Year-end preparation for a real estate group comes down to two habits. The first is keeping your CPA informed of significant events as they happen, so the books reflect them in the right period. The second is planning with your CPA in the fall, so everyone knows what will be needed after year-end and when.
Groups that plan ahead tend to start fieldwork on schedule. Groups that wait usually spend the first months of the year answering requests that could have been settled earlier. This article covers what to share now, what to prepare once the books close, and a timeline that ties the two together. It applies whether you have an audit, a tax return, or both.
Real estate owners sign agreements throughout the year, and some of them affect the year-end audit, the tax return, or both. A document that reaches your CPA during the year can help ensure the transaction is properly reflected in the books as it occurs. One that arrives after the close may result in updates to your financial statements and a lengthy process to complete compliance work after year-end.
Send your CPA:
- New or amended loan agreements, closing statements, and payoff letters
- Covenant compliance certificates and lender correspondence
- Lease amendments for any long-term tenants
- Operating agreement amendments
- Financial agreements with municipalities (PILOT agreements)
- Agreements or invoices for major capital improvements
Why each one matters
- Loan documents and payoff letters determine whether debt is classified as current or noncurrent. A refinance can also trigger a write-off of unamortized debt issuance costs and any prepayment penalty, and it creates new costs to amortize.
- Covenant compliance affects debt classification and the going concern and disclosure assessments. A breach or a waiver matters either way.
- Lease amendments to long-term rental agreements can change the straight-line rent calculation for commercial space, and new leases need to be reviewed to set it. The audit team needs every signed lease to ensure that rental income is properly recognized.
- A change to a distribution waterfall or special allocations flows into capital accounts and the partner allocations on the K-1s.
- See the PILOT section below.
- Documents to support major capital improvements help determine correct financial statement classification, as well as depreciation, if any, cost segregation, and placed-in-service dates.
If you have a PILOT agreement
A financial agreement with a municipality defines how the annual service charge, commonly called the Payment in Lieu of Taxes (PILOT), is calculated. Depending on the agreement, the charge is often a percentage of annual gross revenue, with gross revenue defined in the agreement and varying from one to the next. The agreement also sets the length of the exemption and any administrative fee.
Annual gross revenue is the usual base, so how the agreement defines it drives the charge. The team needs to know which revenue the agreement includes and which it excludes, and a small difference in wording can change the result. The audit team cannot test the PILOT expense or the related accrual without the signed agreement and every amendment.
If the agreement reaches your CPA in February, the team may find that the year’s PILOT was calculated on the wrong basis, resulting in large amounts owed to the municipality. The agreement also drives disclosure in the financial statements, which must describe the remaining term, how the annual service charge is calculated, and any commitments to the municipality.
Bring your CPA in before the agreement is signed, so the revenue definition says what you intend. After signing, send the agreement and any amendments right away.
Prepare these after the books close
Some of what the audit team and tax preparer request cannot be produced until the books are closed, so these need a plan of their own. The most common requests are:
- Year-end general ledger
- Year-end trial balance
- Year-end bank statements and bank reconciliations
- Accounts receivable supporting schedules
- Accounts payable and accrued expense supporting schedules
- Fixed asset listing, including the depreciation roll forward
- Prepaid expense supporting schedule
- Security deposit listing
- Year-end loan statements
- Payroll reports
- Intercompany and related-party balance schedules
- Capital account roll forwards showing contributions, distributions, and allocated income or loss
Timeline
- November: confirm the request list with your CPA
- December: develop a timeline of the year-end close to ensure quick delivery to your CPA after year-end
- January: close the books and send the supporting schedules by the agreed date
The person who owns the close should reconcile the bank accounts, build the supporting schedules, and deliver them to your CPA by the date you set together. In our experience, this lets the audit team test balances right away, delivers final numbers to the tax preparer earlier, and raises questions while the transactions are still fresh.
A good first step is a short call with your CPA to review last year’s request list, remove what no longer applies, and add any new agreements, financing, or properties. Schedule your call with a WG advisor to help ensure a quick turnaround on year-end compliance work.
