From Mike Olsen:
There is really no guidance on this. However, your 1st entry for the Landlord is correct, it would be a debit to Replacement Reserves and a credit to Rental Income.
The second one is where there is some confusion on what should be done. You are correct in that the Landlord would credit Replacement Reserves and debit a Capital Improvement. There are times when the tenant does capitalize the improvement and not the Landlord. However, HUD believes the Landlord should capitalize the improvement.
From client:
Thanks for the response.
The question is , if the tenant capitalizes and not the landlord, what would the landlord debit when he would credit the escrow account?
From Mike:
That’s a good question. He would need to debit a receivable from the tenant.
From client:
Thanks so much – the client is telling me he should be debiting rent income which didn’t make sense to me.
From Mike:
That was my answer, you would debit a receivable from the tenant, which is what the people in New York do. The other thing you may consider doing is to debit the capitalized asset. In many of the agreements the Landlord has the ability to buy back all of the assets at book value at the end of the term.
Debiting rental income would not be a good idea, that would create other problems, one of which would be a compliance issue.
From client:
Thanks for your explanations. We will insist that he capitalize the asset which is what HUD wants him to do.