The goal of the profit and loss statement is to identify issues and present the true profitability of the complex. Having a well-organized revenue section leads to an informative report. There are several different issues and I present them here in order of importance:
- Every owner and manager wants to know the maximum revenue potential from their complex. In addition, the owner/manager is interested in knowing the total actual revenue earned against the potential maximum. This is referred to as the occupancy rate and financial performance.
- In addition to the rental aspect of operations, the complex has several other sources of income. These include application fees to the money earned from the soda machines.
The following sections explain these in more detail and provide an illustration of how the respective section is presented in the revenue section of the statement of income (profit and loss statement).
Occupancy Rate and Financial Performance
The following is the rental revenue section of a financial statement related to an apartment complex located in the Midwest of the United States. I’ve changed the name to protect the source. Please review and I’ll explain its value immediately thereafter.
This is the primary section of the financial statement. Notice how it identifies several attributes for the reader. First off, it clearly states the maximum potential rent from the complex. Basically, based on the current rental rates and the portfolio mix of various sizes of apartments the statement identifies the optimum financial income. This is an essential piece of information as it will clearly evaluate the apartment manager in her job of making sure the complex is occupied.
Now almost all larger complexes have two types of adjustments. The first relates to models used to show for potential tenants. The rental revenue section backs out the model’s potential rental income because management would clearly like to know how much value is lost related to having models available. In addition, many tenants are able to negotiate reduced contractual amounts or the contract was signed using an older rental rate. So a line of value related to contractual obligations is inserted to identify the value associated with these agreements. Some complex managers will discount the rental rate for a police officer or deputy with the understanding that the law enforcement official will park the police cruiser at the complex. This benefits the complex and provides additional security. This is where that dollar value related to that agreement is inserted.
The end result is the actual maximum potential rent the complex manager can collect from the tenants. In this case, $1,849,685 is the absolute best the apartment complex manager can collect during this time period. Now that we know how much can be collected, we would want to know the major sources of rents earned. Almost every complex is involved in some form of government subsidized program working with their tenants. This is very common, so this report reflects the two sources of rents earned – traditional and subsidized. Other complexes may have many military based tenants. So I’ve seen where the breakout isn’t by the form of payment but the respective groups of tenants. So the two lines could be ‘Traditional Leases’ and ‘Military Personnel’. The key is using this section to assist management in ascertaining sources of rents for potential marketing purposes.
The Total Rents line identifies the actual amounts earned from tenants. It means that the tenant is legally obligated to pay that amount. It doesn’t mean it gets collected, it means that the tenants owe this to the apartment complex. Now, we want to know, how well did the manager perform in getting the money collected? The uncollected amount identifies the property manager’s performance in collecting the money. It is rare for the manager to get every single dollar.
The final line reflects actual collected rents.
Notice how this reporting format provides several pieces of information:
- Maximum potential rent
- Amount of adjustments for models and contractual agreements
- How the money was earned
- Actual occupancy rate which is merely a function of Total Rents divided by Adjusted Potential Rent, in this case it equals 98% which is outstanding
- Financial performance is illustrated by dividing the actual Collected Rents by the Adjusted Potential Rent; in this case 96.28%. This is good, but improvements could be achieved by reviewing the background and credit checks on those tenants that failed to pay and see if there is any commonality in this group.
This is so much better than the traditional one line of Rental Income or even a two line reporting format. In this industry, the revenue section has much more value related to interpretation and information than your traditional profit and loss statement presentation formats. The apartment complex business model has a strong correlation to the ‘Heads on Beds’ model used in the hospitality industry. So make this section informative and use this presentation format.
There is still more. Often apartment complexes have other sources of revenues and the next section illustrates a great presentation format for these other sources.
Other Sources of Income
In general an apartment complex has a multitude of other types of charges related to their operations. These charges are broken out into three distinct groups. The first group and often the most significant in terms of monthly dollars relate to the tenants. I call this the ‘Tenant Charges’ section. The second group relates to services the apartment complex provides. These include site rental (like renting out the clubhouse, pool or recreational facilities), laundry facilities and even the money earned from the soda machine sales. The third group is generally insignificant in terms of dollars and is called ‘Miscellaneous’.
The following three sections describe the basic groups and the corresponding details for each.
Many apartment complexes provide packages of services to their tenants. One of the more expensive yet common charges relates to utilities. Most complexes provide the water and sewage treatment as a function of the rent but the other types of utilities are not included. So tenant charges can consist of cable or internet access fees, hookups to gas or electric and so on.
The following is a long list of different types of tenant charges I’ve seen used over the years:
- Cable/Internet Access
- Nonrefundable security deposits
- Pet fees
- Late fees
- Penalties (excessive tardiness with rent payment, failure to comply)
- Damage fees
- Application/Background Checks
- Termination charges
- Washer/Dryer Rental (Not Laundry Room Income)
Facility income relates to sources of revenue for use of the property. Often tenants will have gatherings and require the use of facilities. No different than how a hotel charges for using the ballroom; apartment complexes should charge a fee to use existing facilities. The following are the more common facility sources of income:
- Laundry room
- Clubhouse/Pool/Recreational Rents
- Game Room/Vending Commissions
- Preferred Parking Access
The third group of other forms of income is miscellaneous. This group acts as the catch all for any oddball income. You don’t need to create sub accounts to this one; just put all the remaining items in this one line of information. The following is a list of various sources of miscellaneous income that I’ve seen recorded by others:
- Non-Sufficient Funds charges
- Court Costs related to matters that are not eviction based; eviction based items are included in Tenant Charges
- Lost key charges
- Statement printing charges
- After Hours Access Services
The Other Income section of the revenue section of an apartment complex profit and loss statement will look like this:
Many of the different accounting software packages allow you print out a detailed report for the three sections.
Now let’s combine the two major sections of the revenue part of the profit and loss statement and see how this looks:
Now when you look at this illustration, isn’t this an informative report? It is easy to understand and evaluate performance. In addition, it separates the primary revenue source from the auxiliary sources of income.
Many managers and owners believe that they have to follow some mandated reporting format. You do not. This is your financial report; there are no Profit and Loss Cops out there that will cite you for an improper report. The secret is to rearrange your chart of accounts to present information that is easy to understand and easy to evaluate performance of management and the complex as a whole. Future articles will get into more detail related to the other sections of the profit and loss statement; my goal here was to illustrate the best format for the revenue section of an apartment complex profit and loss statement. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.
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