---
name: PM Accounting Expert
description: Fund accounting, investor reporting, distribution waterfall, preferred return, capital account, K-1, management fee, acquisition fee, CAM reconciliation, NAV, ILPA, carried interest, hurdle rate, multi-entity consolidation.
---

# PM Accounting Expert

**Scope:** Fund-level accounting, investor reporting, distribution waterfall calculations, management company financials, and multi-entity consolidation for Sunrise Capital Investors and its portfolio of manufactured housing and parking assets. This is DISTINCT from `rm-accounting-expert` (which covers RentManager platform specifics like GL codes, charge types, and property-level accounting). This skill operates one level up -- at the fund, investor, and management company layer.

**Important:** This skill synthesizes GAAP standards, SEC regulations, ILPA guidelines, and industry best practices as of March 2026. All financial calculations, waterfall examples, and regulatory citations should be verified against current fund operating agreements, tax counsel guidance, and applicable law before relying on them for investor-facing work. All investor-facing materials require auditor review per CLAUDE.md protocol.

**Cross-references:**
- `rm-accounting-expert/skill.md` -- Property-level accounting, GL codes, RentManager specifics
- `entity-formation/skill.md` -- LLC formation, entity hierarchy, property onboarding
- `mhp-acquisitions-expert/skill.md` -- Deal underwriting, buy box criteria, due diligence
- `finance-operations-expert/skill.md` -- Bank reconciliation, variance analysis, month-end close
- `hubspot-expert/skill.md` -- Investor CRM, deal pipeline (capital raise tracking)

---

## Table of Contents

1. [Sunrise Fund Structure](#1-sunrise-fund-structure)
2. [Management Fee Framework](#2-management-fee-framework)
3. [Distribution Waterfall Mechanics](#3-distribution-waterfall-mechanics)
4. [Capital Account Maintenance](#4-capital-account-maintenance)
5. [Investor Reporting](#5-investor-reporting)
6. [Fund-Level Cost Allocation](#6-fund-level-cost-allocation)
7. [Multi-Entity Consolidation](#7-multi-entity-consolidation)
8. [K-1 and Tax Reporting](#8-k-1-and-tax-reporting)
9. [Acquisition and Disposition Fees](#9-acquisition-and-disposition-fees)
10. [CAM Reconciliation for MHPs](#10-cam-reconciliation-for-mhps)
11. [Audit Preparation](#11-audit-preparation)
12. [NAV and IRR Calculations](#12-nav-and-irr-calculations)
13. [Capital Call Mechanics](#13-capital-call-mechanics)
14. [SEC and Regulatory Compliance](#14-sec-and-regulatory-compliance)
15. [Debt Covenant Reporting](#15-debt-covenant-reporting)
16. [Impairment and Valuation](#16-impairment-and-valuation)
17. [Decision Trees](#17-decision-trees)
18. [Common Gotchas](#18-common-gotchas)
19. [Procedures](#19-procedures)
20. [Output Formats](#20-output-formats)
21. [References](#21-references)

---

## 1. Sunrise Fund Structure

### Entity Hierarchy

```
Sunrise Capital Investors LLC (Parent / GP entity)
  |
  +-- SCI Management LLC (Management Company)
  |     |-- Property management agreements with each property LLC
  |     |-- Employs staff, provides centralized services
  |     |-- Revenue: management fees, construction management fees
  |     |-- QBO entity for GL
  |
  +-- SCI Fund [N] LLC (Capital raise vehicle)
  |     |-- LP interests held by investors
  |     |-- GP interest held by Sunrise Capital Investors LLC
  |     |-- Operating Agreement defines waterfall, fees, governance
  |     |-- QBO entity for GL
  |
  +-- SCI [Property Name] MHP LLC (Single-Asset Entity)
  |     |-- Owned by fund entity or direct by parent
  |     |-- Separate bank accounts (operating + security deposit)
  |     |-- RentManager property-level accounting
  |     |-- QBO entity for GL
  |
  +-- SCI [Property Name] Parking LLC (Parking Assets)
        |-- Same single-asset SPE structure
```

### Key Relationships

| Relationship | Flow | Documentation |
|-------------|------|---------------|
| Fund -> Property LLC | Equity investment (capital contributions) | Operating Agreement, Subscription Agreement |
| Management Co -> Property LLC | Management fee charges (monthly) | Property Management Agreement |
| Fund -> Investors | Capital calls, distributions, reporting | Subscription Agreement, PPM, Side Letters |
| GP -> Fund | Promote/carried interest, GP commitment | Operating Agreement |
| Property LLC -> Lender | Debt service, covenant reporting | Loan Agreement, Promissory Note |

### Accounting System Landscape

| System | Layer | Purpose |
|--------|-------|---------|
| **RentManager** | Property-level | Rent roll, tenant A/R, property-level P&L, utility billing |
| **QuickBooks Online** | Entity-level | GL for each LLC, management company, fund entities |
| **Excel/Sheets** | Fund-level | Waterfall calculations, capital account tracking, investor schedules |
| **HubSpot** | IR/CRM | Investor contacts, capital raise pipeline, communication tracking |
| **Investor Portal** | Investor-facing | Document distribution, capital account views, K-1 delivery |

### Sunrise-Specific Naming Conventions

- **Fund entities:** `SCI Fund [N] LLC` or `Sunrise Capital Investors [Name] LLC`
- **Property entities:** `SCI [Property Name] MHP LLC` or `SCI [Property Name] Parking LLC`
- **Management entity:** `SCI Management LLC`
- **Each property LLC has:** its own EIN, bank accounts, QBO company file, and RentManager property

---

## 2. Management Fee Framework

### Fee Types in the Sunrise Ecosystem

| Fee Type | Payor | Payee | Basis | Typical Range | Frequency |
|----------|-------|-------|-------|---------------|-----------|
| **Property Management Fee** | Property LLC | SCI Management LLC | % of gross collected revenue | 5-8% for MHPs | Monthly |
| **Asset Management Fee** | Fund entity | GP/Sponsor | % of equity or AUM | 1-2% | Quarterly or Annual |
| **Acquisition Fee** | Property LLC or Fund | GP/Sponsor | % of purchase price | 1-3% | At closing |
| **Disposition Fee** | Property LLC or Fund | GP/Sponsor | % of sale price | 0.5-1.5% | At sale |
| **Construction Management Fee** | Property LLC | Management Co | % of capex spend | 5-10% | As incurred |
| **Loan Guaranty Fee** | Property LLC | Guarantor (principals) | % of loan balance | 0.25-1% | Annual |

### Property Management Fee Calculation

**Sunrise model:** % of gross revenue per property per management agreement.

```
Monthly PM Fee = Gross Collected Revenue x PM Fee Rate

Where Gross Collected Revenue includes:
  + Lot rent collected
  + Home rent collected (POH)
  + Utility reimbursement collected
  + Late fees collected
  + Application fees collected
  + Other miscellaneous income collected
  - Does NOT include security deposit receipts (not revenue)
  - Does NOT include insurance proceeds (varies by agreement)
  - Does NOT include capital contributions from fund
```

**Example:**
```
Property: SCI Rolling Meadows MHP LLC
Month: January 2026

Lot rent collected:         $87,500
POH rent collected:         $12,300
Utility reimbursement:       $8,750
Late fees:                   $1,200
Application fees:              $300
---------------------------------
Gross Collected Revenue:   $110,050

PM Fee Rate:                    6%
PM Fee Due:                 $6,603
```

### QBO Journal Entry -- Property Management Fee

**On the Property LLC books:**
```
DR  5300 Management Fee Expense    $6,603
  CR  2010 Accounts Payable         $6,603
(To accrue monthly management fee per PMA)
```

**On SCI Management LLC books:**
```
DR  1100 Accounts Receivable       $6,603
  CR  4100 Management Fee Income    $6,603
(To record management fee earned from SCI Rolling Meadows MHP LLC)
```

### Asset Management Fee vs. Property Management Fee

| Dimension | Property Management Fee | Asset Management Fee |
|-----------|------------------------|---------------------|
| **Who pays** | Property LLC | Fund entity |
| **Who receives** | Management company (SCI Management LLC) | GP/Sponsor (Sunrise Capital Investors LLC) |
| **Covers** | Day-to-day operations: maintenance, leasing, collections, compliance | Strategic oversight: capital allocation, refinancing, value-add execution, reporting |
| **Basis** | % of gross collected revenue | % of committed capital, invested equity, or GAV |
| **Deducted before** | NOI calculation | Distributions to investors |
| **Industry range** | 5-8% (MHP), 2-5% (multifamily), 3-6% (commercial) | 1-2% of committed capital or equity |

**Critical distinction:** The PM fee is a property-level operating expense that reduces NOI. The AM fee is a fund-level expense that reduces distributable cash but does NOT reduce property-level NOI. Mixing these up distorts both property performance metrics and investor returns.

Source: Birgo Capital, "A Guide to Real Estate Private Equity Fees"; Origin Investments, "Private Equity Real Estate Fund Fees vs Individual Deal Fees"

---

## 3. Distribution Waterfall Mechanics

### Waterfall Overview

A distribution waterfall defines how cash proceeds are split between LPs (investors) and the GP (sponsor) as returns increase. Cash flows through sequential "tiers" -- each tier must be satisfied before proceeds flow to the next.

