Accounting Best Practices: Transitioning From Development or Rehabilitation to Placed in Service for Affordable Housing Entities

Once an affordable housing project has been developed or rehabilitated and is ready to be placed in service, the developer usually engages a managing agent to manage the day-to-day operations, monitor compliance with regulations, as well as maintain the accounting records. Most managing agents usually maintain the books on a cash basis and begin recording transactions from rental receipts, other income, and operating expenses.

In the first year of operations, the developer must work with the managing agent to combine the construction period activity with the operational transactions recorded by the managing agent in order to generate a complete set of general ledger accounts. Here are a few important considerations to properly account for these transactions in the first year of operations.

Real estate costs include acquisition and construction costs. The managing agent should be provided with a copy of the cost certification in order to record these costs. As transactions are recorded when paid for, it is possible that the last few construction in process (“CIP”) items were not recorded, as there is a lag in the billing and payment. This should be properly reflected as construction costs payable. If there are still residual funds in the construction account, the developer should share the subsequent activity with the managing agent so they can account for the additional cash account. The CIP balance should be brought to zero after recording the details from the cost certification.

All reserves including, but not limited to, operating and replacement reserves must be funded per the terms of the regulatory agreement, and balances should be properly recorded. It is common that some reserves are funded by debt or equity contributions directly and do not flow through the entity’s bank account and, as a result, do not appear in the records. The managing agent should have a process in place to reconcile debt and equity accounts to ensure all transactions have been recorded. It is common for the reserves to be listed in the cost certification, but they should not be recorded if not funded.

During the construction phase, funds may be directly released to the contractor as payment for services rendered instead of to the entity. The lender may also remit net amounts to the entity after deducting applicable loan costs. This results in unrecorded transactions because they did not flow through the entity’s bank account. As part of the cost certification process, the total development costs are reconciled to the debt and equity contributions; this should be utilized to ensure that all mortgage and equity transactions are properly recorded. The cost certification also provides the amount to be recorded as loan costs or syndication costs, if any.

Based on the placed-in-service date, there can be initial year operating expenses recorded as part of the cost certification. These are expenses incurred after the project is placed in service and are, therefore, not capitalizable costs.

The amounts recorded for the construction period should be reconciled to the cost certification, as this report represents the accountant’s certification of the total costs. Mortgage, debt, and reserve balances should agree to the monthly statements. Equity contributions should be confirmed with the developer or owners directly.

The benefits of implementing these best practices include time and monetary savings on future financial statement audits, accurate reporting to funding sources and owners, and a complete picture of the entity for management’s performance reviews.

Author: Asha Ganesh, CPA, CFE, Real Estate Team Member | [email protected]