Property Management Trust Accounts

Misuse of trust accounts is the number one reason why property management companies are audited. That’s why it’s vital that the proper trust fund accounts are established as needed, and used properly.

Improperly using trust accounts that were established to maintain owner funds and tenant security deposits can result in stiff penalties, such as license suspension or revocation. Improper tracking or usage of tenant security deposits can also result in the management company being responsible for the cost of damages incurred while the property was occupied.

Trust accounts are traditionally used as a method to keep tenant deposits and rent payments separate from operating capital. For example, in both California and Arizona, rent payments must be placed into a trust account no later than three business days after the funds have been received.

Funds placed in the trust account can only be withdrawn by the broker or broker-officer whose name the account is established under. Brokers are not allowed to tap into these funds except for trust related items. To complicate matters, many states currently require that security deposits be kept in a trust account, with some state statutes requiring that the deposit be in a separate trust account, while others allow them to be placed with the owner’s trust account. For instance, in Arizona, brokers must maintain a separate account for all tenant security deposits. Note that in most states, security deposits received on broker-owned properties do not have to be deposited into a separate trust account, but it’s always wise to check your own state’s requirement.

In recent years, some states have implemented new laws requiring property managers and owners to specify in the management contract exactly how trust accounts will be used. Even if your state has statutes specific to the use of trust accounts, it’s best to spell out any specifics in the management contract.

The Department of Real Estate in each state has its own set of established rules and regulations governing the proper and improper usage of trust accounts, and it’s wise to get yourself up to speed on these regulations.

While your state’s department of real estate will continue to perform audits, if your management company has followed the statutes, and maintained ‘good accounting practices,’ you should be able to sail through any audit that your property management company may be subjected to. (Source propertymanagement.com)

New Accounting Rules Affecting Tenants & Landlords

The Financial Accounting Standards Board and International Accounting Standards Board have been working on a project to modify how leases are reported by tenants. Currently the standards require that tenants evaluate leases to determine if they are capital or operating leases. Capital leases are recorded as Assets and related Liabilities on the company's Balance Sheet. Operating leases are expensed as the lease term passes and future lease obligations are disclosed in the footnotes to the financial statements. Most real estate leases are recorded as operating leases. The new rules will require that all leases are recorded as a right to use Asset and lease related liability, calculated using the present value of all lease payments. These "Assets" will be amortized over the life of the lease and lease obligations will be reduced as lease payments are made with an interest component to take into account time value of money. We see many possible implications of this new rule. No question these new rules will affect the company's Debt/Equity ratio, maybe forcing a company to shorten the length of its leases to meet its covenants. A shorter lease will require only a fraction of the debt to be recognized in the balance sheet. Under the rule renewal options must be included if it is likely the option the option will be exercised. Landlords also have to change the way they report leases. For leases with significant risk and benefits associated with, they will have to record a liability for the obligation to provide space and an asset for the rents to be received. For all other leases landlords will have to use the derecognition approach, meaning they will have to record a lease receivable for the future rents and a residual asset representing the lessor's right to the underlying asset at the end of the lease term. Like with the case of a tenant, the term of the lease would require auditor's judgement and must be re-evaluated at each reporting date. These new rules will affect, landlord's and tenant's, leasing decisions in the future. Commercial real estate entities must contact their accountant and business advisors regarding these changes. It is our opinion that the proposed standard will create an incentive for shorter leases, creating more volatility and affecting property values. It may also create situations where tenants may be better off purchasing rather than leasing space. All these changes and their possible effects must be discussed with a Certified Public Accountant before making any decisions.

Retailers and Lower Rents

The United States Retail Sector showed signs of stability during the third quarter of 2010, according to information from REIS Inc. and notes from the Journal of Property Management of IREM. With a 10.9% vacancy rate at neighborhood and community centers and a positive net absorption of 300,000 square feet, the market still have opportunities for certain retailers who want to take advantage of lower rents and vacancies resulting from the recession by opening new stores and extending leases at favorable terms, according to data collected by CoStar Group. Mall have shown losses of 13.6% in rent while lifestyle centers showed 12.1%, according also to data collected by CoStar Group. These centers are most likely to be after those retailers businesses, looking for dcicounted rates. Kohls is one of the retailers taking advantage of lower rents to opoen new stores. It opened 30 stores in 2010 (21 in the third quarter) and plans to open 40 new stores in 2011. Many of the new stores will take over vacated space by Lowes and Wal-Mart. Electronic retailer HHGREGG also plans to take advanatage of market conditions opening new stores and his presence and expansion in South Florida is already a reality. Pittsburg based, Dick's Sporting Goods Inc. has similar plans.

