Property Accounting: The New Frontier for Real Estate Back Office Outsourcing
In both start-ups and mature businesses, executives must be equally focused on achieving revenue targets and building a back office accounting infrastructure that supports and accurately measures growth. Coping with the challenges of maintaining internal controls and producing reliable financial reports often draws management away from strategy implementation. To alleviate this issue, outsourcing back office functions has become commonplace across industries. Property accounting is an additional outsourcing opportunity that has recently gained attention in the real estate sector across property types.
Property Accounting Roles and Functions
Most accounting functions and even more senior accounting positions can be outsourced to an accounting firm with deep knowledge of property accounting and the range of transactions undertaken by privately owned real estate companies, private equity funds, and REITs. The firm must have knowledge not only of property accounting but entity structures and the many layers of the capital stack financing the properties.
Most property accounting functions for multiple investment entities can be outsourced, including accounting for new transactions and bookkeeping for the existing portfolio, accounts receivable, accounts payable, cash management and bank reconciliations, payroll, and financial reporting. If a property is to be audited for the benefit of a capital provider, an outsource team can create professional financial reporting with footnotes and provide all other information necessary to facilitate that audit.
For private equity funds, outsourcing property accounting can be paired with outsourced fund administration, which includes accounting, tax planning and compliance, capital calls and distributions, and investor reporting at the fund level. (In a private equity fund the outsourced accounting team can also support the calculation of cash flow waterfalls.)
The specific accounting roles that can be outsourced include:
- Systems Manager
- Accounting Manager
- Property Accountant
- A/P Specialist
- Treasury Analyst
- Payroll Specialist
As the company and its portfolio of investments grows, the outsourced staff is scaled to meet the increasing needs of senior management. The team is on call and available in the same way as any internal company personnel.
Benefits of Outsourcing Property Accounting
Property owners need to get the numbers right to achieve their intended returns. They need real-time information when issues arise, and accurate and timely reports that enable decision making. A number of excellent property management software packages support day-to-day accounting and financial reporting, but often these expensive products are not fully utilized or regularly upgraded by users, and the cost-benefit ratio isn’t realized. To achieve the full benefit of these systems and optimize management and investor reporting, a real estate company needs to invest in both a first-rate accounting team familiar with industry leading practices, and a technology group that is current on the latest software updates. Outsourcing achieves both of these objectives.
Outsourcing the property accounting function enables senior management to focus on investment strategies, deal structuring and optimizing property performance without the burden of worrying whether the books and records are up-to-date, accurate, and actionable. An accounting firm is knowledgeable of the latest pronouncements that may impact how transactions are recorded, and will use state-of-the-art cloud technology to deliver financial statements and other reports in a timely fashion, accessible to management through any device, anywhere. That means the company can have the best possible accounting solution typically for less cost and without the management issues of running an in-house accounting department.
Not only does the real estate company save on personnel costs, including benefits, but on the all the overhead associated with an accounting department: rent, furniture and equipment, and the IT costs associated with each staff person. The outsourcing cost also includes the use of technology, typically cloud-based, leveraging the software the company was already using, or upgrading to a more state-of-the-art system. Managing an in-house staff also requires dealing with absences, vacations, and staff turnover. In an outsourcing environment management is relieved of all of these challenges. Instead, a consistent outsourced team is always available to management.
Making it work
Outsourcing has to be set up correctly for management to realize its benefits. The outsourced team must have the requisite skill sets and deep experience in real estate and property accounting, particularly the types of properties and investment structures being used by the company. One size never fits all. Detailed planning to specify which roles and functions will be outsourced and which will remain in the company -- and customizing the arrangement to meet the company’s needs -- is critical to appropriately set expectations and achieve the best results. Effective outsourcing can best be achieved with an initial review of current accounting processes, controls and technology, so that the company and outsourcing partner can together find improvement opportunities that can be achieved as the outsourcing is implemented.
Despite outsourcing the property accounting function, the company must devote a resource to managing the effort from the inside, and set up governance, communication, and approval protocols to promote seamless interaction and meet deadlines. The parties should establish a calendar for closing the books and financial reporting, and the outsourced team should receive advanced notice of upcoming transactions so there are no surprises on either side. Training related to future-state processes often makes the transition smoother.
Company management should expect that it might take a few accounting periods to fully establish the flow of data that will enable bookkeeping and reporting. Processes and communications must be honed as technology is stabilized and then optimized. However, once up and running, the outsourced team can be scaled to support a real estate venture’s increasing deal volume and portfolio growth. Outsourcing property management to well qualified technical experts enables management to focus on that growth without the additional burden of running the back office, and the company can receive a multiple on its investment when the outsourced functions truly support its strategy.
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