed the financial report and focuses on presentation and classification errors. (It's like our Monthly Reports—PMs are responsible for it).
7-1. Which components are commonly tracked in a vendor database? (7-8)
The vendor database should include: · Vendor Legal Name · Remittance Address · Federal Tax ID # · Minority Status · Vendor Entity Type
11-4a. How are cash collections and disbursements categorized for the owner? (11-7)
They are categorized by account code.
1-6b. What is true about both sides of the accounting equation? (1-9)
They are equal. Always.
4-2b Why are operating expense escalations necessary? (4-3)
They are necessary so that owners can recapture increases in property taxes, utilities, insurance and tenant demand for services.
1-7. How are debits and credits applied to the fundamental accounting equation? (1-11-12)
They are the backbone of accounting and are considered double entry accounting.
9-2b. Why are detailed explanations for each line item important when preparing an expense budget? (9-4)
They clarify the reason for including the expenditures and facilitate explanation of variances from the budget during the year.
9-2d. Where should expenses be budgeted for operations reported on the accrual accounting basis?
They should be budgeted in the month they occurred/incurred (action)
9-2c. Where should expenses be budgeted for operations reported on the cash accounting basis?
They should be budgeted in the month they'll be paid.
1-1c. How do property and facility managers use periodic financial reports (1-3)?
They use them to make budgets and make business decisions to best balance the needs of the occupants at the property and market forces with the goal of enhancing the property value.
3-6(b6) What are the requirements for interest on security deposits? (3-14)
They vary by state. Usually the interest earned is kept by the landlord.
6-6a. What is the objective of CPI and what do you need to obtain in order to calculate it? (6-19)
To anticipate the increase in inflation for the coming year. To calculate, you need the following: · Base CPI Index · Prior Year's CPI Index, if any · Allowable increase % · Base rent amount Note: It's sensitive to the city/region you're in, so you need the index that is reflective of that.
14-1a. Purpose of Financial Ratios (14-3)
To demonstrate the relationship btwn certain items on the income statement and the balance sheet.
2-1c. Why are controls necessary (2-4)
To determine checks and balances for detecting irregularities in bills.
8-8b What is the main reason for cost accounting (or job order costing)? (8-23)
To establish a basis for pricing and to enable management to control and localize cost excesses to correct or minimize these excesses
5-8a Explain a proper collection policy (5-15) TEST
To facilitate timely payment from your tenants: · Amounts due should be properly communicated · Collection Policy should be uniform and consistent · Tenant payments should be properly directed and deposited · Delinquent tenants should be contacted
3-1b. What is the property or facility manager's role during a lease dispute? (3-2)
To have a good working knowledge of the lease and ready access to summaries and abstracts in order to provide quick authoritative responses to the tenant.
2-8. What is the purpose of the audit trail? (page 2-16)
To leave a financial record that auditors can verify. It includes: · Project write-ups (SOW) · Quotes · An Authorization to Proceed · A Purchase Order · Proof of Delivery · Payment information
3-2. What is the primary function of a lease? (page 3-3)
To protect the interests of each part—both landlord and tenant.
11-6a. What is the purpose of a trial balance? (11-12) TEST
To show that debits and credits have been applied correctly. If they have, they will balance out.
4-10. What are best practices for communicating charges to tenants? (4-23)
Transparency is the key. · Monthly estimates are calculated/communicated to tenants by early December · Totals should be verified against the lease · Communicating escalation charges can be the most difficult interaction with a tenant.
9-7. When reviewing contract expenses, what should building professionals pay close attention? (9-16)
Use some form of zero-base budgeting (income/expense cancel out to zero). Review the need for each contract: · What are the services required? · Which services can be eliminated or added? · How has occupancy affected? · Is it required under lease agreements?
8-2a. What is an occupancy audit? (8-4)
Usually a direct correlation btwn increases in occupancy and cleaning costs. When a new tenant accepts a space, the latest cleaning expense increase is attributed to the tenant in accordance with the newly SF occupied.
3-3c. What is stepped rent? (3-28)
· A lower than average first year rental rate that gradually increases throughout a lease term. Ex. Used for startups, during soft markets, tenant incentive
5-6. How is holdover rent calculated? (5-11) TEST Know How to Calculate***
· After the standard lease expires · Month to month · Negotiable · Calculated as some multiple current rent [Base Rent] X [Hold Over Rate] = Hold Over Rent Note: Know how to calculate for test Ex 5-11
7-4. What are the functions of a purchase order? (7-8-9)
· Approval assurance to vendor/purchasing entity · Defines specific parameters requested · Verification upon delivery
1-6. What are the three summary account types? (1-9)
· Assets (everything a company owns) Ex. Cash, building & land, inventory supplies, office furniture · Liabilities (funds borrowed—like mortgage) Ex. Accounts payable, debts owed for equip & furniture, mortgages · Owner's Equities (owner's money) Everything remaining after liability is subtracted by the sum of all assets.
12-1b. What does a balance sheet show?
