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A Trust Account Primer for Property Managers

While many people may think that property management consists mainly of leasing space or units and overseeing maintenance and repairs, experienced property managers know what property management is really about— lots of paperwork and handling other people’s money, often large sums of money.

The License Law requires that when a broker acting in the capacity of a broker or an escrow agent or a temporary custodian of funds receives monies in a real estate transaction, he or she must deposit and maintain those funds in a separate federally insured checking account unless all the parties which have an interest in those funds have agreed in writing for the broker to do something different. A separate account of course is one that is separate from the account or accounts that hold the broker’s money, in other words, a trust account.

Rents Collected Are Trust Funds.

That requirement means several things in regard to property management. Both rents collected on someone else’s property and security deposits collected from tenants are trust funds, and brokers must place them into a trust account. Some property managers have the mistaken idea that, unlike security deposits, rents collected are not trust funds. Few ideas could be further from the truth. If a property manager collects rents on property owned by any other person, he or she must deposit those funds in a trust account. To do otherwise constitutes commingling.

A rare exception to that requirement occurs if the leases, consistent with the management agreement, directed that the rents be paid directly to the owner. If permitted by the property management agreement, the broker could receive the rents on behalf of the owner and deposit them into a bank account owned by the owner. Yet, even in this exception, the rents are trust funds to the broker. Property Management Brokers just do not deposit them into a trust account by agreement of the parties.

Rents on Properties Owned by Licensees.

Brokers sometimes manage their own property and permit their affiliated licensees to do the same. In those instances since the rents collected belong to the licensee, it is not appropriate to deposit the rents into a trust account. However, brokers and their affiliated licensees must be careful that the actual ownership of the property allows it to be managed independent of the firm. For example, if an affiliated licensee is the sole owner of a property, the broker may allow that affiliated licensee to manage the property outside the firm. However, if the property is co-owned by another party, for example the licensee’s spouse, the property must be managed by the firm since a brokerage situation exists. Any rents or security deposits collected by the licensee must be deposited in the firm’s trust account and distributed according to the management agreement.

Security Deposits Are Tenant’s Funds.

The situation with security deposits is perhaps less complex. Security deposits are tenant’s funds unless and until the landlord becomes entitled to receive all or part of them under the terms of the lease. If the broker collects security deposits from the tenants in a property owned by the broker or by another party, the broker must place those deposits in a trust account. Unless the lease directs that the security deposits be paid directly to an unlicensed owner, the broker must deposit and maintain those deposits in a trust account owned by the broker and opened with the broker’s federal Employer Identification Number (EIN) and in the broker’s name.

A recent case illustrates the importance of this point. A property manager collected rents and security deposits for several owners. For each owner he set up one trust account in which he deposited rents and one trust account in which he deposited security deposits. Unfortunately, he opened each account in the name of and with the social security number of the owner.

The IRS filed a tax lien against one of the owners. Because the security deposits from that owner’s property were in an account opened in the owner’s name and social security number, the bank and the IRS insisted that the account was subject to seizure even though the broker argued that the funds in that account belonged to the tenants, not to the owner.

Paying Property Expenses from Trust Funds.

Judging from inquiries made to the Commission, some confusion exists about whether the broker can pay property expenses from a trust account. The answer is, “Yes,” under certain conditions.

First, the management agreement must give the broker the authority to pay property expenses and to use rent proceeds to do so. Second, the broker must not write checks for expenses on an owner’s property unless that owner has sufficient funds in the trust account to cover those checks.

Regardless of the overall balance in a rental trust account, a broker can not write a check from that account to pay an owner’s expenses unless that owner has sufficient funds on deposit in that account to cover the check. Certainly, if the amount of the check is smaller that the total amount in the account, the check will not bounce. However, the balance in the trust account is not the deciding factor. What the broker must consider is whether that particular owner has enough funds in the trust account to cover any checks written to pay expenses of his or her property.

Therefore, if both these conditions are met, the broker can write checks out of the trust account to pay an owner’s property expenses. The broker must not, as some have reported doing, write a check from the trust account, deposit it in the firm’s operating account, and then write a check from the firm’s account to pay the property expense. To do so is commingling.

Carnahan Property Management services Woodland Hills,West Hills, Calabasas, Canoga Park, Tarzana, Reseda,Porter Ranch, Topanga, Encino, Northridge, Van Nuys,North Hills,Chatsworth, Sherman Oaks, Studio City, North Hollywood, West Hollywood, San Fernando Valley, Granada Hills, Mission Hills, Simi Valley, West Lake Village, Agoura,Toluca Lake, Valley Village, Burbank. Call us at (818) 884-1500 and check if we can serve your area.