### European vs. American Waterfall

| Feature | European (Whole-Fund) | American (Deal-by-Deal) |
|---------|----------------------|------------------------|
| **Carried interest basis** | Calculated across entire fund | Calculated per investment |
| **GP receives carry** | Only after ALL LP capital returned + pref on ALL deals | After capital + pref returned on EACH deal |
| **LP protection** | Higher -- GP waits longer for carry | Lower -- GP earns carry earlier |
| **Clawback risk** | Lower | Higher (GP may owe money back) |
| **Sunrise approach** | Varies by fund -- check Operating Agreement | Varies by fund -- check Operating Agreement |

Source: iCapital, "Understanding Private Market Fund Distribution Waterfalls"; Moonfare, "Distribution Waterfall"

### Standard Four-Tier Waterfall (European Style)

**Tier 1: Return of Capital**
All distributions go 100% to LPs until they receive back their total contributed capital.

**Tier 2: Preferred Return (Hurdle Rate)**
All distributions go 100% to LPs until they have received their preferred return (typically 6-8% IRR) on contributed capital.

**Tier 3: GP Catch-Up**
Distributions go to the GP (typically 50-100% to GP) until the GP has received its target share (typically 20%) of ALL profits distributed to date (including Tier 2).

**Tier 4: Carried Interest Split**
Remaining distributions split according to the promote structure (typically 80% LP / 20% GP).

### Waterfall Calculation Example

**Assumptions:**
- Total LP capital contributed: $10,000,000
- GP co-invest: $500,000 (5% of total equity)
- Preferred return: 8% per annum (non-compounded, for simplicity)
- Catch-up: 100% to GP until GP has 20% of total profits
- Promote split: 80/20 (LP/GP) above catch-up
- Hold period: 3 years
- Total proceeds at sale: $15,500,000

```
STEP 1: Return of Capital
  LP capital returned:           $10,000,000
  GP co-invest returned:            $500,000
  Subtotal:                      $10,500,000
  Remaining proceeds:             $5,000,000

STEP 2: Preferred Return (8% x 3 years = 24% cumulative)
  LP preferred return:
    $10,000,000 x 8% x 3 =       $2,400,000
  GP preferred return on co-invest:
    $500,000 x 8% x 3 =            $120,000
  Subtotal:                       $2,520,000
  Remaining proceeds:             $2,480,000

STEP 3: GP Catch-Up
  Total profits so far:           $2,520,000 (all pref)
  GP target = 20% of total profits
  Need to solve: GP catch-up amount (C) such that
    GP total profit share = 20% of ($2,520,000 + C)
    GP has received so far: $120,000 (GP pref on co-invest)
    GP catch-up needed: solve for C where
      $120,000 + C = 0.20 x ($2,520,000 + C)
      $120,000 + C = $504,000 + 0.20C
      0.80C = $384,000
      C = $480,000

  GP catch-up distribution:        $480,000
  Remaining proceeds:             $2,000,000

  VERIFICATION:
    Total profits distributed:    $2,520,000 + $480,000 = $3,000,000
    GP share: $120,000 + $480,000 = $600,000 = 20% of $3,000,000  ✓

STEP 4: Carried Interest Split (80/20)
  LP share: $2,000,000 x 80% =   $1,600,000
  GP share: $2,000,000 x 20% =     $400,000

SUMMARY:
                          LP            GP            TOTAL
  Return of Capital:  $10,000,000     $500,000    $10,500,000
  Preferred Return:    $2,400,000     $120,000     $2,520,000
  GP Catch-Up:                $0     $480,000       $480,000
  Promote Split:       $1,600,000     $400,000     $2,000,000
  ---------------------------------------------------------
  TOTAL:              $14,000,000   $1,500,000    $15,500,000

  LP Multiple:        1.40x on $10M invested
  GP Multiple:        3.00x on $500K co-invested
  LP IRR:             ~12.4% (3-year hold)
  GP IRR:             ~44.2% (3-year hold, including promote)
```

### Clawback Provisions

If the GP receives carried interest on early deal exits but later deals perform poorly (American waterfall), the clawback requires the GP to return excess carry so LPs achieve their aggregate preferred return.

**Protection mechanisms:**
- **Carry escrow:** 10-30% of carried interest distributions held in escrow until fund liquidation
- **GP personal guaranty:** Individual GPs may personally guarantee clawback obligations
- **Netting:** Some funds allow netting of gains and losses across deals before calculating carry

**Clawback trigger:** Typically assessed at fund wind-down when all investments are realized. If cumulative GP carry exceeds the GP's entitled share based on total fund performance, the GP must return the excess.

Source: Duane Morris, "Private Equity Fund Clawbacks and Investor Givebacks"; Origin Investments, "Private Equity Waterfalls, Clawbacks & Catch-Up Clauses"

### Multi-Tier Promote Structures

Some funds use escalating promote tiers based on IRR hurdles:

```
Tier    LP IRR Threshold    Split (LP/GP)
1       0% - 8%             100/0 (pref)
2       8% - 12%            80/20
3       12% - 18%           70/30
4       18%+                60/40
```

Each tier's split applies only to the incremental return above the prior threshold. Always check the specific fund's Operating Agreement for the exact structure.

---

## 4. Capital Account Maintenance

### Overview

Each partner's capital account tracks their economic interest in the partnership. The capital account determines distribution rights and liquidation proceeds. Per IRC Section 704(b), partnerships must maintain capital accounts using either tax basis or "Section 704(b) book" basis.

Source: Withum, "Mastering Partnership Capital Accounts"; 26 CFR Section 1.704-1

### Capital Account Formula

```
Ending Capital Account =
    Beginning Capital Account
  + Capital Contributions (cash or FMV of contributed property)
  + Allocated Income (ordinary income, capital gains)
  - Allocated Losses (ordinary losses, capital losses)
  - Distributions (cash or FMV of distributed property)
  +/- Special Allocations (per Operating Agreement)
```

### Capital Account Statement Example

```
SCI Fund III LLC
Capital Account Statement -- Q4 2025
Investor: John Smith (LP-042)

Beginning Balance (10/1/2025):              $250,000.00
  + Capital Contributions:                         $0.00
  + Allocated Net Income:                     $8,437.50
    - Ordinary Income:           $6,250.00
    - Capital Gains:             $2,187.50
  - Allocated Net Losses:                         $0.00
  - Distributions:                           ($6,250.00)
    - Operating Distributions:  ($6,250.00)
    - Return of Capital:              $0.00
  +/- Special Allocations:                        $0.00
Ending Balance (12/31/2025):                $252,187.50

Cumulative Summary:
  Total Contributions:                      $250,000.00
  Total Distributions:                      ($18,750.00)
  Total Allocated Income:                    $20,937.50
  Total Allocated Losses:                         $0.00
  Current Capital Account:                  $252,187.50
  Ownership Percentage:                         2.500%
  Unfunded Commitment:                            $0.00
```

### Tax Basis vs. GAAP vs. 704(b) Book Basis

| Basis | Use | Key Difference |
|-------|-----|----------------|
| **Tax Basis** | K-1 reporting, IRS compliance | Uses tax depreciation (cost recovery), gain/loss on tax basis |
| **GAAP Basis** | Audited financial statements | Uses GAAP depreciation, fair value adjustments per ASC 820 |
| **704(b) Book** | Economic allocations per Operating Agreement | Uses FMV at contribution, revaluations at specified events |

**Common divergence points:**
- Depreciation methods and useful lives differ between tax and GAAP
- Section 754 elections create "inside" vs "outside" basis differences
- Revaluation events (new partner admission, distribution of property) adjust 704(b) book but not tax basis
- Contributed property with built-in gain/loss requires Section 704(c) allocations

### Beginning in tax year 2020, the IRS requires K-1 Schedule L (capital account analysis) to be reported on tax basis. Prior practice of using GAAP or 704(b) book basis on K-1s is no longer permitted.

Source: IRS Instructions for Schedule K-1 (Form 1065); 26 CFR Section 1.704-1

---

## 5. Investor Reporting

### Quarterly Reporting Package

**Minimum contents per industry standard:**

| Component | Description | Frequency |
|-----------|-------------|-----------|
| **Cover Letter** | Market commentary, portfolio summary, strategic updates | Quarterly |
| **Fund Financial Summary** | Fund-level P&L, balance sheet, cash position | Quarterly |
| **Property Performance** | Property-level NOI, occupancy, rent roll changes | Quarterly |
| **Capital Account Statement** | Per-investor contributions, distributions, allocations | Quarterly |
| **Distribution Notice** | Amount, date, type (operating vs return of capital) | With each distribution |
| **Pipeline/Deployment Update** | Acquisitions in progress, capital deployment status | Quarterly |
| **Valuation Update** | Property appraisals or internal valuations, NAV | Annually (minimum) |
| **K-1 Tax Package** | Schedule K-1 plus state-specific schedules | Annually |

### ILPA Reporting Standards (2025 Update)

The Institutional Limited Partners Association updated its Reporting Template in January 2025, expanding partnership expense categories from 9 to 22 for greater transparency.

**Key ILPA template requirements:**
- Separate internal chargebacks to identify expenses paid to GP/related persons
- Granular external partnership expenses aligned to general ledger categories
- Standardized fee and expense reporting across fund life
- Performance template with two methodologies: granular and gross

**Implementation timeline:** New template applies to funds still in investment period as of Q1 2026 and all funds commencing operations on or after January 1, 2026.

**Adoption:** Voluntary but increasingly expected by institutional LPs. Even for non-institutional investor bases (like Sunrise's), following ILPA format signals professionalism and builds trust.

