A common problem in corporate real estate is when a property comes to the end of its useful life and needs to be sold and there is the dawning realization that the net book value of the property is well in excess of the potential sales proceeds. Bad news – an unwelcome hit to the profit and loss (P&L) account and substantially lower cash receipts than may have been expected.
In the story, he details several points that are often overlooked:
- Owned properties are recorded at historic costs
- Property is usually depreciated using a straight line method
- Cost increases with capital improvements
- Replaced assets should be written off
- Assign the correct residual value
- Employ the proper useful life
The combination of overinflated cost bases and excessive useful lives and residual values that bear little relation to the market mean that all too often the depreciation of property assets is understated and net book values are overstated in property accounts. So when you’re looking to sell that corporate property and you’re facing a huge loss – don’t blame the corporate real estate team, don’t blame the property market – blame the depreciation policy, stupid.
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