Property Management Accounting (#258)
/In this podcast episode, we discuss property management accounting. Key points made are noted below.
The Property Manager
A property manager is an independent manager of properties that does so on behalf of property owners. For example, a vacation property has a hundred condominiums in it, each of which is owned by a different family. They all rent out their condominiums when they’re not using the units, and the property manager for the entire complex does so on their behalf. The same situation occurs for an office building – where perhaps a pension fund owns the building and contracts out the property management to a third party. The property manager takes care of everything on behalf of the property owners, which includes advertising, maintenance, risk management, and accounting for the results.
The property manager acts in a fiduciary role on behalf of the property owners, which means that the manager has to act with proper diligence in managing the property, and in reporting the results of its activities back to the owners. As an agent for the owners, the property manager is usually required by state law to maintain accurate accounting records for each of the properties under management. This means that a separate set of accounting records is maintained for each property owner. Given that there could be a lot of property owners, it makes sense for the property manager to maintain exactly the same chart of accounts for each property, though this may not always be possible if a large property owner demands that its chart of accounts be used instead.
Property Management Chart of Accounts
The chart of accounts used by a property manager mostly differs in the area of revenue tracking. The manager may want to separately identify income from rent, late fees, utilities, laundry, vending machines, storage units, parking, and even renter assistance payments from the government.
Property Management Accounting Entries
So, what kinds of accounting entries is a property manager likely to make? There will certainly be entries for rent payments and security deposits, as well as withholdings from security deposits to pay for damage to rental units. Property owners may also be required to make reserve payments, which are accumulated to pay for major property repairs. There may also be pass-through charges, such as when the property manager pays to have the carpeting cleaned in a rental property, and the cleaning fee is then passed along to the tenant. Another possibility is an entry for contingent rent, which is usually based on the future sales or profits of the tenant. This arrangement is most common for retail stores, where part of the rent is a percentage of a store’s sales. And of course, the property manager charges a fairly substantial monthly management fee to each property owner.
Funds Held in Trust
When a property manager is handling money on behalf of a property owner, these funds are considered to be held in trust. For example, rent payments and security deposits cannot be mixed in with the funds of the property manager. Under most state laws, trust funds have to be held in a bank account that’s identified as a trust account, which makes it more difficult for a property manager to inadvertently misappropriate the funds.
Pooled Trust Account
One problem with using separate bank accounts is that the property may need to deal with a massive number of bank accounts in situations where there are many property owners. To get around this problem, the property manager can use a pooled trust account, where all property owner funds are kept in a single bank account, with the accounting system being used to identify the funds held by each property owner.
This doesn’t necessarily mean that just one pooled account is being used for a property. There may be three. One is the operating account, which handles incoming rent payments, and which is used to pay for most day-to-day expenses. The second is the security deposit account, which – obviously – contains all of the security deposits paid in by tenants. And the third is a reserve fund account, which contains funds that will be used for capital expenditures, such as repaving the parking lot or replacing the roof. This money comes from the property owners.
Property Management Reporting
Property managers are expected to periodically issue a reporting package to property owners. There’s no standard report configuration, but it usually includes a rent roll, which is a detailed listing of the rent earned from each property. There is usually also a summary of operations that matches expenses against revenues, so that owners can see the net income from operations. Owners also want to see a summary of the activity in the reserve account, so that they can see the amount of funds that have been added, the amount taken out to pay for various items, and the ending balance.
The information for the rent roll comes from the rental ledger, which stores a complete set of information about each tenant, including balances owed, payments made, security deposits, and pass-through charges.
Operating Expense Ratio
Property owners will probably calculate the operating expense ratio for their properties. This is operating expenses divided by gross income, and is a good measure of the ability of the property manager to keep expenses under control. However, it can be also misleading, since operating expenses go up over time, as a property ages. Also, the ratio doesn’t differentiate between fixed and variable operating expenses. This is not minor, since variable expenses will probably change along with the occupancy level, while fixed expenses, such as property taxes, will still be incurred, even if a property is completely empty.