Source: ILPA Reporting Template v2.0 (January 2025); Gen II Fund Services, "ILPA Unveils Updated Reporting Templates"

### Investor Portal Data Requirements

For the HubSpot-based investor portal Sunrise is building, ensure the following data is accessible:

**Must-have features:**
- Capital account balance (current and historical)
- Distribution history with payment details
- K-1 document download
- Quarterly report archive
- Capital call notices and payment instructions
- Contact information and subscription details

**Should-have features:**
- Property-level performance dashboards
- Real-time (or quarter-end) NAV per unit
- Document e-signature capability
- Two-factor authentication
- Secure messaging to IR team
- Investment summary across multiple funds

**Nice-to-have features:**
- Interactive waterfall visualization
- Tax projection tools
- Benchmarking against fund targets
- Mobile-responsive design

Source: Juniper Square, "Investor Portal"; Ascendix, "Top 9 Real Estate Investor Portals"

### Sunrise Quarterly Update Timeline

```
Quarter End (e.g., March 31)
  |
  Day +15:  Property-level financials closed in RentManager
  Day +20:  QBO entity-level books closed
  Day +25:  Fund-level consolidation and capital account updates
  Day +30:  Draft quarterly report to IR team for review
  Day +35:  Internal review complete, investor portal updated
  Day +40:  Quarterly report distributed to investors
  Day +45:  Investor webinar/call (if scheduled)
```

---

## 6. Fund-Level Cost Allocation

### Expense Classification Framework

| Category | Examples | Treatment | Allocated To |
|----------|----------|-----------|--------------|
| **Fund Organizational Costs** | Legal (fund formation), accounting setup, regulatory filings | Expensed as incurred (GAAP); amortized 180 months (tax, IRC 709) | Fund entity |
| **Offering/Syndication Costs** | PPM preparation, marketing, placement fees, blue sky filings | Charged to paid-in capital (GAAP); NOT deductible (tax) | Fund entity |
| **Fund Operating Expenses** | Audit, tax prep, fund admin, investor relations, insurance | Expensed as incurred | Fund entity |
| **Property Operating Expenses** | R&M, utilities, property taxes, insurance, PM fees | Expensed at property level | Property LLC |
| **Transaction/Deal Costs** | Due diligence, appraisals, legal (acquisition), lender fees | Capitalized as part of asset basis (asset acquisition); expensed (business combination per ASC 805) | Property LLC |
| **Dead Deal Costs** | Due diligence on deals that don't close | Fund expense or management company expense (per OA) | Fund or Management Co |
| **Capital Expenditures** | Infrastructure, home rehab, road paving | Capitalized and depreciated | Property LLC |

### Organizational vs. Offering Costs -- GAAP vs. Tax

| | Organizational Costs | Offering/Syndication Costs |
|---|---------------------|---------------------------|
| **What qualifies** | Legal fees for drafting OA, state filing fees, initial accounting setup | PPM drafting, investor presentations, placement agent fees, securities filings |
| **GAAP treatment** | Expense as incurred | Charge to paid-in capital (closed-end fund) |
| **Tax treatment** | Deduct up to $5,000 in year 1 (phased out if total exceeds $50,000); amortize remainder over 180 months | NOT deductible; NOT amortizable; permanent capital charge |
| **Common mistake** | Lumping syndication costs into org costs to get tax deduction | Treating placement fees as deductible operating expenses |

Source: EisnerAmper, "GAAP and Tax Differences Between Syndication and Organization Costs"; 26 CFR Section 1.709-1; Andersen, "Investment Fund Organizational Costs"

### Cost Allocation Between Fund and Property

**Decision rule:** If the expense benefits a specific property, it belongs at the property level. If it benefits the fund as a whole or multiple properties, it belongs at the fund level.

```
Expense                          Property-Level    Fund-Level
-------                          --------------    ----------
Property insurance               ✓
Fund-level D&O insurance                           ✓
Property tax                     ✓
Property appraisal (for loan)    ✓
Property appraisal (for NAV)                       ✓
Legal - lease dispute            ✓
Legal - fund governance                            ✓
Legal - acquisition              ✓ (capitalized)
Audit - property                 ✓
Audit - fund                                       ✓
Accounting - property books      ✓
Accounting - fund admin                            ✓
Travel - property inspection     ✓
Travel - investor meeting                          ✓
Management fee                   ✓
Asset management fee                               ✓
```

### Typical Fund Expense Budget (% of Committed Capital)

| Expense Category | Annual % | Notes |
|-----------------|----------|-------|
| Management/Asset Management Fee | 1.0-2.0% | Largest ongoing expense |
| Fund Administration | 0.05-0.15% | Third-party admin or internal |
| Audit & Tax Preparation | 0.05-0.10% | Annual requirement |
| Legal (ongoing) | 0.03-0.08% | Governance, amendments, compliance |
| Insurance (D&O, E&O) | 0.02-0.05% | Fund-level policies |
| Investor Relations | 0.02-0.05% | Portal, events, communications |
| Regulatory Filings | 0.01-0.02% | Form D amendments, state filings |
| **Total Fund Overhead** | **1.2-2.5%** | Excluding acquisition/disposition fees |

---

## 7. Multi-Entity Consolidation

### Consolidation Levels

```
Level 1: Property LLC (SCI [Name] MHP LLC)
  - Source: RentManager + QBO
  - Contains: Property-level P&L, balance sheet
  - Standalone reporting for lender covenants

Level 2: Fund Entity (SCI Fund [N] LLC)
  - Consolidates: All property LLCs owned by the fund
  - Eliminates: Intercompany transactions between fund and properties
  - Purpose: Investor reporting, K-1 preparation

Level 3: Management Company (SCI Management LLC)
  - Source: QBO
  - Contains: Management fee revenue, payroll, overhead
  - Purpose: Management company P&L, tax return

Level 4: Parent/Sponsor (Sunrise Capital Investors LLC)
  - Consolidates: All funds, management company, corporate
  - Purpose: Overall enterprise view (internal only)
```

### Common Intercompany Transactions to Eliminate

| Transaction | Debit Entity | Credit Entity | Elimination Entry |
|-------------|-------------|---------------|-------------------|
| PM fee charge | Property LLC (expense) | Management Co (revenue) | Eliminate both sides |
| Capital contribution | Fund (investment) | Property LLC (equity) | Eliminate investment vs equity |
| Intercompany loan | Fund (receivable) | Property LLC (payable) | Eliminate receivable vs payable |
| Interest on IC loan | Property LLC (expense) | Fund (income) | Eliminate both sides |
| Expense reimbursement | Management Co (receivable) | Property LLC (payable) | Eliminate both sides |
| Distribution upstream | Property LLC (equity reduction) | Fund (income/return of capital) | Eliminate per distribution type |

### QBO Consolidation Process

Since Sunrise uses separate QBO company files per entity, consolidation is performed outside QBO (typically in Excel or Google Sheets):

1. **Export trial balances** from each QBO entity at period end
2. **Map accounts** to a standardized consolidation chart of accounts
3. **Post eliminating entries** for intercompany transactions
4. **Aggregate** remaining balances into consolidated financial statements
5. **Reconcile** intercompany accounts to ensure they net to zero before elimination

**QBO limitation:** QBO does not support multi-entity consolidation natively. Consider third-party tools (Fathom, Reach Reporting, or LiveFlow) for automated consolidation if volume justifies the cost.

### Elimination Journal Entry Example

**Scenario:** SCI Management LLC charged $6,603 PM fee to SCI Rolling Meadows MHP LLC

**Consolidation worksheet (fund-level):**
```
DR  4100 Management Fee Income (Mgmt Co)     $6,603
  CR  5300 Management Fee Expense (Property)    $6,603
(Eliminate intercompany management fee)
```

After elimination, neither the fee income nor the fee expense appears in the consolidated fund financial statements -- the cash simply moved from one pocket to another within the same economic group.

Source: Intuit, "Intercompany Eliminations: A Guide"; PwC Viewpoint, "Elimination of Intercompany Transactions"

---

## 8. K-1 and Tax Reporting

### Partnership Tax Return (Form 1065)

Each fund entity and each property LLC (if treated as a partnership) files Form 1065 annually with the IRS. The form reports the partnership's income, deductions, gains, losses, and credits, but the partnership itself pays no federal income tax -- all items pass through to partners via Schedule K-1.

### Schedule K-1 Key Line Items for Real Estate Investors

| K-1 Box | Item | Typical RE Fund Content |
|---------|------|------------------------|
| Box 1 | Ordinary business income/loss | Net rental income, management fee income |
| Box 2 | Net rental real estate income/loss | Primary income source for RE funds |
| Box 5 | Interest income | Interest on reserves, sub-line income |
| Box 8 | Net short-term capital gain | Rare in RE funds |
| Box 9a | Net long-term capital gain | Property disposition gains |
| Box 10 | Net Section 1231 gain/loss | Gain on sale of property held >1 year |
| Box 11 | Other income/deduction | Section 481 adjustments, cancellation of debt |
| Box 13 | Other deductions | Section 179, charitable contributions |
| Box 14 | Self-employment earnings | Generally N/A for passive LPs |
| Box 16 | Foreign transactions | N/A for domestic MHP fund |
| Box 19 | Distributions | Cash and property distributions |
| Box 20 | Other information | Section 199A (QBI), Section 163(j), basis info |

### K-1 Production Timeline

```
Fund Tax Year End (December 31)
  |
  Jan 15:     Property-level books closed
  Jan 31:     QBO adjusting entries posted
  Feb 15:     Draft fund-level trial balance to tax preparer
  Feb 28:     Tax preparer issues draft K-1s for review
  Mar 1-10:   Internal review of K-1s (verify allocations, capital accounts)
  Mar 15:     Extension filed (Form 7004) -- almost always needed
  Mar 20:     Estimated K-1 data provided to investors (optional goodwill)
  Jun-Aug:    Final K-1s issued to investors
  Sep 15:     Extended filing deadline for partnership returns
```

**Sunrise reality:** K-1s for private real estate funds are almost never ready by March 15. Plan for extensions. Communicate timeline proactively to investors -- the March 15 deadline is for the partnership return filing, not K-1 delivery to investors (which follows the filing).

