Accrual Method – a method of accounting that recognizes expenses when they are incurred, not when they are paid. It also shows receivables as future income. It does not reflect the checkbook.
Assets – include such items as the infrastructure, land, cash in bank, accounts receivable, and prepaid expenses.
Average Market Rent – a figure which results from dividing the total rent collected by the number of homesites which contributed
Balance Sheet – a reconciliation of assets, liabilities, and owner’s equity.
Besides varying by amount, a mortgage will vary by term (the length of the mortgage), the interest rate, how the interest rate is calculated, and when it is applied. Typically, mortgage payments are made monthly. However, the payment may vary from month to month if the loan is an adjustable rate mortgage, commonly referred to as an “ARM”. The interest rate on this type of loan may float with a specific index such as the prime rate (the rate a bank charges its best customers when they borrow money). This rate may change continuously and therefore, the monthly payment for the loan may also change. A fixed rate mortgage, on the other hand, does not change over the term of the loan. Payment amounts remain constant.
Capitalization Rate – this is often referred to as simply “cap rate”. It is a percentage used to show the rate of return that an investor wants to make or will make on an investment. By varying the purchase price of the community, the investor has an opportunity to control the capitalization rate (or rate of return) he wishes to realize from his investment. The higher the selling price of the community, the lower the cap rate will be for the investor (buyer).
Cash Accounting – a method of accounting that only records the actual dollars spent and revenue collected. It reflects the checkbook. It does not allow for accumulating of expenses (such as taxes) which grow monthly but are usually paid only annually. Nor does it account for receivables or payables.
Cash Flow – the amount of money left after debt service is deducted from net operating income
Chart of Accounts – the listing of the account name and number assigned to each line item in the financial statement
Debt Service – the monthly mortgage payment on the community, which typically includes principle, interest, and escrow amounts. Some communities may have more than one mortgage that must be accounted for in this category. A typical mortgage will be 80% of the purchase price of the property. The remaining 20% is then referred to as owner’s equity.
Depreciation – this is a non-cash item that is subtracted from NOI primarily for tax purposes. Depreciation is a concept that permits the recovery of the cost of an asset over the useful life of the asset. The Internal Revenue Service has assigned a useful life to both residential property (27 ½ years) and commercial property (31 ½ years).
Economic Occupancy – the counting of total homesites within a community which are obligated pay rent each month
Economic Vacancy – the counting of total homesites within a community which do not incur a monthly obligation for payment of rent
Effective Gross Income – the actual amount of money deposited into the checking account as received from residents. This includes rents paid and other income collected. This amount is also known as actual cash on hand before expenses and debt service.
Fixed Expenses – those expenses which continue, regardless of occupancy rate, such as taxes, streetlights, mortgage, and commercial insurance
Gross Potential Rent – sometimes called “optimum rent”, this is the actual dollar value of your potential income if all homesites were obligated to pay the current rate of rent
Income Statement – a reconciliation of revenues, expenses, and debt service for the property. It generally also includes a comparison of budget to actual.
Liabilities – include outstanding economic obligations such as accounts payable, loans, mortgages
Net Operating Income – the amount of money left after operating expenses are deducted from effective gross income
Operating Expenses – a category that includes both fixed and variable expense totals
Other Income – income received by the community on a regular basis other than rent. Examples include late fees, extra person charges, water and sewer reimbursements, pet fees, returned check charges, etc.
Owners Equity – includes capital stock, paid-in capital, retained earnings, and partners equity
Physical Occupancy – the counting of total homesites within a community, on which a home sits, but does not necessarily incur an obligation to pay rent
Physical Vacancy – the counting of total homesites within a community which have no home sitting on them
Reserves for Replacement – a fund set aside for the replacement of items that wear out from time to time, such as air conditioning systems, roof replacements, and large equipment. The general amount is 5% of income. Most property management companies prefer to simply expense items when they are incurred, rather than set aside a contingency fund.
This concept implies that any physical improvements to land will deteriorate over time and the owner of the property will eventually have to replace them. The IRS allows a property owner to deduct this continuing obsolescence each year as a cost of doing business. Land can not be depreciated since it does not deteriorate nor lose its value.
Vacancy and Collection Loss – a dollar value computed by adding together three things: the uncorrectable rent for vacant homesites, the uncorrectable rent for economic vacancies, and any other uncorrectable rents which are written off as bad debts or given away as promotions
Vacancy and Collection Loss – the total of lost revenues from vacant homesites combined with uncorrectable receivables. Promotional discounts are also included as part of the vacancy loss in most cases, although some companies do show these incentives as expenses, rather than as a loss of income.
Variable Expenses – sometimes called “controllable expenses” and viewed as those more readily under the manager’s control. They also vary directly in proportion to occupancy. Examples include water, sewer, maintenance, office supplies, and wages.