· Assets-D [cash, AR, inventory, land] · Liabilities-C [AP, loans, interest, wages, taxes] · Owners' equity-C [Revenue(C)-Expense(D)] Note: Total assets should equal the sum of total liabilities and shareholders' equity. A balance sheet shows a company's total value while the income statement shows whether a company is generating a profit or a loss.
13-2. Which organizations provide reports used for benchmarking performance in the commercial real estate industry and help widen the scope for comparisons? (13-8)
· BOMA-Experience Exchange Report (EER) · Institute of Real Estate Management · National association of Real Estate investment Trusts · International Facility Management Association · International Council of shopping Centers · National Association of industrial and office properties
12-1a. What are three major financial statements that companies use to reflect their business activities and profitability for each accounting period?
· Balance sheet · Profit and loss statement (or income statement) · Cash flow statement
11-1a. Accurate reporting is paramount to the success of properties and is key to its owners. What four reports are PMs called upon to review?
· Bank Reconciliations · General Ledger · Trial Balance · Income Statement
11-1. Define Bank Property Record Components (11-3)
· Bank records include cash receipts and disbursements. · Accountants should compare bank records to property records. Bank reconciliation: Comparing property cash receipts (deposits) and disbursement journals (payouts)
3-3a What is a gross lease? (3-5)
· Base rent paid by tenant · Covers all charges owed
5-1a What are the three basic varieties of tenant billings (5-3)
· Base rent-core rental charge in lease, monthly basis · Additional rent-CPI, Stepped Rent, Expense Escalations, CAM · MTCs (Mis. Tenant Charges)
4-4. Explain two different methods for assessing modified gross lease rent increases. (4-9)
· Base year · Base amount/Expense Stop
7-1. An RFP should... (7-4)
· Be detailed and specific · Outline requirements of the contract · Establish a baseline to enable objective vendor proposal comparisons · Include an appropriate deadline.
5-1. What are the three functions of the revenue cycle? (5-3)
· Billing Tenant · Collecting What Is Billed · Reporting Billings and Collections
13-1. What are the benchmarks against which a property's actual performance can be compared? (13-2)
· Budget comparison & variances · Prior year comparisons · Industry comparisons
10-1b1 List the accounting principles that will help determine the payback period (10-3)
· Budgeting Capital · Compounding · Time Value of Money · Capitalization · Present Value · Net Present Value · Excess Present Value · Internal Rate of Return · Depreciation · After-tax Cash Flow
14-5c Define Days' Sales Collected. How is it calculated? (14-12)
· Calculation of the speed with which a company collects its accounts. 1. (AR + Total Net Sales/Days in Yr.) = Avg Day Sales 2. (AR/Avg Day Sales)
1-5. Describe the accounting cycle types most common to the commercial real estate management business. (1-5)
· Capital (property acquisition & financing) · Conversion (non-monetary assets) · Expenditure (Exchange for goods or services Ex. Utility services) · Revenue (Exchange for cash Ex. Commercial Office Space)
5-10. Explain the process that owners use to classify income. (5-21)
· Cash received or amounts charged are recorded as income · Income classified into accounts (ex. BOMA Chart of Accounts) · Amounts & Codes transferred to GL · Monthly Financial Statement created
9-2a. Budget explanations are require for? (9-4)
· Clarifying reasons for OPEX · Variances · Defining Assumptions concerning growth · CPI Projections · Change in contract · Projected rates · Other factors
8-8. What are common categories into which costs are segregated for accounting purposes? (8-15)
· Cleaning Costs · Administrative Costs · Real Estate Costs · Building Insurance
1-9. What are the generally accepted accounting principles (GAAP)? (1-19)
· Common set of accounting principles, standards, and procedures · Codified by the Financial Accounting Standards Board (FASB) (not international)
5-7a. What Data will you find on a cash receipts journal? (5-13) TEST
· Company Name (Bank of America) · Property Name (CityPark Business Tower) · Unit (100) · Tenant ID (t000863) · Payment Period (1-2015) · Date of Payment (1/7/2015) · Amount ($19059.75) · Check # (001)
7-5. What standards should be put in place when processing invoices? (7-10)
· Confirmed Receipt · Date stamped · Match PO · Coded correctly · Vendor code · Accounts code · Description/Correct Amount · Additional documentation · Packing slip, receipt signature etc.