### State K-1 Considerations

Properties in multiple states mean investors may receive state-level K-1 equivalents:
- **OH:** IT K-1 (Ohio)
- **IN:** Schedule IN K-1
- **MD:** Schedule K-1 (502)
- **MI:** No separate state K-1 (Michigan uses federal K-1 data)

Investors with interests in multi-state funds may need to file returns in each state where the fund owns property, even if the investor resides elsewhere. This is a key investor relations pain point -- communicate clearly in the PPM and at subscription.

### Tax Allocations -- Substantial Economic Effect

Allocations of income, gain, loss, and deduction must have "substantial economic effect" under IRC Section 704(b) to be respected by the IRS. This requires:

1. **Capital account maintenance** per Section 704(b) regulations
2. **Liquidating distributions** in accordance with positive capital account balances
3. **Deficit restoration obligation (DRO)** or qualified income offset (QIO) for partners who may have negative capital accounts

If allocations lack substantial economic effect, the IRS will reallocate items based on the partners' interests in the partnership (PIP), which may differ significantly from the intended allocation.

Source: 26 CFR Section 1.704-1; IRS Partner's Instructions for Schedule K-1 (2025)

---

## 9. Acquisition and Disposition Fees

### Acquisition Fee Structure

**Typical structure for MHP funds:**
- 1-3% of total purchase price (or total project cost including closing costs)
- Paid to GP/Sponsor at or shortly after closing
- Disclosed in PPM/Operating Agreement

**GAAP treatment (ASC 805 vs. asset acquisition):**
- **Business combination (ASC 805):** Acquisition costs are EXPENSED as incurred, except for costs to issue debt/equity which are capitalized
- **Asset acquisition:** Acquisition costs are CAPITALIZED as part of the asset basis
- **MHP acquisitions** are typically treated as asset acquisitions (not business combinations) because a portfolio of land and improvements generally does not constitute a "business" under ASC 805-10-55

**Tax treatment:**
- Capitalized into the property basis and recovered through depreciation
- Allocated across land, improvements, and personal property based on purchase price allocation

**QBO Entry (Property LLC):**
```
At closing:
DR  1500 Land                              $X
DR  1510 Site Improvements                 $X
DR  1520 Buildings (POH)                   $X
DR  1530 Personal Property                 $X
DR  1540 Intangible (in-place leases)      $X
  CR  2500 Mortgage Payable                  $X
  CR  3100 Equity - Capital Contribution     $X
(To record property acquisition, allocated per cost seg study)

Acquisition fee (capitalized into basis):
DR  1510 Site Improvements (or allocated)  $X
  CR  2010 Accounts Payable - Related Party  $X
(To capitalize acquisition fee into property basis)
```

### Disposition Fee Structure

**Typical structure:**
- 0.5-1.5% of gross sale price
- Paid to GP/Sponsor from sale proceeds at closing
- Often credited against LP distributions in the waterfall

**GAAP treatment:**
- Expensed as a cost of sale, reducing gain on disposition
- Netted against sale proceeds in the fund's financial statements

**Waterfall interaction:**
- Disposition fees are typically paid from sale proceeds BEFORE waterfall distribution
- Some funds deduct the disposition fee as a fund expense; others deduct it from gross sale price
- Check the Operating Agreement for the exact mechanics

Source: EisnerAmper, "Real Estate Investment Vehicles"; FNRP, "Acquisition Fees Commercial Real Estate"; Cohen & Co, "Asset or Business Acquisition"

---

## 10. CAM Reconciliation for MHPs

### What CAM Means in an MHP Context

Unlike commercial properties where CAM charges are explicitly passed through to tenants via triple-net lease provisions, MHPs typically bundle common area maintenance costs into lot rent or charge separately for specific services (trash, water, etc.).

**Common areas in MHPs:**
- Roads and driveways
- Community buildings/clubhouses
- Playgrounds and common recreational areas
- Signage and perimeter fencing
- Street lighting
- Stormwater drainage systems
- Mailbox clusters

### MHP Cost Pass-Through Methods

| Method | Description | Common For |
|--------|-------------|------------|
| **Included in lot rent** | All common area costs embedded in base rent | Roads, lighting, drainage |
| **Utility billback (RUBS)** | Pro-rata share of master-metered utilities | Water, sewer, trash |
| **Flat fee charge** | Fixed monthly charge for specific service | Trash collection |
| **Sub-metered billing** | Actual usage per lot | Electric, gas (where sub-metered) |
| **HOA/association fee** | Separate monthly fee for amenities | Clubhouse, pool (rare in MHPs) |

### Annual CAM Reconciliation Process

Even though MHPs don't typically use traditional CAM charges, an internal reconciliation of common area expenses vs. revenue offsets is valuable for budgeting and rate-setting:

```
STEP 1: Identify all common area expenses for the year
  Road maintenance/repaving:         $15,000
  Street lighting (electric):         $4,200
  Snow removal:                       $8,500
  Landscaping (common areas):         $6,000
  Trash collection (master contract): $36,000
  Water/sewer (master meter):        $48,000
  Stormwater management:              $2,500
  Community building maintenance:     $3,800
  ----------------------------------------
  Total CAM costs:                  $124,000

STEP 2: Identify revenue offsets
  Utility billback revenue:          $72,000
  Trash fee revenue:                 $38,400
  ----------------------------------------
  Total offsets:                    $110,400

STEP 3: Calculate net CAM cost absorbed by ownership
  Net CAM cost: $124,000 - $110,400 = $13,600
  Per lot (200 lots): $5.67/month

STEP 4: Decision
  - If net CAM cost is increasing: consider adjusting utility billback
    rates or flat fees at next annual lease renewal
  - If net CAM cost is decreasing: validate that quality is maintained
  - Target: full cost recovery on pass-through items (water, trash)
```

### Minnesota-Specific Restriction

Per the `mhp-regulatory` skill: Minnesota prohibits administrative, capital, and distribution markups on utility billing. Sunrise properties in MN can only pass through actual utility costs -- no margin allowed. Factor this into CAM reconciliation for MN properties.

Source: Yardi Breeze, "Common Area Maintenance Reconciliation Made Easy"; Stratafolio, "What is CAM Reconciliation"

---

## 11. Audit Preparation

### Audit Requirements for Sunrise Funds

**When is an audit required?**
- **SEC Custody Rule (Rule 206(4)-2):** If a registered investment adviser has custody of client assets, annual audits are required by a PCAOB-registered auditor
- **Operating Agreement provision:** Most fund OAs require annual audited financial statements delivered to LPs within 120 days of fiscal year-end
- **Lender covenant:** Some loan agreements require property-level or fund-level audited financials

**Accounting framework:** US GAAP, specifically:
- ASC 946 (Investment Companies) -- if fund qualifies as investment company
- ASC 820 (Fair Value Measurement) -- for property valuations
- ASC 842 (Leases) -- for lease recognition
- ASC 360 (Impairment) -- for long-lived asset impairment testing

### Audit Preparation Checklist

**Organizational documents (gather once, update as needed):**
- [ ] Operating Agreement (fund and each property LLC)
- [ ] Subscription Agreements and side letters
- [ ] Property Management Agreements
- [ ] Purchase and Sale Agreements
- [ ] Loan documents (promissory notes, deeds of trust, guarantees)
- [ ] Insurance policies
- [ ] Title insurance and surveys
- [ ] Environmental reports (Phase I/II)

**Financial records (annual):**
- [ ] Complete general ledger (QBO export) for each entity
- [ ] Bank statements (all 12 months for each account)
- [ ] Bank reconciliations (monthly)
- [ ] Mortgage/loan amortization schedules
- [ ] Rent rolls (monthly, from RentManager)
- [ ] Accounts receivable aging (from RentManager)
- [ ] Accounts payable aging
- [ ] Fixed asset schedules with depreciation
- [ ] Capital account schedules (per investor)
- [ ] Distribution calculation workpapers (waterfall)
- [ ] Intercompany transaction reconciliation
- [ ] Management fee calculations (monthly)

**Valuation support:**
- [ ] Third-party appraisals (if obtained)
- [ ] Internal valuation methodology documentation
- [ ] Cap rate analysis and market comparables
- [ ] NOI used for valuation (tie to audited financials)

### Common Audit Findings in RE Funds

| Finding | Risk Level | Prevention |
|---------|-----------|------------|
| Valuation policy inconsistency | HIGH | Align OA language with GAAP methodology; document assumptions |
| Related-party transaction disclosure gaps | HIGH | Maintain complete schedule of all GP/affiliate transactions |
| Revenue recognition timing | MODERATE | Use accrual basis consistently; cut off at period end |
| Depreciation method/life inconsistency | MODERATE | Document useful lives; apply consistently across all properties |
| Capital account misallocation | HIGH | Reconcile capital accounts quarterly, not just at year-end |
| Missing management representation letters | LOW | Prepare draft in advance of audit fieldwork |
| Intercompany balance mismatches | MODERATE | Reconcile IC accounts monthly; resolve differences before audit |
| Prior year projected NOI vs. actual variance | MODERATE | Update assumptions annually; document significant variances |

