Behind the Veil

I work in the real estate development business, but my perspective has always been from the accounting and finance group.  I was a ski bum in Vail after college.  I waited tables at a fancy hotel like so many other ski bums, and it wasn’t my plan to stay in the mountains.  But, the lifestyle was great, I felt healthy and stimulated, and I saw there were real opportunities to work hard and have a career.

A relatively easy entry into accounting in many resort towns is as revenue auditor.  Plus, it usually means you work at night and can ski all day.

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The following is a list of accounting jobs from the lowest level to the highest.  I’ve done all of them.

The Revenue Auditor makes sure the front-line staff recorded all their sales transactions correctly.  The auditor makes sure the point-of-sale system tells the same story as the actual cash and electronic payments received.  Once the revenue auditor signs off and corrects any errors, the daily sales can get recorded in the books.

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The Accounts Payable Clerk is the person you want to know if you rely on a company to pay you.  The A/P clerk enters all the invoices into the accounting system for payment and cuts the checks and disburses them when it’s time to pay.  An organized A/P clerk is essential to a reliable accounting department, for both ensuring expenses are recorded accurately and in a timely manner and for managing cash flow.  In a big company the flow of invoices through the A/P clerk can be overwhelming but good A/P clerks develop procedures and schedules to keep everyone happy.  This is the person most likely to have the famous (in accounting departments at least) sign above their desk that reads “Lack of planning on your part does not constitute an emergency on my part”.

The GL/Staff Accountant doesn’t enter invoices for payment but makes all the journal entries for a company.  Cash deposits and transfers, interest payable and receivable, depreciation and amortization, month-end adjustments and write-offs and maybe even payroll get entered into the system by the staff accountant.  They have the power to keep the books clean and accurate or to really screw them up.

The Financial Analyst is not really an accountant but works closely with the department to harvest financial data and create accurate, relevant, and useful reports for management to use in decision-making.  They often have access to the accounting software so they can write reports directly in the system for easy output. 

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The Assistant Controller is the catch-all once you’ve moved beyond A/P Clerk and G/L Accountant.  Every CFO has been an assistant controller somewhere along the way, and if a company has only one or two accountants, someone is the assistant controller.  The role is responsible for making sure the activity recorded on the books is accurate, that you’re not bouncing checks, that your source documents are organized and auditable, and everyone higher up is getting what they need. 

The Controller usually isn’t in the software except for review.   The controller is managing cash flows in and out, signing checks, and closely following sales.  The controller is reviewing and finalizing financial reports, preparing cash forecasts, dealing with auditors, and overseeing tax work.  The controller may often have some responsibility over the human resources/payroll department and the technology services group.

The VP of Finance is the person in charge of business plans and budgets and matching up the actual work of the accounting department versus budgets while looking into the future.   The VP of Finance needs reliable information from the Controller but also works closely with heads of sales, project management, capital improvements, and other departments to make sure overall company performance is on the right track.  You’ll often find an Ivy League MBA in this role.

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The Chief Financial Officer is the boss.  He or she talks to lenders, investors, Wall Street, the CEO and anyone else who is important to the finances of the business.  The CFO is where the buck stops on the finance side of the business.  You’ll usually find someone here with great technical skills and excellent personal and communication skills.  It takes both to get to the top.

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Real Estate Development Accounting

A young auditor from a Big Four accounting firm once told me that real estate accounting is the easiest kind.  It was the only kind of accounting I knew so I took him at his word.  After many years of experience, I think he was right.  But accounting may be the only aspect of real estate development that is easy.

For real estate development accounting you try to capitalize everything.  To capitalize something means to convert your cash to another hard asset on the balance sheet versus having it be expensed and go against your bottom line.  This is for a couple of reasons.  First, the end all, be all of accounting principles is the matching principle.  Match your expenses with your revenues.  But what do you do when you spend money for 18 months to build some townhomes and then sell each unit in a day?  Real estate requires you incur all your costs up front, over a relatively long time frame, and then sell the finished product (not just put under contract, but close escrow with the title company) in a day.  Spend $400,000 evenly over the course of a year, sell and collect $500,000 in revenue in one day.  The numbers are for example purposes, but you get the idea.  Imagine the scale and time frames and dollars spent when building Manhattan’s massive residential skyscrapers or Florida’s sprawling master-planned golf communities.

Put all the costs in one pot and then try to match up the cost when you sell the finished product.  In real estate development it’s impossible to match where every shingle went, where every electrician pulled a wire, where every unit of concrete was poured, so you pool all the costs and then allocate them relative to the revenue you expect to make overall for the project(s) for which the costs were incurred.

Phasing helps make this simpler.  You can at least usually track the costs of a phase based on contracts.  But how about that main road that’s going to access multiple phases. You’ll have to come up with some sort of reasonable allocation to spread those costs into the cost pools of each phase the road is going to serve.

There are some complexities, but like the industry itself, real estate development accounting can be a little like the wild west.  In order to match those costs with future sales you must start with the assumption that you know the finished product will sell a year from now and have some idea of how much it will sell for.

The second biggest thing you’re likely to ever buy rolls off an assembly line in a day.  The house, the office building, the tower takes years of costs to produce.   And the accountant can lump them all together and make estimates about very large transactions that should happen in the future, sometimes years out.

But I think the auditor was right, real estate accounting is easy.  That’s good, because nothing else about real estate development is.

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