Red Flags at Sunset: A Dixie Drama

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Dixie Phair received three years of expense data from Sunset Apartments, an older, average quality building under appeal in Any Municipality County. As an experienced Commercial Real Property Analyst, she quickly identified some problems in her review of the provided information:

Category 2013 2014 2015
Management 5% of EGI 5% of EGI $0
Cleaning $14,090 $12,562 $0
Insurance $8,400 $10,000 $7,000
Professional Fees $0 $7,150 $0
Repairs $15,474 $17,230 $16,012
Supplies $5,238 $0 $2,132
Utilities $19,238 $20,014 $31,459
Reserves $16,800 $13,200 $14,400

Red Flags:

  • Zero expense reported for the categories of Management and Cleaning in 2015, a sure sign of poor management and substandard operational practice.
  • Insurance expenditures are rounded and erratic year-by-year, calling validity into question.
  • Professional Fees need explanation: why a significant charge in one year, and zero in the years before and after?
  • The amounts for Supplies are highly variable over the reporting period, thus inconsistent with market practice.
  • A large increase in Utilities, reported in 2015, requires explanation. Is this effectively major rent concessions to prop up occupancy?
  • Reserves are far in excess of the typical allocation in this market on a per-unit basis.
  • Reserves are also too variable for an expense account meant to enforce consistent accrual.

Dixie decided the level of deviation from market standard in expense amounts reported, as well as in reporting practice, was sufficient to require further documentation from the appellant. She knew she was the first (and usually also the last) line of defense for the other taxpayers in her jurisdiction.