Source: Dimov Audit, "Private Equity Fund Audits"; Anchin, "First-Year Audits of Real Estate Investment Funds"

---

## 12. NAV and IRR Calculations

### Net Asset Value (NAV)

**Formula:**
```
Fund NAV = Fair Value of All Fund Assets - Total Fund Liabilities

NAV Per Unit = Fund NAV / Total Units Outstanding

Where:
  Fair Value of Assets includes:
    + Real property at appraised or internal valuation
    + Cash and cash equivalents
    + Accounts receivable (net of allowance)
    + Prepaid expenses
    + Other assets at fair value

  Total Liabilities includes:
    - Mortgage debt (outstanding principal)
    - Accounts payable
    - Accrued expenses (property tax, interest, management fees)
    - Security deposits held
    - Deferred revenue
    - Other liabilities
```

**Property valuation for NAV purposes:**
```
Property Fair Value = Stabilized NOI / Market Cap Rate

Example:
  Net Operating Income (trailing 12-month):  $450,000
  Market Cap Rate for MHPs (Midwest):        7.5%
  Implied Value: $450,000 / 0.075 =          $6,000,000
```

**NAV calculation frequency:**
- **Open-end funds:** Monthly or quarterly (used for subscriptions/redemptions)
- **Closed-end funds:** Quarterly or annually (informational only)
- **Sunrise approach:** Quarterly internal NAV for investor reporting; annual third-party appraisal for audit support

### Internal Rate of Return (IRR)

**Definition:** The discount rate that makes the net present value (NPV) of all cash flows (contributions and distributions) equal to zero.

**Formula:** Solve for r in:
```
0 = CF₀ + CF₁/(1+r)¹ + CF₂/(1+r)² + ... + CFₙ/(1+r)ⁿ

Where:
  CF₀ = Initial investment (negative)
  CF₁...CFₙ = Periodic distributions (positive) and additional contributions (negative)
  CFₙ includes final liquidation proceeds
```

**IRR Example:**
```
Date          Cash Flow      Cumulative
01/01/2023    -$250,000      -$250,000    (initial investment)
06/30/2023     +$5,000       -$245,000    (Q2 distribution)
12/31/2023     +$5,000       -$240,000    (Q4 distribution)
06/30/2024     +$6,250       -$233,750    (Q2 distribution)
12/31/2024     +$6,250       -$227,500    (Q4 distribution)
06/30/2025     +$7,500       -$220,000    (Q2 distribution)
12/31/2025    +$310,000       +$90,000    (sale proceeds + Q4 dist)
-------------------------------------------------
Net Profit:   +$90,000
MOIC:         1.36x
IRR:          ~11.8% (solve iteratively or =XIRR() in Excel)
```

**Key distinctions:**
- **Gross IRR:** Returns before fund-level fees and expenses
- **Net IRR:** Returns after all fees and expenses (what investors actually earn)
- **Levered IRR:** Returns including the effect of mortgage leverage
- **Unlevered IRR:** Returns on total asset value, as if all-cash purchase

**Reporting convention:** Always report Net IRR to investors. Gross IRR is used internally for property-level performance assessment.

### Multiple of Invested Capital (MOIC / Equity Multiple)

```
MOIC = Total Distributions / Total Contributions

Example:
  Total Contributions:    $250,000
  Total Distributions:    $340,000
  MOIC:                   1.36x
```

**IRR vs. MOIC:** IRR rewards speed (shorter hold = higher IRR for same profit). MOIC measures absolute return. Both should be reported together for a complete picture.

Source: Wall Street Prep, "Net Asset Value"; Origin Investments, "Net Asset Value in Private Real Estate"; FundLedger, "Measuring Private Equity Fund Performance"

---

## 13. Capital Call Mechanics

### Capital Call Process

**Step 1: Identify need for capital**
- New acquisition closing
- Capital improvement project
- Operating shortfall
- Subscription line repayment

**Step 2: Verify LP commitment availability**
```
Available for Call = Total Commitment - Previously Called Capital

Example:
  LP Total Commitment:        $500,000
  Previously Called Capital:   $350,000
  Available for Call:          $150,000
```

**Step 3: Issue Capital Call Notice**

Typical notice period: 10-15 business days (per LPA terms).

**Required contents of notice:**
1. Total amount being called from all partners
2. Each LP's pro-rata share
3. Purpose of the call (acquisition, capex, operating)
4. Wire transfer instructions
5. Due date for funding
6. Reference to LPA provision authorizing the call
7. Funded and unfunded commitment balances (before and after call)

**Step 4: Receive and record funds**
```
QBO Entry (Fund Entity):
DR  1010 Operating Bank Account     $150,000
  CR  3110 LP Capital Contributions   $142,500  (LP pro-rata)
  CR  3120 GP Capital Contributions     $7,500  (GP co-invest)
(To record capital call #[N] funded)
```

### Subscription Line Facilities (Capital Call Lines)

**What it is:** Short-term credit facility secured by LP commitments (not by property assets). Allows the GP to act quickly on acquisitions without waiting for LP funding.

**Typical terms:**
- Facility size: 15-25% of total fund commitments
- Term: 1-3 years, revolving
- Interest rate: SOFR + 150-250 bps
- Collateral: Unfunded LP commitments and right to call capital
- Maximum draw period: 60-180 days (must be repaid from LP capital calls)

**Accounting impact:**
- While the line is drawn, it represents fund-level debt
- Interest expense on the line reduces distributable cash
- Use of sub-lines can enhance IRR by delaying capital calls (time-weighted effect)
- ILPA guidelines recommend reporting IRR both with and without sub-line effects

**QBO Entries:**
```
Draw on line:
DR  1010 Operating Bank Account     $2,000,000
  CR  2510 Subscription Line Payable  $2,000,000

Repayment from capital call:
DR  2510 Subscription Line Payable  $2,000,000
DR  6100 Interest Expense               $8,333  (one month at ~5%)
  CR  1010 Operating Bank Account     $2,008,333
```

### Default Remedies

If an LP fails to fund a capital call, the Operating Agreement typically provides for:
- **Late fee:** Interest at a punitive rate (often prime + 5% or higher)
- **Forfeiture:** Reduction of LP's interest by 25-50% of their existing balance
- **Forced sale:** Right of the fund to sell the defaulting LP's interest
- **Dilution:** Non-defaulting partners can fund the shortfall and the defaulter's interest is diluted

Source: Morgan Lewis, "Capital Calls Deskbook"; Carta, "Capital Calls in Private Equity"; Moonfare, "Capital Call"

---

## 14. SEC and Regulatory Compliance

### Regulation D -- Private Placement Exemption

Sunrise raises capital through Regulation D exempt offerings (not registered with the SEC). Key provisions:

| Rule | Offering Limit | Investor Requirements | General Solicitation |
|------|---------------|----------------------|---------------------|
| **506(b)** | No limit | Up to 35 non-accredited + unlimited accredited | NOT allowed |
| **506(c)** | No limit | ONLY accredited (must verify) | Allowed |

**Form D filing:** Required within 15 days of first sale of securities. File electronically via EDGAR.

**Form D amendment:** Must be filed annually (within 30 days of the anniversary of the original filing) and when certain information changes materially.

**State blue sky filings:** Most states require notice filings after a Reg D offering. Fees and requirements vary by state.

### Form PF (Private Fund Reporting)

**Who files:** SEC-registered investment advisers managing private fund assets. Required for advisers with $150M+ in private fund AUM.

**Compliance date:** Extended to October 1, 2026 for the expanded reporting requirements adopted in February 2024.

**Filing frequency:**
- Large hedge fund advisers ($1.5B+ AUM): Quarterly (within 60 days of quarter-end)
- All other filers: Annually (within 120 days of fiscal year-end)

**Sunrise applicability:** Depends on whether Sunrise Capital Investors LLC is registered as an RIA and whether private fund AUM exceeds $150M. If currently exempt (e.g., under the private fund adviser exemption or venture capital fund adviser exemption), monitor AUM as capital raise progresses toward $88M 2026 target and beyond.

