Reserves and Deposits in the Trust Account

This is the tenth episode in our new weekly video series covering property management principles. This episode covers a property manager’s handling of a trust account to accommodate the flow of property income and expenditures.

The prior episode illustrates a property manager’s actions to increase the intangible image – goodwill – of a property.

Managing the flow of property income and expenditures

To accommodate the flow of income and expenditures from the properties and monies they manage, the property manager maintains a trust account in their name, as trustee, at a bank or financial institution. [Calif. Code of Regulations §2830]

Generally, a property manager receives a cash deposit as a reserve balance from the landlord. The sum of money includes a start-up fee, a cash reserve for costs and the tenants’ security deposits.

A start-up fee is usually a flat, one-time management fee charged by the property manager to become sufficiently familiar with the property and its operations to commence management activities.

The cash reserve is a set amount of cash the landlord agrees to maintain as a minimum balance in the broker’s trust account. The cash reserve is used to pay costs incurred when costs and mortgage payments exceed rental income receipts. Security deposit amounts are separate from the client’s cash reserves.

The prudent property manager insists that all security deposits previously collected from existing tenants are deposited into the property manager’s trust account.

The security deposits need to be accounted for separately from other client funds in the trust account, though this separation of a client’s funds is not required. Security deposits belong to the tenant, though the landlord and the property manager have no obligation to handle them differently than funds owned by the landlord.

On a tenant vacating, their deposit is returned, less reasonable deductions. For a residential tenant, an accounting is mailed within 21 days of the tenant’s departure. For commercial properties, the security deposit accounting is mailed 30 days after a commercial tenant’s departure. [Calif. Civil Code §1950.5(g)(1); 1950.7(c)(1)]

A property manager is required to deposit all funds collected on behalf of a landlord into a trust account within three business days of receipt. These funds are called trust funds.

Trust funds collected by a property manager include:

security deposits;
rents;
cash reserves; and
start-up fees. [Calif. Business and Professions Code §10145(a); California Bureau of Real Estate Regulations §2832]

Separate ledger for each landlord

Trust accounts are to be maintained in accordance with standard accounting procedures. These standards are best met by using computer software designed for property management. [DRE Reg. §2831]

Also, withdrawals from the trust fund account may not be made by the landlord, only by the property manager.

However, a property manager may give written consent to allow a licensed employee or an unlicensed employee who is bonded to make withdrawals from the trust account. [DRE Reg. §2834(a)]

No matter who the property manager authorizes to make the withdrawal, the property manager alone is responsible for the accurate daily maintenance of the trust account. [DRE Reg. §2834(c)]

The property manager’s bookkeeping records for each trust account maintained at a bank or thrift include entries of the:

amount, date of receipt and source of all trust funds deposited;
date the trust funds were deposited in the trust account;
date and check number for disbursements of trust funds previously deposited in the trust account; and
daily balance of the trust account. [DRE Reg. §2831(a)]

Entries in the general ledger for the overall trust account are kept in chronological order and in a column format. Ledgers may be maintained in a written journal or one generated by a computer software program. [DRE Reg. §2831(c)]

Separate subaccount ledger for each landlord

In addition to the general ledger of the entire trust account, the property manager maintains a separate subaccount ledger for each landlord they represent. Each subaccount ledger accounts for all trust funds deposited into or disbursed from a separate landlord’s trust account.

Each separate, individual subaccount ledger identifies the parties to each entry and include:

the date and amount of trust funds deposited;
the date, check number and amount of each related disbursement from the trust account;
the date and amount of any interest earned on funds in the trust fund account; and
the total amount of trust funds remaining after each deposit or disbursement from the trust account. [DRE Reg. §2831.1]

Like the general ledger for the entire trust account, entries in each client’s subaccount record are kept in chronological order, in columns and on a written or computer journal/ledger. [DRE Reg. §2831.1(b)]

Stay tuned for the next installment of the property management series.

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