Idiot Brokers and Naive Multifamily Investors

PLWhat amazes me are the brokers who have no understanding of P&L’s.   Of course, the other thing to watch out for are the sellers who  fudge the numbers.

Let me give you an example in the following e-mail trail from a broker who sent us what he considered a deal that met our criteria :


Subject: Country Creek Apts. 336 Units – New Documents Notice: Nov 2013 Rental Report Up 4.24%

Thank you for your interest in the Country Creek Apartments, 336 Units, located in Glendale, AZ.

Income collected rose 4.24% for the month of November 2013.  Attached is the updated rental report and current rent roll.  Please be advise the property is partially managed by Dick James and Associates and part by owner.  Dick James manages the rental operations while the owner manages all other expenses so there are 2 sets of operating statements.  The KUMS Inc P&L is the ownership P&L which the Dick James statements flow through to.  (Please note we do not yet have the November KUMS P&L report)

The following link will provide you with access to the Documents Vault: Click Here.  Feel free to contact us with any questions or to schedule a property tour (24-48 hour notice, please).

Best Regards



On Thu, Dec 19, 2013 at 5:05 PM, we replied:


Can you explain what the ‘City Tax Collected’ Income is as well as the ‘Net Security Deposits’ Income?




City Tax Collected is Rent Tax.

Net Security Deposits are Security Deposits collected from tenants when they sign a lease.

Hope that helps.



On Fri, Dec 20, 2013 at 2:36 PM, we replied:

Eddie ,

First, why would ‘Rent Tax’ be considered income on a profit and loss statement? This is not income and should not be used to increase the NOI of the property. There is no corresponding expense to offset this.

Second, I cannot understand under what circumstances an accountant would categorize ‘Security Deposits’ as income. This is a liability and should not be included on a P&L but instead on a Balance Sheet.

This additional ‘Income” that is not really income, at a 5.9 Cap, artificially increases the value by $1,813,000.

Can you explain this for me?


He replies

The corresponding expense is in the KUMS statements.  In my underwriting and pro forma I extract the rent tax collected from the income.

Traditionally security deposits are considered income because not all is refundable and even the refundable portion is conditional.


Our reply :

Thanks for that explanation. I will go back and connect the dots for the City Tax from the different P&Ls.

Respectfully, I must disagree with your contention that security deposits are considered income. According to all GAAP standards, security deposits are considered a liability on the books of a multifamily property until they have been forfeited by the resident. At that time, it becomes Security Deposit Forfeiture Income. Increasing the NOI by approximately $75,000 in security deposits inflates the value to a level that any DUS-lender would not support.

If you can show me any documentation in support of your contention, I would be more than willing to review it.


You’ve got to be kidding me. Is this broker on drugs?    This is a great training example that we have now used in the ” Understanding Multifamily Financial Statements”  video for our mastermind group.

Here is a 20 minute video that I put out to everyone here:


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