9-6. What strategies might be employed in the process of appealing a property tax? (9-12)
· Contact a real property tax consultant firm Ex. Wilkes Artis · Building Management granted only one appeal per FY · Include the projected fee for the RE Tax firm in your budget
9-1. What are the typical time frames in which an expense budget is prepared? (9-3)
· Correspond w/ reporting frequency (of owner) · Report on a monthly basis · Account for timing and annual amounts Note: Always use zero based budgeting---don't just budget 3% increase
14-7. Which calculations are used to determine a company's debt service ratios? (14-15)
· Debt Service Ratio [Debt] 1. Interest + Income b/f taxes=Income available to pay debt service 2. Income Avail to pay debt serv/debt serv amt= #of times debt service can be paid
3-6f List some examples of nonfinancial lease clauses (3-22)
· Default · Insurance Certificates · Cancellation Rights (specific events that allow the lease to be canceled) · Personal Guarantees (guaranteed required by an individual, usually bldg. owner) · Use of Premises (types of business activities tenants can have)
14-1b. What are the 3 basic areas of interest are financial ratios grouped in? (14-4)
· EARNING POWER: The ability to generate income. o Earnings per share o Return on Equity o Common Size Comparative Statements · LIQUIDITY: The ability to meet current obligations. o Working Capital o Current Ratio o Quick Ratio/Acid Test o Days Sales AR o Inventory Turn Over · SOLVENCY: The ability to meet long-term obligations. o Debt Service Ratio [Debt] o Owner's Equity as % of Liabilities [Debt] o Fixed Asset Leverage Ratio [Owner's Eq/Fixed Assets] o Return on Fixed Assets [Owner's Eq/Fixed Assets]
9-2. What types of budget explanations are commonly required by owners? (9-4)
· Each line should be budgeted separately/reported in detail · Detail budget variances facilitate explanations during operating year · Explanations define assumptions for growth, CPI, contracts, projected rates etc.
9-3. What are common components to include in a review of a building's operating history? (9-7)
· Effective budgeting begins w/ recent occupancy & operating history · Operating history of expense reports 2-3 years back · Reforecast represents changes in current budget
7-8. Which elements are often seen on a payroll register? (7-19)
· Employee Name · Hours Worked · Gross Wages Wage Deductions: · Federal & State withholdings · Other deductions (Health & Life insurance) Other Wage Deductions · Federal Withholdings Unemployment (FUTA) · State Holding Unemployment (SUTA) · Federal Insurance Contribution Act (FICA) · Net Pay (After withholdings/deductions)
1-10. What are International Financial Reporting Standards (IFRS)? (1-19)
· Established and maintained by International Accounting Standards Board. · Used by many multinational companies in the US & Canada
2-3a. What is the typical journey of a purchase order? (2-7)
· Facility manager recognizes a need: submits request to purchasing agent · Purchasing agent approve: sends PO to preferred supplier · Vendor receives order: ships item to purchasing agent · Purchasing agent records item & check shipment: sends to facility manager · Invoice received purchasing agent checks for accuracy: sends to accounts payable.
9-6b. List the usual taxes, benefits, and compensation categories associated with a payroll (9-13)
· Federal Insurance Contribution Act (FICA) · Federal Unemployment Tax Act (FUTA) · State Unemployment Tax Act (SUTA) · Workers Compensation · Health, Dental, & Life Insurance · Training & Education · Overtime & Vacations · Bonuses & Raises · Retirement/401K plans Note: Don't stress on the acronyms. Won't be on test***
9-7a. List typical monthly billings (predictable expenses) for building operations (9-15)
· Fire Alarm/Life Safety System Maintenance · Landscaping · Janitorial · HVAC PM Maintenance · Security · Waste Removal · Window Cleaning · Elevator Maintenance · Pest Control · Water Treatment
4-4a. Define Base Year. (4-9)
· Generally, first year operating expenses are considered the base year. · Each subsequent year is known as a comparison year. · If comparison is equal to or less than base amount, there is not tenant charge or credit.
7-7e. What are challenges of In-House Payroll Systems? (7-16)
· Hours Worked- from time cards · Gross Wages-multiplied by wage rate · FICA-% paid to SS & Medicare · Withholdings-based on exemptions · Other-worker's comp/health insurance
9-3b. Why do we use the past to predict the future in operating history? (9-7)
· Identifies areas of recurring costs · Highlights monthly services · Reveals major repairs/rehab, trends · Pinpoints area requiring additional concentration/expenses Note: It is crucial to inspect the property to identify, conditions, systems, quirks, needs
7-1a. What responsibilities are included within the expenditure cycle? (7-2)
· Identifying maintenance needs · Negotiation vendor contracts · Managing maintenance jobs · Remodeling and Tenant buildouts · Ensuring proper payment to vendors · Reporting all these activities to ownership timely & accurately
4-9. Describe the benefits of percentage rent and kick-out clause. (4-21)
· If sales climb above and agreed-upon level, the owner receives a % of sales as additional rent (used more for major chains, not 'Mom & Pop' shops) · Allow landlords to terminate lease if tenant does not achieve agreed-upon sales levels.
1-11a. What are the three basic external reports or standard financial statements that businesses use? (1-20) TEST
· Income statement · Balance Sheet · Cash Flow Statement
14-3d. How is LIQUIDITY measured in terms of Working Capital? How do you calculate it? (14-10) TEST
· It is measured by analyzing the strength of a company's working capital. Current Assets - Current Liabilities
7-1b. What services are normally covered under a monthly contract? (7-3)
· Janitorial · Security · Landscaping · Elevator/escalator · HVAC maintenance · Pest control · Metal maintenance · Waste removal/recycling
6-1a. Describe the Budget Timing Overview from June Through December (6-3)
· June: Capital Expense Budget · July/August: Operating Expense Budget · September: Income Budget · October/November: Owner Review/Approval · December: Tenant Reminder/Notice Distribution
4-7a. Give examples of expenses excluded from escalatable costs? (4-14)
· Leasing Commissions · Depreciation · Advertising/Promotional Fees · Franchise & Income Tax of Owner · Interest · Amortization of Debt Service · CAPEX · TI · Ground Rents · Non-Operating Ownership Expenses.
