Helped an Asset Manager of a Hotel Identify Misallocated Funds Through Deep Financial Analysis
•Identified $250K in misappropriated funds over six-month period on a property
•Findings used to replace property management and negotiated additional borrower oversight of property management
An asset manager responsible for monitoring the cash flow of a hotel asset had concerns that property management was misallocating corporate overhead costs.
The loan agreement indicated that the lender had a right to inspect the financial records of property management with a 60-day notice. SitusAMC interviewed the property manager and accounting personnel to understand the nature of the corporate costs as well as the methodology for allocating those costs. We determined that a deeper level of analysis was required to test the consistency of the allocation methodology. To do that, we developed a document request list that included financial reports such as balance sheets, income statements, detailed general ledger, vendor invoices and contracts and a schedule of allocated costs for the last 12 months.
Through our forensic analysis, we found that the property manager used inconsistent percentages to allocate corporate costs with no backup to support the inconsistencies. We concluded that approximately $250k was overallocated to the property over the last 12 months. The lender used the analysis as support for requiring the borrower to replace the existing property manager and to negotiate additional language in the loan agreement that required the borrower to have oversight of property management and accounting.