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Property Management and Trust Fund Accounting

Dean Sherry - Monday, April 14, 2014

What you need to know…
By Dean Sherry, President, Duke Property Management


Let’s say you are a real estate owner/investor and have hired a property management company to manage your apartment buildings. You sign a management contract and the company opens a regular business checking account with their bank. They begin managing your property and collecting rents and paying your bills.


However, did you know that by not setting up a trust fund account to manage your money, the property management company could be liable for not complying with the California Bureau of Real Estate (CalBRE) rules and regulations? In the eyes of the CalBRE (formerly known as the DRE), ignorance is not bliss and the consequences of an audit could be quite severe. Therefore, it’s important to know the legal guidelines to understanding trust fund accounting. It can only help make your life easier.

In terms of property management, trust fund accounting is predicated on the notion that the management company has created an agency relationship with a third party through a management contract and therefore has a legally-bound fiduciary duty to the owner(s) of the funds they are managing.


In other words, they are essentially holding the money from your properties “in trust for” you and thus must handle the money according to trust fund accounting standards. For the property management firm, this is much different than most other real estate transactions where money is held and managed by an independent escrow company. The management company takes this function upon themselves and they are fully responsible and accountable for your funds. This is why management companies need to practice trust fund accounting. Below are the major points you should know about trust fund accounting.


Setting Up a Bank Account


In order to do trust fund accounting, the management company must first set up a trust fund account with a bank. This account is usually used as the “operating account” into which rent collections are deposited, funds held and from which payments and distributions are made for, among other things, services, maintenance and repairs, loan payments, payment of taxes and distribution to owners. Many owners/investors should also have another type of trust account for their tenant’s security deposits and reserves. It’s critical to note that it’s legal to have one trust account to manage several properties held by the same owners or different owners, but I generally consider this a bad business practice due to the complexity of keeping accurate records. It’s best to have a trust account for each property, but it all depends on how you, the owner, want the management company to set it up.


However, none of the trust fund accounts can be commingled with the management company’s corporate accounts and they must be non-interest bearing accounts. Furthermore, although it’s much easier for record keeping and reporting to set up separate accounts, the most important thing is that the management company clearly identifies who owns what account and keeps accurate records for each property separately.


Many of the larger banks have some sort of real estate treasury management division and are well-versed in the legal requirements of trust fund accounting, per CalBRE. However, there is a caveat; some banks do not provide this type of “in trust for” accounts and the local branch agent might tell your management company they just need a DBA account and a trust agreement to get started. This is wrong. The company will need, in the very least, their legal business documents and a signed management agreement. It all starts with choosing a bank that provides trust fund banking and who can assign your property management firm a personal customer service representative that is knowledgeable about this type of banking.


Record Keeping / Software Reporting


As I had previously mentioned, it’s vital to keep separate and accurate records for each property under management, even if there is only one trust account. All that data entry can be cumbersome and costly for the management firm. Using technology to automate this process makes it much easier for the company to create and enjoy a streamlined process of bookkeeping and accounting, which better serves the owner.


Most commercial management software solutions have trust fund accounting systems and can easily integrate with the management company’s online banking system. For example, for account receivables, many companies use an online payment system like PayLease to electronically collect rents. The PayLease transactions can then be automatically synced with the management company’s bank, which in turn, can also integrate with their property management software. The end result is that it saves them time doing data entry and money on payroll and greatly increases the accuracy of the financial reports. They can then focus on providing their clients with better customer service.


As long as the management software is compliant with trust fund accounting, the management system the firm uses will enable them to meet the CalBRE reporting and reconciliation requirements, including, but not limited to:


  • Ownership/Property Reporting
  • Tenant Info / Rent Roll
  • General Ledger/Transaction Reporting
  • Balance Sheet & Financial Statements
  • Bank Statements & Reconciliation Report

Most property management companies are well aware of the requirements of trust fund accounting. However, there are always some companies that aren’t managing your funds the way they’re supposed to. If you care about your real estate investment(s), don’t let your management company expose themselves to noncompliance accounting practices. You don’t want the CalBRE auditing your management company’s accounting and thereby risk a state or federal audit of your own funds. It’s just not worth it.


For more information, please refer to:
http://www.dre.ca.gov/files/pdf/OpeningTrustAccount.pdf
http://www.dre.ca.gov/files/pdf/re13.pdf
http://www.dre.ca.gov/files/pdf/refbook/ref22.pdf


View the original Article here

How to Increase Water Efficiency & Lower Utility Bills

Web Admin - Friday, March 07, 2014

Posted February 10, 2014 by Beth Clymer


With the current water drought in California getting worse each passing day, it is vital for landlords to take the necessary steps towards conserving water and energy. To that end, we recommend reading this article by Beth Clymer on How to Increase Water Efficiency & Lower Utility Bills from the Buildium Property Management blog site.


As a property manager, why should you care about water efficiency? One reason is that it’s good for the planet. The other is that it’s good for your bottom line. The fiscal, environmental, and moral reasons for water efficiency and conservation are clear enough, so this post will cover the steps for making water efficiency a reality across your properties.


Read More

Get the Scoop on Security Deposits

Web Admin - Thursday, January 23, 2014
This is a great article by Stephen Fishman on the Top 10 Tax Deductions For Landlords from the Buildium Property Management blog site. No landlord would pay more than necessary for utilities or other operating expenses for a rental property. Yet millions pay more taxes on their rental income than they have to. 

Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for landlords. Click here to read more.

How to Keep Good Tenants

Web Admin - Friday, October 25, 2013
Retaining good tenants in your property can be more challenging than finding reliable tenants in the first place. Continuing with the same people in your properties is hugely beneficial for you as either a landlord or a property manager, as it prevents void periods where the property is empty and receiving no rental income. It also reduces the amount of time and paperwork dedicated to each property, due to the fact that the current tenants do not need to be continuously regulated and checked in the same way new tenants require.


Here are some pointers to help keep your tenants happy and encourage them to stay in your property. Read more.


Want to learn more? Visit the All Things Property Management blog, a one-stop destination for folks interested in learning more about managing real estate. Tune in for next week's installment of The Pulse.

Duke Property Management

1040 S. Robertson Blvd
Suite B
Los Angeles, CA 90035

Office: 310-657-4256
Fax: 310-657-4486

Email: info@dukepm.com






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Duke Property Management, Inc., Property Management, Los Angeles, CA

Duke Property Management

1040 S. Robertson Blvd Suite B
Los Angeles, CA 90035

Office: 310-657-4256
Fax: 310-657-4486

Email: info@dukepm.com

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