9-8b. Explain market considerations when dealing with lease costs (9-18)
· Leasing commissions · Rent abatement · Tenant Improvement allowances Note: In a soft market landlord may pay for this
10-6. What are the considerations of life-cycle costing? (10-16)
· Life expectancy · Inflation Rate · Real interest income · All Initial expense factors Purchase price, Installation costs, Taxes, Adverse expense due to down time, Income tax effects & benefits, Reduced operating costs, Energy Savings · Ongoing expenses salaries, materials, energy etc. · Discount Rate-bringing it back to Day 1 [Inflation Rate + Interest Rate] - [Escalation Rate] Ex. I'm buying a chiller and I want to know what the true cost is, buy the chiller, PM the chiller, money for training, routine maintenance, how long you expect it to last?
9-9a. How should budgeting for maintenance and repairs be handled? (9-18a)
· Look at prior year history · Involve building staff in the process as they have good feedback pertaining to usage.
6-3a. What factors must be considered when predicting future leasing activity? (6-9)
· Market Conditions · The rate per psf · TI Allowance · Leasing Commissions · Timing of Anticipated lease commencement
6-5a What are the basic negotiating points in a lease transaction? (6-13)
· Market conditions · Rate PSF · Amount of TI Improvement allowance · Leasing Commission · Timing of Anticipated Lease Commencement
1-2a. Describe the role(s) filled by a property manager during the holding period. (1-3)
· Meeting the owner's goals and objectives, which usually include protecting and growing the cash flow. · Properly caring for the physical asset. Both roles result in enhancing the value of the property, thus proving profit potential upon sale.
13-8. What are some limitations associated with industry comparisons? (13-20) TEST
· Methods may vary by each company · Data generally 6 months old · All respondents do not submit data for each line · Data likely biased toward older properties w/ more historical data
5-9. What are methods for addressing delinquent tenant payments? (5-19-20) TEST
· Monthly reminders sent on the 25th of the month proceeding the due date of the 1st of the month. · Any tenant whose rent is not received by the 5th is given a payment reminder. · Any tenant whose rent is not received by the 10th should be contacted by phone. · Any tenant whose rent is not received by the 15th should receive a face-to-face visit · After this collection efforts are communicated to the owner · Seriously delinquent tenants (greater than 30 days) may require legal action. · Maintain good records if legal actions are necessary and pull AR report
6-2. What are common elements of the rent roll that need to be updated? (6-6) [Step One: Gather Information]
· New leases not yet abstract · Commencement letters, extensions, expansions, contractions, and other changes to space per lease · Amendments, changes to lease term, renewals, vacancies
9-4. When estimating utilities expenses, what resources are available to the property or facilities manager? (9-9)
· Occupancy · Extended Extreme Weather · Types of Equipment · Equipment Condition · Utility Company Rate Increases
8-2. What causes cost variation? (8-4)
· Occupancy · Inflation · Govt. Regulations/Compliance · Building Size & Age · Tenant Service Requirements · Usage (utilities etc.)
11-9. What are common offsetting variables considered in a budget comparison? (11-19)
· Often result in budget variance within tolerance limits · Require explanations and provide guidance for interpreting financial results · Help property or facilities managers become knowledgeable w/ property needs. Note: Typical Variance Threshold Per Book: 5% OR $5,000
9-4a. What is the most effective tool for budgeting utilities and what other tools does one use? (9-5)
· Operating history*** · Projected Occupancy Change · Building Specs · Changes in Utility Rates Prior history—many PMs use average costs from 5yrs worth of data.
3-6e. List some examples of other lease clauses (3-21)
· Option to expand · Right of first refusal (on another space) · Right of first option (to occupy another space) · Right to terminate the lease · Right to reduce space
2-3. What are the advantages to using a purchase order? (page 2-7)
· Outlines provided goods or services · Provides general terms and conditions · Tracks purchases · Limits access · Centralizes purchasing · Consolidates orders and discounts · Records inventory · Validates accounts · Safeguards funds
3-6(b7) What are customary and additional billable services? (3-16)
· Overtime HVAC · Sub metered Electric · Repairs & Replacements (Lights, Keys etc.)