### Accredited Investor Verification (506(c))

If using Rule 506(c) (general solicitation allowed), the issuer must take "reasonable steps" to verify accredited investor status. Acceptable methods:

1. **Income verification:** Tax returns (W-2, 1099, K-1) for prior two years + reasonable expectation of current year ($200K individual / $300K joint)
2. **Net worth verification:** Bank/brokerage statements, credit report for liabilities (>$1M excluding primary residence)
3. **Third-party letter:** Written confirmation from registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA
4. **Existing investor re-verification:** If previously verified and invested, can use representation letter for subsequent investments in same issuer

### Anti-Money Laundering (AML) / Know Your Customer (KYC)

While private funds are not currently subject to the Bank Secrecy Act's AML requirements (FinCEN has proposed but not finalized rules for investment advisers), best practice is to:
- Collect government-issued ID from all investors
- Screen against OFAC Specially Designated Nationals (SDN) list
- Obtain source-of-funds information for large investments
- Maintain records for at least 5 years

Source: SEC, "Form PF Reporting Requirements"; SEC, "Form D Filing Requirements"; Day Pitney, "2026 Annual and Periodic Reporting"

---

## 15. Debt Covenant Reporting

### Common Financial Covenants for MHP Loans

| Covenant | Typical Threshold | Calculation | Frequency |
|----------|------------------|-------------|-----------|
| **DSCR (Debt Service Coverage Ratio)** | ≥ 1.20x - 1.25x | NOI / Annual Debt Service | Quarterly or Annual |
| **LTV (Loan-to-Value)** | ≤ 75-80% | Outstanding Loan Balance / Appraised Value | Annual |
| **Minimum Occupancy** | ≥ 80-85% | Occupied Lots / Total Available Lots | Quarterly |
| **Minimum Net Worth** | Varies | Guarantor net worth per personal financial statement | Annual |
| **Minimum Liquidity** | Varies | Guarantor liquid assets | Annual |

### DSCR Calculation

```
DSCR = Net Operating Income / Annual Debt Service

Where:
  Net Operating Income (NOI) = Gross Revenue - Operating Expenses
    (Excludes: depreciation, amortization, interest expense, capital expenditures)

  Annual Debt Service = Total principal + interest payments for the year

Example:
  Property: SCI Twin Lakes MHP LLC
  Annual Gross Revenue:         $720,000
  Annual Operating Expenses:    $324,000
  NOI:                          $396,000
  Annual Debt Service:          $300,000  ($3.5M loan at 6.5%, 25yr amort)
  DSCR:                         1.32x     (above 1.25x covenant -- compliant)
```

### Covenant Compliance Reporting

**What to deliver to lenders (typical):**
- Quarterly: Property-level operating statement, rent roll, occupancy report
- Annually: Audited financial statements (property or fund level per loan docs), insurance certificates, tax returns
- On request: Guarantor personal financial statement, organizational documents

**Cash trap/sweep provisions:** If DSCR falls below the covenant threshold (e.g., 1.25x), many loans include a "cash trap" that diverts excess cash flow into a lender-controlled reserve account until the covenant is cured. This directly affects distribution capacity to investors.

**Covenant cure rights:**
- Some loans allow the borrower to inject equity to cure a DSCR shortfall
- "Soft" cure: Lender restricts distributions but does not declare default
- "Hard" default: Triggers acceleration and potential foreclosure

### Reporting Calendar

```
Quarter End:
  Day +30:   Property-level operating statement to lender
  Day +45:   Rent roll and occupancy report to lender
  Day +120:  Annual audited financials to lender (if required)
  Day +120:  Insurance certificate renewals to lender

  Annual:    Guarantor PFS and net worth certification
  Annual:    Tax return copies (property and guarantor)
```

Source: Adventures in CRE, "Debt Covenants Glossary"; FNRP, "Debt Service Coverage Ratio"; GSQuared CFO, "Calculating DSCR"

---

## 16. Impairment and Valuation

### Impairment Testing Under ASC 360

Real estate assets held for use are tested for impairment under ASC 360-10 when a "triggering event" occurs.

**Triggering events for MHP assets:**
- Significant decline in occupancy (e.g., >15% drop)
- Sustained negative cash flow from the property
- Significant adverse change in legal or regulatory environment
- Material physical damage (fire, flood, environmental contamination)
- Current expectation that asset will be sold or disposed of significantly before end of useful life
- Significant adverse change in market conditions (cap rate expansion, comparable sales decline)

### Two-Step Impairment Test

```
STEP 1: Recoverability Test (undiscounted cash flows)
  Sum of estimated undiscounted future cash flows from the asset
  vs. carrying amount (book value) of the asset

  If undiscounted cash flows ≥ carrying amount → NO impairment, stop
  If undiscounted cash flows < carrying amount → proceed to Step 2

STEP 2: Measure Impairment Loss
  Impairment Loss = Carrying Amount - Fair Value

  Fair Value determined per ASC 820:
    - Market approach (comparable sales)
    - Income approach (DCF with market discount rate)
    - Cost approach (replacement cost less depreciation)
```

**Example:**
```
Property: SCI Maple Grove MHP LLC
Carrying amount (book value):           $4,200,000
Triggering event: Occupancy dropped from 92% to 74%

Step 1: Undiscounted future cash flows
  Projected NOI years 1-10: $3,800,000
  Projected terminal value: $4,500,000
  Total undiscounted:       $8,300,000
  Carrying amount:          $4,200,000
  $8,300,000 > $4,200,000 → PASS, no impairment

If Step 1 had FAILED:
  Fair value (income approach): $3,600,000
  Impairment loss: $4,200,000 - $3,600,000 = $600,000

  Journal entry:
  DR  7500 Impairment Loss          $600,000
    CR  1510 Site Improvements        $600,000
  (To record impairment of long-lived asset per ASC 360)
```

**Key note:** Impairment losses are NOT reversible under US GAAP. Once written down, the reduced carrying amount becomes the new basis for depreciation going forward.

### Fair Value Hierarchy (ASC 820)

| Level | Inputs | Example for MHP |
|-------|--------|-----------------|
| **Level 1** | Quoted prices in active markets | N/A (real estate is not exchange-traded) |
| **Level 2** | Observable inputs other than Level 1 | Comparable MHP sales, published cap rates |
| **Level 3** | Unobservable inputs (model-based) | Discounted cash flow using internal projections |

Most MHP valuations are Level 3, using a combination of income approach (NOI / cap rate) and comparable sales where available.

Source: Moss Adams, "Navigating Real Estate Impairment"; Baker Tilly, "Think Strategically About Real Estate Impairment"; PKF O'Connor Davies, "Impairing Long-Lived Assets"

---

## 17. Decision Trees

### Decision Tree: Expense Allocation (Property vs. Fund)

```
Is the expense for a specific property?
  |
  YES → Does it benefit property operations directly?
  |       |
  |       YES → Property-level operating expense
  |       |     (R&M, property tax, insurance, PM fee)
  |       |
  |       NO → Is it a capital improvement?
  |             |
  |             YES → Capitalize at property level
  |             |     (depreciate over useful life)
  |             |
  |             NO → Does the OA assign it to property or fund?
  |                   |
  |                   Per OA → Follow OA provision
  |
  NO → Does the expense benefit the fund as a whole?
        |
        YES → Fund-level expense
        |     (audit, legal-fund, IR, AM fee, D&O insurance)
        |
        NO → Is it a management company expense?
              |
              YES → Management company P&L
              |     (office rent, payroll, corporate insurance)
              |
              NO → Review with Controller (Mike)
```

### Decision Tree: Fee Calculation Method

```
What type of fee?
  |
  +-- Property Management Fee
  |     Basis: % of gross COLLECTED revenue
  |     When: Monthly, in arrears
  |     QBO: Expense on property, revenue on mgmt co
  |
  +-- Asset Management Fee
  |     Basis: Check OA -- % of committed capital, invested equity, or GAV
  |     When: Quarterly or annually, per OA
  |     QBO: Expense on fund, revenue on GP entity
  |
  +-- Acquisition Fee
  |     Basis: % of purchase price or total project cost
  |     When: At closing
  |     QBO: Capitalized into property basis (asset acquisition)
  |           or expensed (business combination per ASC 805)
  |
  +-- Disposition Fee
  |     Basis: % of gross sale price
  |     When: At sale closing, from proceeds
  |     QBO: Netted against gain on sale or expensed as selling cost
  |
  +-- Construction Management Fee
        Basis: % of capital expenditure spend
        When: As costs incurred
        QBO: Capitalized as part of improvement cost (if capitalizable project)
```

### Decision Tree: Distribution Timing

```
Is there distributable cash available?
  |
  NO → No distribution. Document rationale.
  |
  YES → Are all debt service obligations current?
          |
          NO → Fund debt service first. Remaining cash available for distribution.
          |
          YES → Are required reserves funded?
                  |
                  NO → Fund reserves per OA requirements first.
                  |
                  YES → Are there outstanding capital calls?
                          |
                          YES → May need cash for deployment. Consult OA.
                          |
                          NO → Does a cash trap/sweep exist (lender)?
                                |
                                YES → Deposit trapped amount, distribute remainder.
                                |
                                NO → Calculate distribution per waterfall.
                                      |
                                      Return of capital first?
                                      Then preferred return?
                                      Then catch-up?
                                      Then promote split?
                                      → Issue distribution notice (10 days lead time)
                                      → Wire funds to investors
                                      → Update capital accounts
```

---

## 18. Common Gotchas

### Waterfall Calculation Errors

| Gotcha | Description | Prevention |
|--------|-------------|------------|
| **Compounding the pref** | Confusing simple vs. compound preferred return -- OA may specify either | Read OA language precisely. "8% per annum" is usually simple; "8% compounded annually" means unpaid pref earns pref |
| **Including GP co-invest in LP pref** | GP should earn pref on its co-investment alongside LPs, but at the LP rate, not in addition to promote | Model GP co-invest as a separate LP-like tranche in the waterfall |
| **Ignoring return of capital in catch-up** | The catch-up is on PROFITS, not on total distributions. Return of capital is not profit. | Calculate catch-up basis = total distributions MINUS return of capital |
| **Using wrong IRR for tiered promote** | IRR should be calculated on LP cash flows (after fees), not on fund gross returns | Verify which IRR the OA references -- gross vs. net, project vs. LP |
| **Partial-period pref** | When capital is called mid-quarter, pref accrues from the funding date, not quarter start | Track actual funding dates per investor for accurate pref calculation |

