Property Management: Overhead Allocation Methodologies

1. The Controller’s Corner
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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

2. The Controller’s Corner
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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.