9-1a. What factors affect how an expense budget is prepared (9-2)
· Owner's investment objective · Market conditions · Condition of the property · Marketing strategy
6-7. What are other income amounts that must be budgeted? (6-20) [Step 5: Budget for Other Income]
· Parking · Storage · Antenna/satellite dish rental · Rooftop solar panels · Wind turbines
3-5. What are examples of common lease clauses particularly significant to the building professional and tenant? (pages 3-7-8)
· Parties to the contract · Commencement date of term of lease · Delay of possession · Rent amount · Payment requirements · Late charges · Additional Rent · Security Deposit · Additional services (customary) · Subleasing and excess rent · Continuous Operations · Holdover · Option to Renew
9-8. Which expenses are directly and indirectly affected by changes in occupancy? (9-17)
· Payroll · Management Fees · Elevator Maintenance · Waste Removal · Janitorial & Rest Room Supplies · Utilities
3-4e. Define Ground Lease (3-6)
· Permits tenant to develop property during period of the lease. · After the lease period, land and all improvements return to the property owner. · Also known as land lease since landlord is leasing out only the land.
8-3a When revising a budget, the property manager should do what? (8-7)
· Persuade owner to retain necessary budget items for property benefit · Be aware of owner's consideration in any budget revision · Communicate the effects revisions will have on the property.
7-6. Why is invoice coding needed? (7-12)
· Prevent the wrong contractor from being paid · Ensure the correct amount is being applied to the correct budget account.
3-8c Define Tenant Profile (3-28)
· Printout of data from lease abstract · A reference for more detailed lease questions · Not a substitute for exact lease language
8-5. What recourse do owners have when they are made aware of a budget variance? (8-9)
· Property Manager should notify owner of concerning variance ASAP · Goal of Owner & PM is to increase value of investment
3-8a Define Rent Rolls (3-26)
· Quick reference for basic lease terms of tenancy. · Lists most important financial data per tenant.
9-5a. On what two components is the calculation of real property taxes usually based? (9-11)
· Real Estate Tax Assessment · Levy Mill Rates
4-3. What are examples of common billable expenses on a lease? (4-5-8)
· Real Property Taxes (based on RE assessment, owner pays and passes costs to tenant) · Operating Expenses (escalatable cost, OPEXs outlined in lease) · Common Area Maintenance Charges (CAM—landscaping, parking maintenance, lighting etc.) · Utilities (Electricity/Water—direct metering to tenant, landlord pay common area)
5-7c What is the process of Reporting Charges and Collecting Payments each month? (5-15)
· Recurring Charges (Base Rent) Copied to Database & Posted to Cash Receipts Journal · All Other Recurring Charges Copied to Database & Posted to Cash Receipts Journal · One-Time Charges Entered Directly into The Cash Receipts Journal · Reminder Notice-Sent to Tenant (Monthly Charges) · Tenant Makes Payment · Payment is Deposited in Bank Info Recorded into Cash Receipts Journal & What Acct to Apply to · Collection Process Initiated-Unpaid Amounts · Data from Cash Receipts Journal is Posted To GL which allows for inclusion in financial statements
2-1d. What types of controls are commonly used (2-3)?
· Reimbursables are backed up by receipts · Account #s are added to invoices · Shipping receipts are matched w/ invoices · Invoices & Receipts are checked against budget numbers.
3-8. What are tenant and property reports commonly created with information contained in lease abstracts? (3-26-29)
· Rent roll · Stacking plan · Tenant Profile · Reminder Notices · Stepped Rent Report · Lease Expiration Report
3-8e Define Stepped Rent Report (3-28)
· Report that shows upcoming rent increases · Help in making sure rent hikes are recognized by both billing and tenant
3-8f Define Lease Expiration Report (3-28)
· Report that shows when leases will expire · Helps give a heads up on when leasing should reach out a/b potential lease renewals.
8-5b What do internal controls do? (8-11)
· Safeguard assets · Ensure accurate and reliable accounting data · Promote operational efficiency · Adhere to prescribed management policies
8-5c What areas of concern give rise to internal controls? (8-11)
· Selecting vendors · Establishing prices & terms of goods and services · Requesting & Accepting from vendors the goods & services · Reporting requested goods & service · Computing amount due for goods & services · Disbursing payment for goods & services · Making adjustments to cash disbursements, vendor accounts & distributions · Accessing records pertaining to purchasing, receiving, and disbursement etc.
3-8d Define Reminder Notices (3-28)
· Sent at beginning of month to pay rent · Not required as lease obligations are clearly stated in lease
14-10. Which basic accounting concepts underlie all financial statements? (14-20) TEST
· Separate Entity: The business entity must be kept separate from that of the owner. · Going Concern: The business entity is expected to exist indefinitely as a 'going concern' (operational unit) · Stable Monetary Unit: The information in the financial statements must be expressed in monetary units. (Everything is paid in US dollars)
3-4. What are the different net lease types? (3-5-6)
· Single-net lease · Double-net (net-net) lease · Triple-net (net-net-net) lease · Absolute net lease · Ground Lease
3-3b. What is a modified gross lease? (semi gross) (3-5)
· Spells out items that require additional payments (only taxes, not opex?) · Must have a base year to calculate
3-8b Define Stacking Plan (3-26)
· Stacked appearance to show each floor and occupancy. · Indicates scheduled expiration dates of tenant leases
7-7d. What types of taxes may be withheld from a paycheck? (7-15)
· State, Local, Federal & Sometimes City Income taxes · Federal Insurance Contribution Act (FICA) · Federal Unemployment Tax Act (FUTA) · State Unemployment Tax Act (SUTA) · Union Benefits
12-5. Which procedures should be put in place for recording the expenses associated with supplies purchased? (page 12-8)
· Supplies are known as inventory · The transfer method of applying them from the balance sheet to the cash basis income statement is known as charging out inventory.