The Flexibility of leasing office space

For many firms, renting office space might work out better than purchasing an office condominium unit. Thus, a company that is growing rapidly may require additional space every few years. This type of company might do better with short term leases or with a long term lease containing options to acquire additional space in the building at specified future dates. A condominium office building can be expected to have infrequent turnovers, and obtaining additional space may be difficult, although some condominiums use a right of first refusal requiring unit owners selling or leasing units to offer them to the other unit owners. An office tenant can move out at the end of the lease without worrying about disposing of the leased premises. The key is flexibility when you expect growth. In the Medical field, doctors and dentists do not usually experience the kind of growth that requires the same flexibility so in these cases an office condominium may work better, taking some advantages of ownership. The same is true for other professionals. Therefore the success of some professional office condominium projects. For these doctors or professionals owning may have better financial and/or tax advantages, making it a lot more attractive than leasing.

Real Estate Market in 2010

With high Federal Government spending, either if you agree with this policy or not, there is no doubt that at this pace increases in the Federal Deficit will continue to be one of the major problems of our economy. If the results of this policy will have a positive effect in the economy or not, it has to be seen. High unemployment is also a problem. Florida's unemployment rate increased to just over 11% and there is no non-government job creation which continues to be a problem. Another important factor is that commercial real estate debt since 2004 has reached 2.2 trillion dollars and almost all real estate acquired or refinanced between 2006 and 2008 has lost all the equity. 600 billion of debt will mature between 2010 and 2011 and the CMBS market continues to be absent as a source of refinancing. Banks, who hold most of the debt, are underwriting under more stringent guidelines so the ability to finance real estate in the next two years is not going to be there.

Some economists expect the economy to bottom sometime in mid 2010 and this may be an statistical recovery year but nothing else.

On the residential real estate market the financing problems still persists and even FHA has tightened its underwriting guidelines making it more difficult for Buyers to qualify for mortgage loans. This tend to lower the absorption rate on the market, therefore inventory will remain high for a longer period of time and construction will remain weak, another problem for jobs and the economy.

For the residential and commercial property owner now is the time to look for professional asset and property managers who can really improve the operation of the properties and long term value. Now is the time to implement resident and tenant retention programs and develop lease work out agreements, avoid falling into a deferred maintenance situation, decrease operating costs and increase income. Not an easy task but professional experienced asset and property managers are trained to deal with this task and every property owner should be thinking about hiring the right people and using the right amount of resources.

The idea is not to dispose of properties now in the worst market ever but to weather the storm and have an excellent asset in the next cycle. To the contrary, now is the time to purchase properties and enhance portfolios. yes, there is lack of financing, but there are opportunities out there that are too good to be missed. We are about to see institutional investors to come into the market to take advantage of these opportunities. With some financial engineering good deals can be structured. We see sectors like multifamily, medical, senior housing and services as the best areas to recover and with great future. Also, some areas in the economy are doing great and are great prospects for growth. Energy and renewal energy, waste management, senior services, medical and life sciences, green technology and environmental companies, are sectors with great growth.

In our local Florida area, we think distribution warehouses and anything having to do with logistics, medical, senior services and multifamily are the sectors we see with great possibilities.

Our summary is, get good asset and property managers to handle your portfolios and properly allocate resources, invest in new real estate opportunities to the extend of your possibilities and focus on the growing sectors. We see this as a moment in time where great fortunes are to be made again in real estate.

The right Roof

Roof materials and its condition affect the value of a property today and the forecast of replacement budgets having an effect in income producing property performance. Asphalt or composite shingles are probably one of the more economical and usually last between 15 to 20 years unless you go for the architectural shingles with a three dimensional look that are more expensive but can last up to 40 years.
Clay or concrete tiles used primarly in residential applications look best in Spanish or Mediterrenean homes and can last up to 50 years.
Metal roofs are among the most expensive, especially those made of copper, but are one of the most durable choices, lasting up to 100 years. On the downside they can be noisy when it rains but they are efective for commercial applications.
New polymer products have come on the market recently for their durability, light weight and fire resistance. Also choices of green materials used more in commercial properties.
Concrete roofs are the best option, especially in areas like South Florida where there is always a risk of windstroms and hurricanes but must have excellent waterproofing,especially in flat areas and may ad in some cases too much weight to the structure, increasing the cost of building.
Common to all roof types is good maintenance taking care of a problem as soon as it is detected.
Now, a new product that can be incorporated into roofing systems, especially with asphalt shingles, are solar shingles, less expensive than solar panels, easy to install and provide a cost effective solution with energency efficiency in mind. Dow Chemical will soon release this product called the Power House Solar Shingle.
As insurance cost rises and during this economic downturn when construction prices have come down significantly, many developers and investors are looking at building with concrete roofs for the long term benefit of the property.

Miami Industrial Real Estate Market

Availabity rate surpasses 14% as vacancy rate reaches 12% and gross rents fell to $5.00/sq.ft per year in Miami-Dade County. Companies downsizing and holding on expansion plans as the economy continues to worsen in many aspects. Construction stopped months ago and new projects are empty waiting for demand for new space to come back.
Until the local economy starts to recover slowly by the end of 2010 and if international markets keep their strengh in trading with US exports, we may see this market to start to recover by the end of 2011 but the process will be slow.