A Guide to Real Estate Fund Financial Statements

For real estate fund managers, financial statements are much more than a compliance requirement. They’re a vital tool for measuring performance, attracting investors and maintaining trust.

Your real estate fund’s financial statements tell the story of its financial health, allowing users to better understand the value of different investments in your portfolio and the fund as a whole. That’s important for all kinds of users, from you as the fund manager to lenders and investors who have significant capital at stake.

Preparing financial statements for a real estate fund isn’t necessarily as straightforward as it is for other businesses. Fund managers must navigate factors such as accurately valuing their assets, accounting for complex debt structures and satisfying extensive disclosure requirements.

Understanding the key components of financial reporting is essential to achieving the transparency and accuracy required to fulfill compliance requirements and strengthen investor relationships.

The Key Financial Statements for Real Estate Funds

Real estate funds rely on several core financial statements: the income statement, balance sheet, cash flow statement, and the statement of changes in equity. Each of these provides valuable insights into different aspects of the fund’s performance and financial health.

There are also supplement statements that provide investors with a more granular view of the fund’s performance. These statements, such as the schedule of investments, are important for larger, more complex funds, but tend to be less significant for smaller funds with more limited investment portfolios.

Let’s review these financial statements, sharing the key components of each. If you need guidance on how to prepare these statements for your real estate fund, we encourage you to reach out to our real estate accounting team at James Moore.

1. Balance Sheet

The balance sheet details the fund’s assets, liabilities and equity. It offers a snapshot of the fund’s financial position at a given point in time, enabling stakeholders to assess liquidity, leverage and overall financial stability.

The balance sheet is composed of three key categories:

• Assets: Assets in a real estate fund are typically categorized as current or non-current. Current assets, like cash and short-term investments, indicate liquidity; non-current assets, such as properties, reflect the long-term value of the fund. How your fund values its assets is key to the accuracy of its balance sheet. Adopt a robust valuation methodology that is consistently applied across all assets.
• Liabilities: For real estate funds, liabilities often include short- and long-term debt, lines of credit and construction loans. Monitoring debt obligations is crucial to managing risk and ensuring the fund can meet its financial commitments. Consider including additional details on factors including interest rates, debt covenants and the maturity dates of the fund’s debt to provide investors with additional clarity.
• Equity: Equity represents the investors’ ownership in the fund. Changes in equity, such as capital contributions or distributions, should be clearly documented to maintain transparency with stakeholders. Supplemental information may be contained in the Statement of Changes in Equity, which we discuss in more detail below.

2. Income Statement

The income statement, also known as the profit and loss statement, reflects the fund’s revenues and expenses over a specific reporting period. For real estate funds, revenues typically include rental income, property sales, and management fees. On the expenses side, costs such as maintenance, property taxes, and insurance are common.

Key elements to focus on when preparing an income statement for a real estate fund include:

• Revenue streams: These should be broken down into recurring income (for example, rental payments), and non-recurring income (such as proceeds from property sales). This level of detail helps fund managers forecast future cash flows and assess the stability of their income sources.
• Inclusion of non-GAAP metrics: While your financial statements should always be GAAP-compliant, including non-GAAP metrics in the income statement provides a clearer indication of operating performance. This includes metrics such as net operating income (NOI) and funds from operations (FFO).
• Impairment issues: If properties in your portfolio have dropped significantly in value, you must record an impairment loss in the income statement. Any impairments you record should be clearly explained, as should your method for calculating the impairment.

3. Statement of Cash Flows

The cash flow statement tracks the movement of cash in and out of the fund, highlighting its liquidity and ability to meet short-term obligations. It is divided into three main sections:

• Operating activities: Cash generated from property operations like rental income. This section helps managers evaluate the fund’s core business activities and its ability to generate sufficient cash to cover day-to-day expenses.
• Investing activities: Cash used for acquiring or selling properties. Real estate funds frequently engage in property transactions, and this section provides insight into the fund’s asset acquisitions and dispositions.
• Financing activities: Cash flows related to borrowing, distributions to investors and other financing activities. This section highlights how the fund raises capital and returns value to investors. For example, it shows whether the fund relies heavily on debt or equity financing.

The statement of cash flows is critical for real estate funds, as it reveals whether the fund has sufficient cash to cover expenses, make investments and distribute returns to investors. A strong positive cash flow from operating activities, coupled with prudent investing and financing strategies, is often a sign of a well-managed fund.

4. Statement of Changes in Equity

This statement provides a detailed reconciliation of changes in equity during a specific period. This helps investors understand how their equity has evolved over the course of the reporting period (accounting for contributions, distributions and withdrawals).

A simplified version of the statement may look something like this:

The Statement of Changes in Equity ensures transparency around how investor money is being managed and how returns are allocated—making it particularly valuable for funds with complex equity structures.

5. Schedule of Investments

The schedule of investments is a supplementary statement that provides a detailed breakdown of the fund’s real estate portfolio, offering further transparency into the fund’s assets and their individual performances.

Ways to break down your fund’s portfolio in this section include:

• Property details: Information such as location, property type (e.g., residential, commercial), acquisition cost and current market value.
• Performance metrics: Data on occupancy rates, rental income and appreciation or depreciation in value.
• Geographic and sector allocation: An overview of the portfolio’s diversification across different regions or classes of property.

Leveraging Financial Statements for Smarter Decision-Making with James Moore

Accurate and transparent financial reporting is essential for meeting regulatory requirements and gaining investor confidence. Real estate funds typically adhere to standards such as Generally Accepted Accounting Principles (GAAP). Compliance with these frameworks ensures consistency and comparability across financial statements, making it easier for stakeholders to evaluate the fund’s performance.

While compliance is a key driver of financial reporting, these statements also serve as a foundation for strategic planning and decision-making. By analyzing trends in income, expenses and cash flow, fund managers can identify underperforming properties, optimize debt levels to balance risk and returns, and plan for future acquisitions and capital expenditures.

If you need help preparing these financial statements for your real estate fund, connect with James Moore. Our real estate CPAs have extensive experience supporting the accounting needs of real estate funds. We bring the specialized knowledge required to ensure your financial statements are compliant with all regulatory frameworks and promote stronger investor relationships.

Contact us today to learn more about our accounting services for real estate funds.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.