1-2. Describe the role(s) filled by an accountant during the holding period. (1-3)
· Support managers by processing, controlling and reporting accounting data. · Deliver accurate, meaningful and timely financial reports (They support the PM, they do NOT to explain a variance.)
3-6. Why is lease documentation important? (3-8)
· Tenant in the lease contract may not pay the rent. · Parent company many execute lease, but subsidiary pays. · Entity on the lease is the entity liable and the party sued if something goes wrong · Properly identifying entities, provides liability protection to landlord
14-6. What does a company's merchandise inventory turnover reveal about the company's financial state? How is it calculated? (14-13)
· The number of times average inventory is sold during an accounting period. · The faster the turnover the better the sale.
14-3a. Define return on equity How do you calculate it? (14-8) TEST
· The rate of return on an owner's equity. Net Income/Average Owners' Equity
14-8a What is leverage ratio? How is it calculated? (14-16)
· The ratio calculated by dividing the liabilities for which the fixed assets are pledged by the long-term assets' book value. The minimum for this ratio is 50%. Mortgage/Total Fixed Assets
14-5a Define Acid-test ratio. How is it calculated? (14-12) TEST
· The ratio of quick assets to current liabilities. Also called a quick ratio. 1. Quick Asset CASH + Accounts Receivable (AR) = Total Quick Assets 2. Quick Asset/Current Liabilities
14-4a Define current ratio. How is it calculated? (14-11) TEST
· The relationship of a company's current assets to its current liabilities. Current Assets/Current Liabilities 2:1 or higher is good
14-8b What return on fixed assets? How is it calculated? (14-16)
· The return earned on fixed assets employed is a measure of managements performance. Income before debt service/ average fixed assets.
4-7b Why is it important that each expense account category contain a full 12 months of activity? (4-14)
· To conform to GAAP Requirements (Generally Accepted Accounting Principles) · Accurate comparison to the base year and/or base amount
12-1. What procedures by the accrual method should be done when recording rent that has been deemed uncollectible? (12-5)
· Uncollectible rent should not be reflected as income · Record the revenue, then offset it by expense reflecting the amount that is uncollectible · If specific amounts can be identified as uncollectible, remove from receivable listing · Record as a bad dept expense.'
5-7b What is the minimal amount of information that should be kept in a tenant database?
· Unique tenant ID # · Full Legal Tenant Name · Tenant Billing Address · Lease Term · RSF of space · Base Rent · Recurring monthly charges Note: Database=MRI & Yardi
14-9. What are the three types of audit opinions? (14-19&20)
· Unqualified—A 'clean' opinion, auditor has no reservations. · Qualified—Auditor has some reservations to the financial statement · Review Engagement or Compilation—Auditor can't form an opinion b/c of an exclusion of material.
14-3. Define Earnings per share and what considerations should be considered? (14-8) TEST
· Used to compare companies withing the same industry/market size · Evaluate the past performance of a business · Project its future earnings · Weigh investment opportunities Net Income / Common Shares
9-3c. List four general cost categories that are usually the largest expenses. (9-8)
· Utilities · Payroll · Property Tax · Contracts for regular services
2-7. Identify reports common in commercial real estate industry that aid building professionals in making decision decisions about use of space, funds, and interactions with tenants. (2-15-16) TEST
· Vacancy Report o Summarizes property info o Aids in leasing and filling vacancies · Delinquency Report o Summarizes financial data o Aids in collections · Rent Roll o Easy to read overview o Used to compare tenants
1-11. What are internal reporting needs common to the real property industry? (1-20)
Numerous activities must be monitored and reported to properly manage real property such as: · Tenant collections · Vendor Payments · Monthly Operating Results (income and expenses against the budget)
7-1. Which elements should be considered when comparing vendors? (7-5-6)
One should compare their hourly rate or their productivity rate.
3-6(b3) What are two common examples of additional rent? (3-13)
Operating Expenses (CAM) and Expense Escalations (RE Taxes)
4-3b. Define Net Lease (4-8)
Opposite of gross lease. Base Rent Bundles in: · Debt service (covers repayment of interest and principal) · Profit · Repairs · Insurance to lessor Tenant pays separately: · Property taxes
3-7. Explain different methods for abstracting a lease. (3-22-23)
Option 1: Abstract is part of lease document Option 2: Lease abstracted by hand directly from lease document to a form then used as a file copy. Option 3: Abstracted by hand directly, working w/ property/tenant base. Filling predetermined fields in database.
