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Property Management: Overhead Allocation Methodologies

Introduction: When services are provided in the execution of the oversight duties for a

Property Management portfolio, it is standard practice to allocate overhead and other

indirect costs over the units within the portfolio using a consistent and conservative

methodology. The nature of the services provided must be linked to the caretaking,

administration and management of the portfolio whether it be maintenance, accounting,

legal, collections, marketing or general management duties. All of the necessary and

common costs for providing these services should be included in the overhead

component. FASB and IRS regulations require that costs be properly allocated and the

methodology be documented to allow a tracing back of each individual allocated cost to

the base costs.

Examples: The following are examples of different methodologies for a real estate

portfolio of rental properties.

1. A property management company (White Deer, LLC) owns 80 homogenous

residential rental properties within different counties in similar geographic areas.

These properties are held by 10 different trusts holding 8 properties apiece. The

Property & Liability insurance coverage is purchased in a single package that has

the same deductibles and limits for all properties at $64,512 annually.

a. Property & Liability insurance is paid for by the Management Company

(Parent Company) and allocated to each trust at $6,451.20 and individual

property at $806.40/year and $67.20/month.

2. Alternatively, White Deer, LLC decides a more equitable method of assigning

costs is based on the total square footage within each Trust to the total

square footage of the entire portfolio. Each Trust is labeled WDT1, WDT2, etc.

representing White Deer Trust 1, White Deer Trust 2, and so on. Not surprisingly,

each Trusts “sf” (square footage) yields a different cost for the individual trust.

Management found that WDT1 accounted for 8% of total “sf” while WDT5 held

15% of the total portfolios “sf”.

a. White Deer LLC (Parent Company) allocates the annual insurance to each

of these trusts as follows:

1. WDT1: $5,160.96/year (8%) for each of the 10 properties at

$516.10 each or $43/month

2. WDT5: $9,676,80.year (15%) for each of the 10 properties at

$967.68 each or $80.64/month

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3. White Deer, LLC further wishes to specifically allocate the costs to each units’

individual square footage within each Trust. The Controller quickly formulates a

“sf” cost based on the total portfolio “sf” of 184,320 for all 80 properties at .35/sf.

The average residential home “sf” is about 2,304 and cost of $806.40/year. Using

the .35 factor resulted in the following allocations:

a. WDT1, Property 1-001: 2,016 “sf” 3-Bedroom: $705.60/yr. or $58.80/mo.

b. WDT1, Property 1-002: 2,136 “sf” 3-Bedroom: $747.60/yr. or $62.30/mo.

c. WDT1, Property 1-003: 1,900 “sf” 2-Bedroom: $665.00/yr. or $55.42/mo.

4. Property Profitability Reporting: The above examples illustrate how the same

cost can be allocated differently which when analyzed at an individual unit level

will produce a different level of profitability. When considering a methodology, it

would make economic sense to take into account all costs before choosing one

way or another since your basis for a straightforward cost such as Property &

Liability Insurance could also be used for other costs such as Overhead Office

Expenses.

5. General Ledger Transaction Posting Set-up: Once the allocation has been

determined, whether using a Property Management Accounting suite or any

quality general ledger system, the savvy Controller will set-up the allocation in a

form of a recurring journal entry over the 12 month period for which the insurance

has been purchased.