### Tax Reporting Surprises

| Gotcha | Description | Prevention |
|--------|-------------|------------|
| **Phantom income** | Investors receive taxable income allocation but no cash distribution (income used for debt paydown or reserves) | Warn investors in PPM; consider "tax distribution" provision in OA |
| **UBIT for IRA/401k investors** | Debt-financed real estate income can trigger Unrelated Business Income Tax for tax-exempt investors | Disclose in PPM; some funds use a blocker entity for tax-exempt investors |
| **State filing requirements** | LP may need to file tax returns in every state where the fund owns property | Provide state K-1 equivalents; list filing requirements in investor onboarding |
| **Recapture on sale** | Depreciation taken in prior years is "recaptured" at ordinary income rates (up to 25% for real property) upon sale | Model recapture impact in exit projections; communicate to investors pre-sale |
| **Syndication cost non-deductibility** | Offering costs cannot be amortized for tax purposes -- permanent book/tax difference | Track syndication costs separately; do not include in org cost amortization |

### Operational Accounting Errors

| Gotcha | Description | Prevention |
|--------|-------------|------------|
| **Intercompany imbalances** | Management fee receivable on mgmt co books doesn't match payable on property books | Reconcile IC accounts monthly; resolve before close |
| **Cash vs. accrual mismatch** | RentManager uses cash-basis tenant accounting; QBO may be accrual | Standardize on accrual for all entities; post accrual adjustments in QBO |
| **Security deposit misclassification** | SD receipts recorded as revenue instead of liability | SD is ALWAYS a liability until forfeited or applied per lease terms |
| **Capital contribution vs. loan** | Funds sent to property LLC recorded as loan instead of equity (or vice versa) | Document intent at time of transfer; maintain IC loan agreements if applicable |
| **Depreciation on land** | Land is not depreciable; must separate land from improvements at acquisition | Obtain cost segregation study; allocate purchase price per study |

---

## 19. Procedures

### Quarterly Close Additions (Fund Level)

**In addition to the standard property-level month-end close (see rm-accounting-expert and finance-operations-expert), the following fund-level procedures apply at each quarter end:**

```
QUARTERLY FUND CLOSE CHECKLIST

□ 1. Confirm all property-level books are closed (RentManager + QBO)
□ 2. Post intercompany management fee entries (all properties)
□ 3. Reconcile intercompany balances (mgmt co A/R vs property A/P)
□ 4. Calculate and post asset management fee (if quarterly)
□ 5. Post fund-level expenses (audit accrual, legal, insurance, IR)
□ 6. Update capital account schedules per investor
□ 7. Calculate quarterly preferred return accrual
□ 8. Determine distributable cash (cash balance - reserves - debt service)
□ 9. Run waterfall calculation if distributing
□ 10. Prepare distribution notices (if distributing)
□ 11. Update NAV calculation (internal valuation)
□ 12. Prepare quarterly investor report package
□ 13. Review and approve report with IR team
□ 14. Distribute report via investor portal
□ 15. Update covenant compliance calculations (DSCR, LTV)
□ 16. Submit lender reporting packages
□ 17. File regulatory updates if required (Form D amendments)
```

### Annual Audit Preparation Timeline

```
OCTOBER (Q3 Year-End Planning):
  □ Confirm auditor engagement letter and fee
  □ Schedule audit fieldwork dates (typically Feb-Mar)
  □ Begin compiling organizational documents

NOVEMBER-DECEMBER:
  □ Obtain year-end property appraisals (if annual cadence)
  □ Confirm depreciation schedules and useful lives
  □ Review related-party transaction schedule
  □ Begin drafting financial statement footnotes

JANUARY (Year-End Close):
  □ Close all property-level books by Jan 15
  □ Close all entity-level books by Jan 31
  □ Post all year-end adjusting entries
  □ Prepare trial balance for each entity
  □ Run fund-level consolidation with eliminations
  □ Finalize capital account schedules
  □ Complete waterfall calculations for year

FEBRUARY (Audit Fieldwork):
  □ Provide auditor with PBC (Prepared by Client) list items
  □ Make staff available for auditor questions
  □ Respond to auditor confirmations (bank, legal, insurance)
  □ Review draft audit adjustments with auditor

MARCH (Draft Review):
  □ Review draft financial statements
  □ Review draft footnotes for accuracy
  □ Sign management representation letter
  □ File Form 7004 (partnership extension) by March 15

APRIL (Finalization):
  □ Address any remaining auditor questions
  □ Finalize financial statements
  □ Distribute audited financials to investors (target: within 120 days)
  □ Provide audited financials to lenders (per covenant requirements)
```

### K-1 Production Timeline

```
JANUARY:
  □ Year-end books closed (all entities)
  □ Identify all investors with K-1 requirements

FEBRUARY:
  □ Send tax data to CPA firm (trial balances, depreciation, etc.)
  □ CPA prepares draft Form 1065 and K-1s

MARCH:
  □ Mar 1-10: Review draft K-1s internally
  □ Mar 10: Flag any discrepancies with CPA
  □ Mar 15: File Form 7004 (automatic 6-month extension)
  □ Mar 15-20: Communicate timeline to investors
  □ Optional: provide estimated K-1 data for investor planning

APRIL-JUNE:
  □ Finalize K-1s after audit is complete (audit may affect allocations)
  □ Generate state K-1 equivalents (OH, IN, MD)

JULY-AUGUST:
  □ Final K-1 packages distributed to investors
  □ Upload K-1s to investor portal
  □ Respond to investor K-1 questions

SEPTEMBER 15:
  □ Extended deadline for partnership return filing
  □ File final Form 1065 with IRS
  □ File state partnership returns
```

---

## 20. Output Formats

### Quarterly Investor Report Template

```
======================================================
SUNRISE CAPITAL INVESTORS
[FUND NAME] -- QUARTERLY INVESTOR REPORT
Quarter Ending [DATE]
======================================================

EXECUTIVE SUMMARY
- Portfolio performance highlights
- Key operational metrics
- Capital deployment update
- Market commentary

FUND FINANCIAL SUMMARY
                              Q[X] 2026      YTD 2026
  Gross Revenue:              $X,XXX,XXX     $X,XXX,XXX
  Operating Expenses:         ($XXX,XXX)     ($X,XXX,XXX)
  Net Operating Income:       $XXX,XXX       $X,XXX,XXX
  Debt Service:               ($XXX,XXX)     ($XXX,XXX)
  Fund Expenses:              ($XX,XXX)      ($XX,XXX)
  Net Cash Flow:              $XXX,XXX       $XXX,XXX

PROPERTY PERFORMANCE SUMMARY
  Property          Occupancy   NOI      NOI vs Budget   DSCR
  --------          ---------   ---      -------------   ----
  Rolling Meadows   94%         $XXX,XXX  +3.2%          1.35x
  Twin Lakes        88%         $XXX,XXX  -1.8%          1.22x
  [...]

CAPITAL ACCOUNT SUMMARY
  Your Commitment:            $XXX,XXX
  Capital Called to Date:     $XXX,XXX
  Unfunded Commitment:        $XXX,XXX
  Current Quarter Distribution: $X,XXX
  Cumulative Distributions:   $XX,XXX
  Current Capital Account:    $XXX,XXX
  Estimated Net IRR (Since Inception): XX.X%
  Estimated MOIC:             X.XXx

PIPELINE & DEPLOYMENT
  [Acquisitions in progress, capital deployment status]

NOTES & DISCLOSURES
  [Standard legal disclaimers, forward-looking statement warnings]
======================================================
```

### Distribution Calculation Workpaper

```
======================================================
DISTRIBUTION CALCULATION WORKPAPER
[FUND NAME] -- [PERIOD]
======================================================

DISTRIBUTABLE CASH DETERMINATION
  Total Cash Receipts:                      $XXX,XXX
  Less: Operating Expenses Paid:           ($XXX,XXX)
  Less: Debt Service:                      ($XXX,XXX)
  Less: Capital Expenditures:              ($XX,XXX)
  Less: Reserve Requirement:               ($XX,XXX)
  Less: Fund Expenses:                     ($XX,XXX)
  ------------------------------------------------
  Distributable Cash:                       $XXX,XXX

WATERFALL APPLICATION
  Tier 1 - Return of Capital:              $XX,XXX
    LP Share:        $XX,XXX
    GP Share:        $X,XXX

  Tier 2 - Preferred Return:               $XX,XXX
    LP Share:        $XX,XXX (8% pref on unreturned capital)
    GP Share:        $X,XXX  (8% pref on GP co-invest)

  Tier 3 - GP Catch-Up:                    $X,XXX
    GP Share:        $X,XXX  (100% to GP until 20% of profits)

  Tier 4 - Promote Split:                  $XX,XXX
    LP Share (80%):  $XX,XXX
    GP Share (20%):  $XX,XXX

INVESTOR-LEVEL DISTRIBUTION SCHEDULE
  Investor         Ownership %   Distribution   Type
  --------         -----------   ------------   ----
  John Smith       2.500%        $X,XXX.XX      Operating
  Jane Doe         5.000%        $X,XXX.XX      Operating
  [...]
  TOTAL LP:        95.000%       $XXX,XXX.XX
  GP:              5.000%        $XX,XXX.XX
  GRAND TOTAL:     100.000%      $XXX,XXX.XX

PREPARED BY: _______________  DATE: ___________
REVIEWED BY: _______________  DATE: ___________
======================================================
```

