Using GNUCash for commercial property held by LLC - Some newbie questions

[John Ralls]

> On Sep 26, 2016, at 5:44 AM, replicon <replicon at gmail.com> wrote:
> 
> Hello everyone,
> 
> I'm part-owner of a commercial property, held by an LLC we've created, and I
> just started learning about GNUCash. I went through the guide and have a
> good general idea of how to set it up, but I have some specific questions I
> hope someone can entertain.
> 
> I'm working with an accountant, but want to set up a reasonable first swag
> of what we've got going to send him, to seed our discussion.
> 
> 1) How do I account for things I've had to pay for _before_ our business
> checking account was available? This includes setting up insurance, and some
> parts of the downpayment that weren't handled by the loan. I'd think of them
> as expenses. They were 'personally' paid for (from my personal checking
> account, which will NOT be part of this separate gnucash file), so to
> properly show where the business is, it would have to reflect that it's in
> the negative. Question is, what account should I create for the double-entry
> part? It's almost like I need a dummy account to hold that negative balance.
> 
> In this thread:
> https://lists.gnucash.org/pipermail/gnucash-user/2013-November/051527.html
> Someone said closing costs should be listed as an asset, but... shouldn't
> that be an expense? It's like... a service I paid for, isn't it?
> 
> 2) How do I account for the case where I need to personally put a bunch of
> money into our business checking account to be able to afford a large
> expense? Again, _personal_ checking account doesn't belong in this gnucash
> file. If I look at the bank statement for our business checking account, it
> looks like a large credit, followed by an equivalent debit, but in _real
> life_, it would have to be represented as a net negative.
> 
> 3) I'm trying to come up with a good starting account setup. The hard part
> is figuring out what goes where, given how we did the purchase:
> 
> * Assets
>    * Business checking account: Actual checking account we have (created as
> part of closing)
>    * Building: This would be the _APPRAISED_ value (not purchase sale
> agreement amount), and depreciation adjustments over time.
> * Liabilities
>    * Loan: Opens with with the loan amount; principal portion of mortgage
> payment starts balancing it.
> * Expenses
>    * Acquisition Costs: Payments made as part of the purchase price (beyond
> loan amount)
>    * Interest: Interest portion of mortgage payments gets split into here
>    * Operating Expenses: separate category, useful for calculating
> operational costs for triple-net leases
>        * Insurance: self-explanatory
>        * Property Tax: self-explanatory
>        * (and other misc stuff we pay for)
> * Income
>    * Rent: Rental income
> * Equity
>    * Opening Balances: (all opening balances from above accounts)
> 
> 
> Does this make sense?
> 
> Some context: The full price we paid for the building was (loan amount) +
> (paying backlogged taxes) + (rent credit for old owner who is a tenant).
> 
> 
> 
> Thanks! I know this is a bunch of stuff, but I hope someone passionate about
> GNUCash will take the time to help a friend out! :-)
> 

I wrote a long response based on normal property ownership, then noticed that this is a triple-net investment [1]. That substantially changes the way the books are structured. First you should make sure that the accountant you're working with is
familiar with this type of investment and then how to structure the books. You've added another layer of complexity by wrapping it in an LLC.

The personal money that you put in can be accounted for either as a loan to the LLC as Liz suggests or as paid-in capital that represents your ownership of the LLC. Paid-in capital is Equity.

In triple-net leases the lessee pays the insurance, property taxes, and maintenance (that's the "triple net"), so you won't be expensing those. IIUC these deals are usually done with a lessee in place and the purchase price of the deal is based on the cash flow of the rent rather than the property value, which is why you book the asset at the appraised value. The whole purchase price needs to be accounted for including any down payment beyond the loan. You'll also need to separate the depreciable (building and other improvements) and non-depreciable (land) parts of the asset into separate accounts.

OTOH if you're planning to bootstrap a new triple-net property then the picture is very different. You book the full purchase price as the asset value (still separated into depreciable and non-depreciable subaccounts). Any improvements or capitalized repairs you make before the property is leased will be booked in additional asset subaccounts to separate the depreciation schedules. You *will* be expensing property tax, insurance, and maintenance until you find a tenant. You'll need an accountant, an attorney, and a commercial realtor who are all well-versed in setting up these sorts of deals, and you'll be expensing their fees. You'll be working pretty hard, too, managing all of this, and you may want to pay yourself for that time, which means wage expense.

Either way, meet with the accountant and in that meeting sketch out a chart of accounts and how you treat your personal contributions to the LLC.

Regards,
John Ralls

[1] http://www.investopedia.com/terms/n/netnetnet.asp