How property companies can get over the 'growth' threshold

Nov 17, 2017
Audit Accounting methods Real estate Construction

Can you see yourself in any of these scenarios?

  • You’ve built a good business with mid-size residential properties, but you’ve now got your eye on larger, mixed-use developments that include more tenants, more amenities, and ground level retail and commercial space.
  • Your business has grown, which is good, but you’re getting frustrated because you’re convinced you’re missing some opportunities to manage your taxes better so you can free up some cash to grow the business.
  • You want to attract a higher level of private investors, but you know they’ll demand detailed financial records with verifiable revenue projections, and you’re not sure your current information system is up to the task.

Many property owners and managers find that growth is a good thing – more dependable cash flow, more revenue and more interesting challenges. But it can also bring growing pains, including:

  • Paying more tax
  • Too much fire-fighting – not the literal kind, but the need to deal with financial or operational crises that suddenly make themselves felt
  • Financial record-keeping systems unable to keep up with more complex situations
  • Lost opportunities to uncover excessive costs

Even the biggest property owners started small – often, with just one person who happened to have an ambitious dream. But only a few companies are able to make that leap from regional to national, or even international prominence.

If your company is to break out of the pack to reach its next stage of growth, it may need to re-think its approach to many things. Here are some of the issues that are often faced by property companies that want to grow.

A more complex tax picture, more opportunities to save

As companies grow their business and begin introducing diverse income streams or new projects, there is often little consideration given to whether the current ownership and operating structure is aligned with the various business objectives. In smaller companies, income, such as income from annual leases received on a regular basis, may be predictable and straightforward. In larger companies, there are likely to be retail properties with lease income based partly on the revenue of each individual store, income from rental of banquet facilities, and income from fitness centers. There are more opportunities to influence income through steps such as improvements to common areas. The result is an increased risk that the company’s finances will not be structured in a way that is efficient from a tax perspective. Maximizing after-tax profits and retained capital from business operations or divestitures is critical to ensuring you have liquidity for distributions to investors while still being able to finance new re-investment opportunities within the business.

Due to the nature of these ventures there are often overlooked tax-planning opportunities that provide much needed after-tax capital to reduce cash flow constraints in these businesses and allow them to grow and re-invest.

More need to raise capital, more opportunities to do so

A second big change in priorities for companies seeking breakout growth is the need to build new skills for raising capital. This difference is felt in two ways.

One difference is that the sums are far larger – bigger properties to buy, the possibility of greater costs for renovating those properties, higher operating costs for offices and staff, and more need to cover ongoing property costs through dips in the income stream.

Another difference that comes with growth is in the wider range of sources of finance available, due partly to the larger amounts of debt or equity the company is offering. The company may attract interest from institutional funds and private capital, looking for secure places to park their money. As well, there are specialized financiers focusing on ventures such as installing rooftop-mounted solar power and taking part of the resulting income stream.

This means the company must become adept at telling its story, and also in producing the detailed, credible financial records these financial sources will require. There will also be a need for revenue projections that are based on hard data and solid assumptions.

Timely, reliable financial statements

The need to be able to act quickly on opportunities is one reason comprehensive, up-to-date information about the company’s financial results must be available on short notice. With current, reliable financial data, the company knows whether it has the financial resources available, so it can act quickly to make an offer when a new property becomes available.

A larger company, with more diverse and variable income streams, can also benefit from a more comprehensive financial system because it helps track these many income streams to find opportunities to save on costs, and also to improve cash flow.

With a larger company, there will be more people who depend on the financial data to guide their work. This means an increased demand for consistency in how financial results are calculated, tabulated and presented. There may also be more need for detailed data, including breakdowns of the operating cost of amenities on the property, to be sure that the fees being charged are in line with their costs.

As a result, financial statements that are audited by external auditors will become more important. Even if the company is privately held, many lenders will pressure it to become compliant with the same financial reporting standards that apply to publicly traded companies.

In a smaller company, compiling reports can perhaps wait until the people with the data are able to compile it. In a larger company, with third-party financial sources such as banks and private equity shareholders, there will be pressure to produce comprehensive financials on a regular schedule.

This, again, calls for a comprehensive financial system so that the data is compiled and will be ready for inclusion in reports whenever they are required.

Keeping in mind these three key areas goes a long way in ensuring that your business can reach new heights.

RSM contributors

  • Mark Jakovcic
    Mark Jakovcic
    Real Estate and Construction Leader
  • Stephen Rupnarain

Stay up to date on what matters most to your business.

Let us know your personal preferences for topics, industries and services to start receiving RSM updates in your inbox. Get the most from insights, events and offers from our team of first-choice advisors.