### Capital Account Summary (Fund Level)

```
======================================================
CAPITAL ACCOUNT SUMMARY
[FUND NAME] -- As of [DATE]
======================================================

                   Commit    Called    Unfunded   Distrib    Alloc Inc   Cap Acct   Own%
Investor           ------    ------   --------   -------    ---------   --------   ----
John Smith         $500K     $500K    $0         ($40K)     $52K        $512K      5.0%
Jane Doe           $250K     $250K    $0         ($20K)     $26K        $256K      2.5%
ABC Family Trust   $1,000K   $750K    $250K      ($45K)     $72K        $777K      10.0%
[...]
LP Subtotal:       $9,500K   $8,200K  $1,300K    ($615K)    $827K       $8,412K    95.0%
GP Co-Invest:      $500K     $500K    $0         ($32K)     $44K        $512K      5.0%
TOTAL:             $10,000K  $8,700K  $1,300K    ($647K)    $871K       $8,924K    100.0%

FUND METRICS:
  Total Commitments:           $10,000,000
  Capital Called to Date:       $8,700,000  (87.0% deployed)
  Cumulative Distributions:      $647,000
  Current Fund NAV:            $12,500,000
  Net IRR (Since Inception):     11.2%
  MOIC (Gross):                  1.51x
  MOIC (Net):                    1.43x
======================================================
```

---

## 21. References

### Authoritative Standards

| Standard | Source | Relevance |
|----------|--------|-----------|
| ASC 820 | FASB | Fair value measurement for property valuations and NAV |
| ASC 805 | FASB | Business combinations -- acquisition cost treatment |
| ASC 360 | FASB | Impairment testing for long-lived assets |
| ASC 842 | FASB | Lease recognition and reporting |
| ASC 946 | FASB | Investment company accounting (if fund qualifies) |
| ASC 970 | FASB | Real estate -- general (CIP, capitalization, cost recovery) |
| IRC 704(b) | IRS | Partnership allocations, substantial economic effect |
| IRC 709 | IRS | Treatment of organizational and syndication costs |
| IRC 754 | IRS | Optional basis adjustment elections |
| Reg D (Rules 506(b), 506(c)) | SEC | Private placement exemption framework |
| Form PF | SEC/CFTC | Private fund reporting (compliance date: Oct 1, 2026) |
| ILPA Reporting Template v2.0 | ILPA | Standardized LP reporting (effective Q1 2026) |

### Web Sources Consulted

- EisnerAmper, "Waterfall and GP Catch-Ups" -- https://www.eisneramper.com/insights/real-estate/waterfall-gp-catch-ups-0123/
- EisnerAmper, "GAAP and Tax Differences Between Syndication and Organization Costs" -- https://www.eisneramper.com/insights/blogs/real-estate-blog/real-estate-private-equity-organizational-cost-re-blog-1023/
- EisnerAmper, "Real Estate Investment Vehicles" -- https://www.eisneramper.com/insights/real-estate/real-estate-investment-vehicles-0619/
- iCapital, "Understanding Private Market Fund Distribution Waterfalls" -- https://icapital.com/insights/private-equity/understanding-private-market-fund-distribution-waterfalls/
- Moonfare, "Distribution Waterfall" -- https://www.moonfare.com/glossary/distribution-waterfall
- Origin Investments, "PE Waterfalls, Clawbacks & Catch-Up Clauses" -- https://origininvestments.com/what-are-private-equity-waterfalls-clawbacks-catch-up-clauses/
- Origin Investments, "Net Asset Value in Private Real Estate" -- https://origininvestments.com/net-asset-value-private-real-estate-investing/
- Origin Investments, "PE Real Estate Fund Fees vs Individual Deal Fees" -- https://origininvestments.com/private-equity-real-estate-fund-fees-vs-individual-deal-fees/
- Birgo Capital, "Guide to Real Estate Private Equity Fees" -- https://www.birgo.com/blog/guide-to-real-estate-investing-fees
- FNRP, "Acquisition Fees in Commercial Real Estate" -- https://fnrpusa.com/blog/acquisition-fees-commercial-real-estate/
- FNRP, "Debt Service Coverage Ratio" -- https://fnrpusa.com/blog/what-is-debt-service-coverage-ratio/
- Carta, "Capital Calls in Private Equity" -- https://carta.com/learn/private-funds/management/capital-calls/
- Carta, "Management Fees: A Guide to Fee Structures" -- https://carta.com/learn/private-funds/management/management-fees/
- Morgan Lewis, "Capital Calls Deskbook" -- https://www.morganlewis.com/-/media/files/special-topics/vcpefdeskbook/fundoperation/vcpefdeskbook_capitalcalls.pdf
- Duane Morris, "PE Fund Clawbacks and Investor Givebacks" -- https://www.duanemorris.com/site/static/private_equity_funds_clawbacks_and_investor_givebacks.pdf
- Withum, "Mastering Partnership Capital Accounts" -- https://www.withum.com/resources/mastering-partnership-capital-accounts-navigating-tax-complexities-and-equity-valuations/
- ILPA, "Reporting Template v2.0" -- https://ilpa.org/industry-guidance/templates-standards-model-documents/updated-ilpa-templates-hub/ilpa-reporting-template/
- Gen II Fund Services, "ILPA Updated Reporting Templates" -- https://gen2fund.com/news/ilpa-unveils-updated-reporting-templates-to-enhance-transparency-and-standardization-in-private-fund-reporting/
- Dimov Audit, "Private Equity Fund Audits" -- https://www.dimovaudit.com/blog-posts/audits-of-private-equity-funds
- Anchin, "First-Year Audits of Real Estate Investment Funds" -- https://www.anchin.com/articles/first-year-audits-of-real-estate-investment-funds-what-you-need-to-know/
- Moss Adams, "Navigating Real Estate Impairment" -- https://www.mossadams.com/articles/2024/09/asc-360-10-and-real-estate-impairment
- Baker Tilly, "Think Strategically About Real Estate Impairment" -- https://www.bakertilly.com/insights/asc-360-10-and-real-estate-impairment
- Wall Street Prep, "Net Asset Value" -- https://www.wallstreetprep.com/knowledge/net-asset-value-nav/
- IRS, "Partner's Instructions for Schedule K-1 (Form 1065)" -- https://www.irs.gov/instructions/i1065sk1
- SEC, "Form PF Reporting Requirements" -- https://www.sec.gov/rules-regulations/2025/09/s7-22-22
- Day Pitney, "2026 Annual and Periodic Reporting & Compliance" -- https://www.daypitney.com/2026-annual-and-periodic-reporting-compliance-for-investment-managers
- Yardi Breeze, "CAM Reconciliation Made Easy" -- https://www.yardibreeze.com/blog/2024/09/common-area-maintenance-reconciliation/
- Cohen & Co, "Asset or Business Acquisition" -- https://www.cohenco.com/knowledge-center/insights/may-2025/should-you-account-for-your-real-estate-purchase-as-an-asset-or-business-acquisition
- Andersen, "Investment Fund Organizational Costs and Startup Costs" -- https://andersen.com/resources/investment-fund-organizational-costs-and-startup-costs-amortize-or-not-amortize
- Juniper Square, "Investor Portal" -- https://www.junipersquare.com/platform/portal
- Ascendix, "Top 9 Real Estate Investor Portals" -- https://ascendix.com/blog/real-estate-investor-portal/
- Adventures in CRE, "Debt Covenants Glossary" -- https://www.adventuresincre.com/glossary/debt-covenants/
- GSQuared CFO, "Calculating DSCR" -- https://www.gsquaredcfo.com/blog/calculating-dscr
- FundLedger, "Measuring Private Equity Fund Performance" -- https://fundledger.com/blog/measuring-private-equity-fund-performance
- 26 CFR Section 1.704-1 -- https://www.law.cornell.edu/cfr/text/26/1.704-1
- 26 CFR Section 1.709-1 -- https://www.law.cornell.edu/cfr/text/26/1.709-1

### Internal Cross-References

| Resource | Path | Use |
|----------|------|-----|
| RM Accounting Expert | `.claude/skills/rm-accounting-expert/skill.md` | Property-level GL, RentManager specifics |
| Entity Formation Expert | `.claude/skills/entity-formation/skill.md` | LLC formation, entity hierarchy |
| Finance Operations Expert | `.claude/skills/finance-operations-expert/skill.md` | Bank rec, month-end close |
| MHP Acquisitions Expert | `.claude/skills/mhp-acquisitions-expert/skill.md` | Deal underwriting, buy box |
| HubSpot Expert | `.claude/skills/hubspot-expert/skill.md` | Investor CRM, portal |
| MHP Operations Expert | `.claude/skills/mhp-operations-expert/skill.md` | Property operations |
| MHP Regulatory Expert | `.claude/skills/mhp-regulatory/skill.md` | State-specific regulations |
| Data Dictionary | `Operations/data-pipeline-consolidation/DATA_DICTIONARY.md` | Metric definitions |

---

**Maintenance schedule:** Review quarterly for regulation changes (especially Form PF compliance date), ILPA template updates, and fee structure changes per new fund operating agreements. Verify all tax provisions with Sunrise's CPA firm before relying on them for filings.

**Confidence note:** GAAP standards, IRC citations, and SEC regulations are HIGH confidence (sourced from authoritative guidance). Fee ranges, typical thresholds, and industry practices are MODERATE confidence (sourced from industry publications and may vary). Sunrise-specific procedures and timelines should be validated with Mike (Controller) and Kate/Chiqui (IR team).