4-5. How are cost increases calculated for a property? (4-10)
[Escalatable Cost Pool] - [Base Rent] = [Net Cost] [Net Cost Increase] X [Tenant's Pro Rata Share] = Tenant's Share of Cost Increase
104b. What is Effective Grow Income and how do you calculate it? (10-11) TEST
[Gross Income] - [Vacancy Rate] = Effective Gross Income
104c. What is the Annual Cash Flow and how do you calculate it? (10-11) TEST
[Gross Income] - [Vacancy Rate] = Effective Gross Income [Effective Gross Income] - [Actual Opex] = Net Operating Income [NOI] --- [Debt Service/Mortgage] = Annual Cash Flow
12-1d. What is a profit and loss statement? (12-2)
An income statement providing accurate accumulation of profit or loss via accrual adjustment.
4-8. How are CPI increases determined? (4-20)
An increase that adjusts for inflation. (GSA)
1-5c. What is an account (1-6)?
An individual record of information and transactions related to each asset or liability and each aspect of owner's equity.
8-1d. What is a semi-variable cost? (8-2)
An operating expense that display both fixed and variable components such as ground maintenance fees and cleaning costs. Ex. Administrative, Roads/Grounds/ Security
13-1b. Explain the importance of budget comparisons? (13-3)
Analyzed monthly, culminating in an analysis of annual operations. Monthly comparisons allow owners to quickly identify problem areas and tac corrective financial action.
12-1f Define Generally Accepted Accounting Procedures (GAAP) (12-2)
Conventions and reporting mechanisms that the accounting profession uses to obtain uniform procedures.
12-1e. What is accrual basis accounting? (12-3)
Financial activities applicable to each period which are not incurred in cash (monies moved but not yet received or paid) are included.
9-6a What are cost centers? (9-13)
Organizational units - generally departments within a company that incur expenses. Ex. Pay roll does not appear on financial statements to be a very large expense b/c it is allocated to different cost centers.
1-6a. What is the basic accounting equation? (1-9)
Owner's Equities= Assets - Liabilities OR Assets= Liabilities + Owner's Equity OR Assets= Liabilities + (Capital + Revenue-Expenses)
3-1a. What is a lease? (3-3)
A written agreement btwn the tenant and the owner of a bldg. for use of space in the bldg. for a period.
14-8d What is an audit opinion? (14-19)
A written statement concerning a company's financial records. They represent a fair analysis of the financial position of the company and the results of its operations.
12-4a. Give an example of how it is applied when dealing w/ insurance? (12-7)
Amortization · Reduces the balance of the prepaid insurance 1. Remove the insurance premium from cash flow statement and record as an asset on balance sheet 2. Transfer applicable portion from the balance sheet to the cash flow statement Unamortized Asset · Also known as a prepaid expense · Remaining balance of the insurance premium.
10-3b Define capitalization (10-8)
An accounting method in which a cost is included in the value of an asset and expensed over the useful lie of that asset, rather than being expensed in the period the cost was originally incurred Transferred from the cash basis income statement and recorded as assets on the balance sheet.***
6-5b What is a gross up and how is it calculated? (6-17)
An additional amount of money added to cover the income taxes of the common area used by a tenant. Rentable Space = Gross Up Factor Useable Space
12-7c What is a deed of trust? (12-15)
An agreement between the loan issuer and the holder covering the asset.
3-6(b2) What is a pass through? (3-13)
An agreement btwn the tenant and the owner concerning a method of increasing rent in addition to the CPI.
2-2b. What does a purchase order contain? (2-5)
An agreement that shows exactly · What is being purchased · Quantity · Delivery Date · Price · Payment Terms
2-2. How is a checks-and-balances system established? (2-3)
By having different individuals performing various control procedures. Ex. The person who codes the invoices is not the person who writes the checks.
1-14a. How do building owners control costs (1-22)?
By monitoring budget preparations and tracking monthly variances.
13-3. How is sample size determined for data compared in the BOMA Experience Exchange Report? (13-14)
By the Number of Buildings (BLDS) supplying data for each income or expense category. This may vary per income or expense line item. The larger the number, the more reliable the calculation of averages.
3-6(b1). What is CPI? (3-13)
Consumer Price Index. It measures inflation year over year. Clauses in the lease may reference the CPI as a reason for increasing base rent.
8-2b. How are costs identified as either controllable or uncontrollable? (8-4)
Controllable Costs: R&M items that PMs chose to do. Uncontrollable Costs: Mill Rates & Tax Assessments Note: Owners need to factor in these variables when identifying the true effect PMs can have on cost control.
6-6. What is slippage and what causes it? (6-18-19)
Difference between Recoverable Opex & Actual Opex Causes Include: · Semi-gross leases w/ base amounts not exceeded by Escalatable Pools · Expense Caps written in lease preventing charges over a certain amount · Area caps that enable tenant to use more space than charged · Empty Space Opex
6-1. What is meant by the term responsibility budgeting? (6-3)
Different parties taking responsibility for different sections of the budget for the property involved in the budget process Ex. Leasing team would be responsible for developing a leasing budget.
