Managing a private equity real estate fund can feel similar to a tightrope walker crossing over Niagara Falls. There can be risk with each step, but the daredevil needs to be focused on the endpoint to survive. For a fund manager, this can mean keeping costs reliable while working through the unpredictability of a real estate deal's lifecycle. Many innovative fund managers realize finding efficiencies is critical and outsource all or portions of their backroom operations to experienced and specialized accounting service providers.
Outsourcing gives funds flexibility and access to specialists who can manage complex financial and accounting problems. But one of the essential benefits is that it takes significant components of the accounting function off the fund manager's plate, so they can focus on core real estate activities. Even if there is a dedicated accounting team within the investment company, there are times when staff augmentation can nicely ease monthly or quarterly pinch points, while easing risks in turnover by having redundancies readily in place.
Providing the right size for your needs
In most cases, a company's most considerable expense is payroll. But making changes (either adding or cutting jobs) is not something companies can typically do quickly or cost effectively. For a PE fund, the accounting department handles everything from bank reconciliations to capital account allocations to filing tax returns. Having an experienced team is helpful during busy times but might be an unnecessary expense between projects. That is where flexibility and the ability to load-balance are critical.
Accounting firms can offer PE funds the support they need, ranging from basic accounting activities (such as cash applications or month-end close) to a more robust range of services when things get busy. For managers who are looking at the bottom line, outsourcing can cut fixed headcounts and reduce HR expenditures. The flexibility and scalability of outsourced teams is a huge benefit.
More services than traditional fund administrators
Accounting firms offer professional services that go well beyond those provided by most fund administrators. They include, but are not limited to:
- Real Estate Investment Trust (REIT) compliance
- Audit preparation, including financial statement drafting
- Treasury and cash management systems and solutions
- Investor reporting specific to the real estate industry
- Tax compliance, preparation, K-1s and filings
- Providing accounting to both the management company and operating entity
Some firms are equipped to take on an accounting department's role, from payroll to acting as a CFO - and everything in-between. In addition, public accounting firms typically have specialists who can collect and validate a property managers' financial data and properly calculate the net asset value (NAV) and distribution waterfall.
These specialists can provide valuable insight and assistance to real estate clients. To sell a property, they can forecast things like the tax impact of gain allocations and cash distributions to the investors or review partnership agreements to avoid surprise costs after the fact. They may also be able to guide firms through Tangible Property Regulations to maximize deductions related to the repairs, cost segregation, and property tax consultations. Other services include:
- Lease abstracts, rent due diligence, agreed-upon procedures (AUP)
- Exit and succession planning
- Construction packages and accounting
- Pro-forma financial statements, benchmarking, vendor contract and billing oversight
- Purchase price allocation
- Mergers & Acquisitions, business valuations, due diligence
- Tax-deferred exchange accounting (tax and GAAP)
Today, real estate PE funds need innovative accounting technology to develop real-time insights and make financial decisions quickly. Having access to a team with dedicated Enterprise Resource Planning (ERP) technology specialists means fund leaders have the resources to implement and maintain systems and ultimately streamline accounting processes. And switching to cloud-based accounting technology continues to make financial sense by eliminating the need for internal networks that require IT for local maintenance while keeping the highest data security levels and enhanced business continuity/recovery.
Outsourcing makes sense
Private Equity real estate funds need to be laser-focused on generating the highest return for their investors. In the current climate, this might be more important than ever. A PE firm that outsources its back office operations will likely see immediate benefits, because top management can focus on real estate activities and will have the flexibility to scale up or down based on needs. Reach out to BPM Partner Mark Leverette to learn more about how he has been funds benefits first hand after outsourcing back office accounting needs.