Real Estate Development is capital intensive and involves many simultaneous workstreams to ensure your cash flow is managed efficiently.
One might ask, isn’t it just bookkeeping and invoice payment? Is it really that complex?
The short answer is “it depends”. If you have the right process with controls and process accountability you can efficiently run your development accounting process and keep cash flow managed well.
Without a well defined process you could be stuck with vendors being unpaid and cutting service, negative cash flow requiring the sponsor to fund the project, and funding tied up in lender approvals. Yikes!
Our five major tips to help you efficiently manage your real estate development cash flow and real estate accounting are:
- Defined Process with Roles – Similar to a factory your invoicing process needs to work in lockstep to support the real estate development process. We encourage the relevant teams and stakeholders to map out the process, timelines, and deliverables to ensure the appropriate controls are in-place while servicing your vendors well. A number of real estate systems such as Yardi are great at providing this supporting infrastructure.
- Job Cost Reporting System – Similar to the point above in order to be able to track your project costs it is critical to utilize a job cost system that will allow you to break down vendor invoices in a more detailed industry standard cost code system. The major categories here are typically hard costs versus soft costs along with additional cost codes to capture data at a low enough level to support your internal and external reporting and monitoring needs.
- Cost Monitor and Lender Draw Process – Nearly every development project has a construction loan provided by an external lender. These loans have very specific terms & conditions for how the funds can be advanced through what is called a lender draw process. In addition, many lenders will employ a “cost monitor” which is a 3rd party firm that will independently verify the monthly funding requests from the sponsor ensuring the proper documentation is in-place prior to providing the lender the comfort to release the funds. In order to make this process effective it is critical that you meet with your lender and the cost monitor in advance to establish timelines and required reporting which is then relayed to your vendors.
- Tax Implications – In Canada there are significant sales and input tax requirements that need to be complied with which are required to be paid and even self-assessed on a timely basis. In advance of the project you will want to be clear on these tax implications to be able to build them into your real estate financial model and ensure you the have the operating mechanisms in-place for smooth tax compliance. In many cases a lender may not advance you funds if they are subject to recovery from the government via sales and input tax procedures.
- Establish Reporting Mechanisms – The classic Peter Drucker line “What gets measured, gets managed” is very relevant here. You will need an ongoing model to track your budget at the detailed job cost level and to have regular reporting of cash flow and process to the real estate development team and internal team members. In addition, your lender will have operational and financial reporting requirements for you to stay on side with the loan.
The above list provides an overview of some of the implications and complexity involved in managing cash flow for your real estate development project. There is significantly more nuance and requirements that need to be explored on a case-by-case basis which should be handled by real estate finance experts to ensure your project stays on track and cash flows is well managed!
At Finalyze Real Estate CFO Services we are pleased to work with our real estate developer clients to support them with their real estate development accounting and cash flow processes. We are familiar with the intricacies of real estate development and can work seamlessly with your team, lender, and vendors to ensure your project remains on track and cash flow is efficiently managed. Reach out today at Info@FinalyzeCFO.com to book a complimentary consultation.