- Reclassifications are common in property management accounting but often indicate underlying process issues and create unnecessary work for on-site teams.
- Frequent reclassifications erode trust in financial reporting, delay owner reviews, and can reflect poorly on the property manager’s performance.
- A CFO services firm can reduce reclassifications by improving account structures, streamlining month-end procedures, and strengthening documentation practices.
What is a Reclassification in Property Accounting?
A reclassification occurs when a transaction is recorded to one general ledger account but later needs to be moved to another. In most cases, this involves reassigning an expense, deposit, or transfer from one category to a more appropriate one. For example, a repair cost might be reclassified to capital improvements, or a tenant payment initially recorded as rent may need to be moved to a security deposit or prepaid rent account.
Reclassifications are not inherently problematic. They often serve as corrections when there is ambiguity at the time of data entry. But in real estate accounting, they tend to pile up. That’s because property managers deal with a high volume of transactions, including vendor invoices, tenant payments, loan draws, reserve transfers, and any inconsistency in coding or categorization increases the likelihood of a reclassification later.
In most cases, these adjustments are made after the reporting period has ended. This creates lag and invites scrutiny from owners, investors, and auditors. What starts as a simple accounting adjustment can quickly become a source of friction across the broader reporting and decision-making process.
Why Reclassifications are Problematic for Property Managers
For property managers, the impact of reclassifications is felt both directly and indirectly. The more glaring adjustments can lead to follow-up questions from ownership. When reclassifications involve older transactions, the property manager may have to go back and track down invoices, lease terms, or email correspondence to explain the original intent. This pulls time and focus away from operational priorities.
Over time, frequent reclassifications can erode confidence in the accuracy of the financials. When monthly statements routinely include journal entries that move costs around, owners begin to question the integrity of the data. We have seen instances where frequent reclassifications strain the relationship between management and ownership. From the perspective of the owner, it becomes an issue of trust in the financials and can make it more difficult for owners to assess asset performance if the numbers are subject to frequent change.
An overlooked dynamic in property accounting is the reputational risk borne by property managers. In the commercial real estate industry, management is evaluated not just on operational execution but also on the quality and consistency of reporting. When the financial package requires frequent clean-up or restatement, it reflects poorly on the management team.
How a CFO Services Firm Can Help
In the context of property accounting, reclassifications tend to be symptoms, not root problems. A CFO services firm helps address the underlying issues that cause miscodings in the first place, and it often starts with the chart of accounts. Many real estate organizations inherit legacy account structures that are overly broad, inconsistently applied, or misaligned with how the properties operate. Management companies that implement a property accounting software for the first time are left with an out-of-the-box chart of accounts that often does not reflect the complexity or nuance of the portfolio under management. A CFO partner can help restructure these charts to reduce ambiguity and improve coding discipline.
The firm also brings structure to the close process. This typically takes the form of introducing pre-close review procedures, standardizing account reconciliations, and flagging likely miscodings before the books are finalized. This shift in accounting procedures helps to identify issues upstream instead of correcting them after the fact, and this has a meaningful, positive impact on reporting quality and speed.
Equally important is documentation. A disciplined CFO services provider establishes a clear process for how reclassifications are proposed, approved, and recorded. This audit trail protects the property manager and improves transparency for owners and auditors. When questions do arise, there is a documented rationale and supporting material for each entry.
Final Thoughts
While reclassifications are sometimes necessary in a commercial real estate operation, they should not become a routine part of the accounting cycle. When they occur too frequently, they create inefficiencies, invite scrutiny, and can strain relationships. Property managers who want to present clean, reliable financials need processes that catch issues early and a team that understands both the operational and accounting sides of the business. A CFO services partner can bring that structure and perspective, helping property managers stay focused on running the property portfolio while improving the quality of accounting and reporting behind the scenes.
Lexcraft Advisors is a CFO services firm that supports middle market real estate funds and syndications. Our team takes pride in providing sponsors with reliable financial operations solutions that mitigate risk and facilitate growth. To learn more about our services, schedule a complimentary meeting with our Managing Partner.