Presented By: Anchin
Real Estate Trends: Developers Search for Business Efficiency & Profit Maximization
Whether you are an international real estate firm, a developer working on a joint venture or working on a particular development deal, building out your operations and infrastructure can be quite challenging. Hiring talent, managing office space and operations, technology and other management factors can be a significant burden on business and a drain on resources.
One trend that is gaining momentum, especially in the real estate industry, is outsourced accounting. The complexity of accounting and tax issues, technology needs, reporting and planning opportunities all factor into the equation. Tax planning and analytical financial reporting are essential to maximizing the success for real estate developers, so the outsourced model often provides significant value for owners and stakeholders.
“We continue to see significant activity here in New York, both by international and domestic developers and investors,” said Robert Gilman, Partner & Co-Leader of the Real Estate Group at Anchin. “New York is not just the financial capital of the world but the center of the real estate market as well. As developers get creative and look to maximize the limited space available—in the busiest city in the world—real estate companies are looking to drive efficiency and profit maximization, rewarding investors and stakeholders alike.”
Whatever the complexity of a real estate firm’s accounting and tax profile, outsourcing some or all of the accounting functions could have benefits the company may not have anticipated.
“When we talk about outsourced accounting, that includes more than just basic accounting functions, like bookkeeping, providing CFO-level insights and tax strategy,” Gilman said. “With Tax Reform significantly impacting the real estate industry, proactive planning is essential to maximizing tax efficiency.”
Within the industry, joint venture deals seem to be increasingly adopting the outsourced accounting strategy. Given their temporary nature, these projects have a finite life span and often-inconsistent need for human capital and resources. Project accountants might not have consistent workflow and, more importantly, don’t really know how long that project might last. This can significantly impact the quality of talent available for the position.
Also, given that two companies are temporarily intertwining an aspect of their financials, neither party is generally keen on giving up complete control, allowing the other to handle the full accounting function. A third-party outsourced accounting group not only makes procedural and financial sense but also neutralizes a possible point of contention.
Outsourced accounting can also be an efficient option for smaller developers, whose needs can be served without the expense of a full-time employee and the office space to house them without having to spend the time to manage them. “Investing significant amounts of time overseeing employees is a task many owners don’t want to handle,” Gilman said.
There is also a benefit to outsourcing the accounting functions for international companies doing business in the U.S., especially since many don’t establish a permanent U.S. presence.
“Many times, international companies will use our address as their office. Some of them are doing significant projects, $200 million projects, but they just don’t want a U.S. presence other than owning and developing real estate,” Gilman said.
“I have an international client now that considered hiring a CFO for the U.S. operations. After weighing the pros and cons of the value and investment, they opted for the outsourced model. They’re not able to have local oversight and the valued the tax insights provided as well. The client was thrilled they could accomplish the same goal with less stress and better insight to the project’s financials.”
As the trend consistently grows, owners and developers also realize that this leverage allows them to focus on what they do best—creating new deals, forging new partnerships and monitoring their current projects. This replaces supervising staff and monitoring the financial functions, as the day-to-day efforts move along without consuming their time.
Another significant benefit realized is the ability to scale talent and resources up and down, based on needs.
“We like to think of it as right-sizing your accounting department,” Gilman said. “If you’re hiring somebody full-time, the job might be 50 percent bookkeeping, 30 percent Controller level and 20 percent CFO-type duties, including high level bank and financial negotiations and analysis. For real estate clients who need all three levels of work completed, you may have to hire three different people but may not have enough work to keep them busy.”
Outsourced accounting has become a solid alternative for real estate firms, allowing companies to leverage the best talent as much as they need it, when they need it. Additionally, providing them with the time and insight to do what they do best—creating efficient, profitable developments—maximizes returns for investors and stakeholders and creates tremendous value for the industry.