RENTAL E XECUTIVE NATIONAL THINK TANK
Getting into the numbers This issue brings together the RENTT (Rental Executives National Think Tank) panel to discuss issues related to accounting, such as the value that the accounting team provides to different parts of the business, getting the team involved in making key decisions, discussing assessment and property tax notices, in-house vs. outsourcing accounting services, advising rental property owners on getting the most benefit from their accounting team, and more. 14 | oct 2017
Jackson Orr Property Manager, Orr Development Corp.
Gloria Salomon CEO, Preston Group
Jeffrey Gould Senior Vice President, Regional Group
rentalhousingbusiness.ca | 15
RHB: Welcome to RHB Magazine’s RENTT panel. We appreciate the time and effort involved in participating in today’s discussion and sharing your knowledge. Our readers will benefit from your input and experience. Today we’d like to talk about how accounting is key to running your business. “What is the importance and value provided in including your accounting team in key decisions on your business and financing issues?” Jackson Orr: The input from the accounting team helps us to plan for the future of our company. For example, their assistance allows us to more accurately decide when to make new hires or delay a new development. Without input from our accountants, we may not fully maximize our refinancing capabilities, which could lead to some missed market opportunities. Their feedback also helps us decide when to be more conservative with taking on new business as cash flow may be an issue. Gloria Salomon: Accurately determining building value is very important in financing. The accounting team can help an outside lender see that the property is worth more than prior appraisals by analyzing costs and aiding with projections. Jeffrey Gould: I agree. The accounting team is an important aspect of making both business and financing decisions. RHB: What about their influence on the level and timing of capital expenditures? Jackson Orr: The long-term planning of capital expenditures would be extremely difficult without consultation from the accounting team. We need their expertise to decide which expenditures can wait and which large items need to be planned for now. Gloria Salomon: Being capital intensive, capital expenditures significantly impact our long-term profitability. Ensuring they’re completed at the ideal time and executed successfully (minimizing the duration of the project, using a trusted contractor) is vital. Cash flow projections always have to be balanced against expenses to determine if the expenditure is optimal for the property. 16 | oct 2017
Jeffrey Gould: The accounting team is an essential contributor to making key decisions on the level and timing of capital expenditures. RHB: How about when you decide on launching a new development? Jackson Orr: It would be irresponsible to plan a new development without thorough input from our accountants. We need to have the capability to absorb lost revenue if a building is demolished leading to tenants vacating. Our company must also consider and have significant excess revenue should building permits be delayed or construction costs increase, which are both common for new developments. There are significant soft costs absorbed well before and actual construction takes place. Gloria Salomon: Since the Canadian housing boom can’t last forever and interest rates will inevitably rise, IRR calculations and cost budgeting is very important in the decisionmaking process. A new development has to make monetary sense in the projections in order to ensure viability. Jeffrey Gould: I’d have to concur. Our accounting team is essential in making decisions on launching new developments. RHB: How much do you involve your accounting team in decisions about unit upgrades? Gloria Salomon: Whenever a unit turns over we conduct an NPV/IRR analysis to determine if the suite should be renovated and, if required, how much money to invest into the renovation in order to maximize our ROI. Upgrades will bring in a higher rent, but if you spend too much, and the market is unable to meet your projected rent, then you have over-upgraded. The accounting team has to be involved to ensure you are not over-maximizing your expenditures. Jackson Orr: Our accounting team would be consulted if the upgrade was generally more than $1000. Jeffrey Gould: We would engage our accounting team in general discussions on the issue, but they would not be involved in the decision-making process.
RHB: What about asking rents, or other revenue maximization efforts? Jackson Orr: Rents are typically based on a price per square foot for comparable product in the immediate area so we do not typically consult with our accountants when setting the rent as rents are market based. We do however often discuss how to increase revenues with our accounting team along with creating completely new sources of revenue. They are quite creative and have accurate information on expenditures and the associated cost increases. Gloria Salomon: The most important input for our NPV/IRR analysis is accurately predicting what market rent we can achieve. For each unit that turns over, we carefully analyze current market comparables and our historical lease rates. While analyzing market rents isn’t a technical accounting skill, synthesizing information and using decision-making skills are crucial competencies of the CPA mindset. Jeffrey Gould: That is not a topic that would require involving our accounting team. RHB: How about when having to use capital expenditures to raise legal rents (in provinces with rent control)? Jackson Orr: We have not historically used cap ex to raise legal rents. We would consider raising market rental rates (on new tenants) if we had recently spent a large amount on an expenditure. Jeffrey Gould: We would involved our accounting team in the process of determining whether to use capital expenditures to raise legal rents. RHB: To what extent do you and your accounting team analyze your assessment and property tax notices, as opposed to contracting out that work? How has that approach worked for you? Gloria Salomon: We are more comfortable contracting that work out to the legal specialists who have experience in negotiating with city representatives, and analyze the tax bills to a higher level than we can. Jackson Orr: We analyze all of our property tax assessments thoroughly. We have appealed many assessments over the years through third party companies with small levels of 18 | oct 2017
successful appeals. There is only a cost associated with an appeal if it is successful. Jeffrey Gould: We’ve contracted out these services to associates within the office. It’s been very successful to date. RHB: At what stage in the growth of your rental business did you change from using an in-house bookkeeper (and contracted accounting services and advice, if applicable) to relying on an accountant in house? How did that work out for you? “We have both in-house and outside accountants. When I first started working in the industry, we had only two properties we were directly managing, and as a C.A., I did all the bookkeeping and I prepared the year- end financials and had them reviewed by our outside firm. As we took on more buildings, and more staff, I concentrated more on day-to-day management, and we currently have in-house staff to do all bookkeeping (accounts receivables and payables, payroll, etc.) and we still prepare our year-end financials that are reviewed by our outside accountants. Our outside accountants also provide tax planning advice and do our year-end corporate filing for tax purposes.” – Gloria Salomon on changing to an in-house accountant Jackson Orr: Approximately 30 years ago we brought accounting in house. Before that we consulted with large accounting firms; the company would have been about 50 years old at that time. It has worked out well for us to be able to collaborate and discuss financing and expenditures with our in-house accountants on a timely basis. Jeffrey Gould: We’ve always had in-house accounting expertise, and it has worked out well to our satisfaction. We use outside accountants for year-end statement preparation, and when they’ve been appointed by clients. RHB: In general, what advice can you give rental property managers about getting the accounting systems and staffing right for their businesses? Jackson Orr: They are an integral part of the accurate management and effective costing
Top Ten things you can do to
your building for
WINTER this year
1. Ensure your filters are clean and your furnace has been professionally serviced. 2. Ensure air diffusers / baseboard heaters are clean and unobstructed. 3. Clear extra space around your heating equipment in case of emergency. 4. Purchase and stock flash lights. 5. Seal all windows to prevent drafts 6. Flush your hot water tank to remove sediments 7. Add floor coverings (area rugs) 8. Turn off outdoor faucets 9. Insulate piping 10. Remove window air conditioners or cover with insulated liners These top ten tips are the courtesy of Sandcastle Energy Systems
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RHB, RHB Magazine, RENTT