10-3 Define the discounting process (10-7)
Discounting=Present Value Discounting determines the present value of an investment before compound interest. · Determines present value of future amount needed. · Discounts anticipated future value by anticipated interest rate. Therefore, the value of a dollar received today is greater than one received in the future, as it can be invested and earn a return in the interim
10-3a What is the formula for discounting (10-7)TEST
Dividing the future value by the sum and interest compounded each year If you discounted $50,000 over 5 years at 7% interest [Calc. 10-7] $50,000 ÷ 1.07= $46,728.97 $46,728.97÷ 1.07 = $43,671.93 $43,671.93÷ 1.07 = $40,814.89 $40,814.89÷ 1.07= $38,144.76 $38,144.76 ÷ 1.07 = $35,649.31
12-3. What are common types of prepaid expenses? (12-6)
Expenses paid in one lump sum that apply to periods up to one year are recorded as prepaid expenses. They Include: · Taxes · Insurance · Service & Maintenance Contracts.
12-2 What is accrual basis accounting and what are the standard time frames in which building, and property expenses should be recorded? (12-6)
Expenses should be accrued for the month during which the service or good was provided, rather than when invoices are received.
14-1. Among the staff at a commercial property, which roles are typically responsible for reviewing tenant financial statements? (14-3)
Facility managers should complete a high-level review, but finance experts such as chief financial officer, controller, or certified accounting professional should give a more thorough review.
4-3a. Describe common area maintenance (CAM) charges (4-5)
Maintaining Items such as: · Sidewalks · Parking lot · Landscaping · Other
10-1d Define Capital Assets (10-3)
Major expenditures such as property, plant or equipment.
13-1d. What is identified by prior year comparisons? (13-6)
Market trends and areas affected or neglected by operating strategies.
7-7g. How is employee work time allocated for reporting purposes?
May be split between buildings or projects. This is based on either actual hours spend on each project or a set percentage split determined by SF occupied.
11-8. How do identified budget variances impact budget revisions? (11-18)
May highlight problems that were not addressed during the period and may influence decisions made regarding the revision of next year's budgets.
1-14. Explain internal accounting control strategies as they are used in real estate. (1-22)
Needed primarily to prevent human error—such as · Missed opportunities to collect cash · Excessive outflows of cash—depleting owner's cash Put in place to maximize cash income and minimize cash outflows.
4-6b Define Non-Operating (Non-Recoverable) vs. Operating (Recoverable) (4-12)
Non-Operating Expenses: · Expenses that are generally not related to the maintenance and repair of the building Ex. Leasing, Capital Improvements, Income Taxes · So non-recoverable and not included in the expense pool. Operating Expenses: · Direct opposite and are recoverable and included in the expense pool Ex. Plumbing, Electrical, Security
8-5a. What is responsibility reporting? (8-7)
Preparation of a portion of the budget, along with explanations of any budget variances, done by the individual who is responsible for the items in that portion of the budget. Ex. An engineer who handles the amount of chemicals used for an HVAC system, should be responsible for managing and explaining that portion of the budget.
13-1e. Industry Comparisons: What is a common benchmark in the commercial real estate industry?
Price per square foot (PSF).
1-13b. What are cash controls? (1-21)
Procedures to ensure that cash is properly handled and to combat human error.
10-1a Define capital budgeting (10-2)
Process of deciding whether to commit resources to a project based on expected future benefits. Is the juice worth the squeeze?
5-2. How is prorated rent applied to the commercial real estate industry? (5-5)
Rent and other charges should begin upon occupancy by the tenant unless otherwise stated in the lease. If the tenant doesn't move in at the first of the month, then the rent is PRORATED to account for the number days the tenant was not in the space. Note: Need to be able to calculate. Use 365 to get your daily rate. Must count the date of occupancy as a prorated day. Ex. 5-6
3-6b. What is the formula for calculating prorated rent? (3-13)
Rent that's calculated proportionately. In other words, you'll pay rent not based on the total monthly price, but for how many days you used the rental that month Note: Leases don't always start on the first of the month.
9-8a. How does the type of market influence efforts to lease a space? (9-17)
Soft Market · More $ for advertising to attract tenants · Landlord may pay more for TI Strong Market · More latitude in selecting tenants · Tenants may absorb more TI costs
2-1b. Why is attention to accounts receivable important (2-3)
Vigilant attention to monies owed a company in the form of rent or services is crucial to maintaining cash flow and profitability.
10-4a. What is the Return on Equity (ROE)? (10-10) TEST
[Annual Cash Flow] ÷ [Investment Value] You get the Annual Cashflow by [NOI] - [Annual Debt] Note: Investment Value=the initial down payment, not the total value
11-1c. What is the formula for reconciling the cash account? (11-2) TEST
[Beginning Cash Balance] + [Cash Receipts] - [Cash Disbursements] = [Ending Cash Balance]