Determine a Property’s Value: 4 Types of Financial Audits

Asset managers must regularly evaluate (audit) each property management firm. An audit is typically held either once each year or every two years. In real estate, the economic value of each property depends directly on the net income that the property produces.

Types of Audits

The four types of audits management firms are subject to are:
1. Compliance audits
2. Tax audits
3. Utility audits
4. Tenant audits

Compliance Audits

Compliance audits verify whether a firm is complying with policies and procedures. These audits make certain that transactions are documented properly, are on file, and are signed by the proper person in authority. They also ensure that the company adheres to bidding and purchasing protocols and conflict-of-interest (or other) ethical guidelines.

Tax Audits

Tax audits are a highly specialized field devoted to reviewing records for tax compliance. Tax audits are conducted by taxing authorities who are direct government employees. Tax auditors typically investigate the classification of expenses and income.

Utility Audits

Some firms specialize in auditing utility bills paid by properties. They generally work on a percentage-of-savings basis and try to find billing errors or miscalculations. These audits are performed by companies specializing in a particular type of utility, such as water or electricity.

Tenant Audits

Asset management and property management firms will audit a retail tenant to verify that the tenant is properly reporting sales and paying the correct percentage as a portion of rent. Most retail leases have provisions for incorrect sales reports.

Tenants may also audit their landlord to ensure that billings are correct. In general, tenant audits are looking for direct errors in calculation of the common-area expenses or other expenses not allowed by the lease. Other areas of concern that tenants may want reviewed include proper allocation of landlord’s expenses, inappropriate administrative expenses, and reasonable efforts to minimize expenses.

The Audit Itself

Although initially an auditor requests only a sample of documentation, he or she may explore any additional files during the process. For instance, when there are discrepancies or incomplete data in a sample, an auditor will review additional files to determine how widespread the problem is. On-site audits typically last from one day to two weeks. The time required depends on the number and complexity of properties being audited.

This article is adapted from BOMI International’s course Asset Management, part of the RPA® and FMA® designation programs. More information regarding this course is available by calling 1.800.235.2664. Visit BOMI International’s website, www.bomi.org.

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