Investing in Commercial Real Estate -- The Financial Aspect

As an investor, monitoring the annual performance of the property is part of analyzing the profitability of the investment as well as the potential of other real estate properties that he might consider investing in to.

When you know that the numbers are not making sense, generally you would not opt to invest for that property. Understanding the financial aspect of real estate investment is important so that you are aware if you will be getting a positive return on your investment.

Performance statements

Certain performance statements similar to that of financial statements for other corporate institutions are provided for the analysis of annual operations. This will be presented in two different ways and that is through the Owner's Representation and Brokers Reconstruction.

The Owner's representation reflects the scheme of the owner in the operation of his or her property. The broker's reconstruction on the other hand represents the standards of the broker in terms of the performance of the operations.

Differences of the two statements

There are a lot of differences between the two statements. While the owner is depicting the property's operation in the best light possible, the broker wants a presentation that is more realistic for the users because primarily, how the property is performing mostly defines its value.

Another difference is that the owner wants the highest value for the property while the broker wants the most reasonable value for it.

Contents of the operating statements

As regards to the contents of these operating statements, broker or owner statements reflect the same line items for an annual basis.

The contents include the gross income, the vacancy and collection estimates, income derived from other sources like laundry, vending, etc. and the operating expenses incurred for the period.

The resulting amount of these annual operating statements is the net income derived from the operation of the property for the said period. Common problems relating to preparations of owner statements and resulting to an erroneous net income is when the owner does not charge the property for work that they are providing.

For example, management expenses incurred by the owner/manager may sometimes be intentionally omitted from the performance statement and as a result overstating the net operating income.

For a proper evaluation of the profitability of one's investment, it is important that all expenses related to the venture should be included in the statements. This is when the broker comes in. The broker reconstructs the expense account so that it will now reflect the appropriate charges.

As with gross income and other important line items in the statements, the same reconstruction should be done to come up with the right figures and not mislead users in terms of decisions and impressions about the profitability of the property. The reconstruction must be able to reflect figures that are as much as necessary realistic for purposes of profitability analysis.