Property management money: rents, security deposits, disbursements, audits

Bottom line: A property manager holds three groups of money that all belong to someone else: rent that is the owner's, security deposits that are the tenant's, and prepaid fees. Keep rent and deposits in different trust accounts, never pay out more for an owner than that owner's ledger holds, and return deposits on time with a written statement for any deduction.

Two separate accounts, at minimum

Property management means managing rental property for an owner: finding tenants, collecting rent, paying bills, and handling repairs. A brokerage firm that does this must deposit rental receipts and security deposits in separate trust accounts, at least one for rent and at least one for security deposits (4 CCR 725-1 Rule 5.5). The rent account holds the owner's money. The deposit account holds the tenant's money. Mixing them is commingling.

The deadline: money received for property management must be deposited no later than five business days after receipt of funds or mutual signing of the lease, whichever is later (Rule 5.7(A)). That is different from the three business days for sale-side money.

Who is the beneficiary?

A beneficiary is a person whose money is in the account. In the rent account, each owner is a beneficiary and gets a ledger. In the deposit account, each tenant (or each lease) is a beneficiary and gets a ledger. Every deposit must show who paid, how much, what type of money (rent, deposit, late fee), and the property address (Rule 5.15(B)).

Paying owners, vendors, and yourself

• Management fee. The firm's fee is normally a percentage of rent collected. Fees are the firm's money only once earned. Money due to the firm must be withdrawn from the trust account monthly (Rule 5.10(A), (C)). When one check pays fees from several owners, the firm must be able to show a schedule listing each piece and each owner's ledger (Rule 5.10(C)).
• Vendors. Repairs and bills must be backed by a bid, invoice, contract, or similar document. The journal and ledger must name the payee, the property, and the amount for each property (Rule 5.15(B)(2)).
• Owner draws. The owner receives what is left on that owner's ledger, reported on the schedule in the management agreement (Rule 5.15(A)).
• Markups. A manager who adds a markup to a vendor's bill, or takes other compensation, needs the client's prior written consent, must disclose it, and must keep records of it (Rule 5.17; C.R.S. 12-10-217(1)(t) bars secret compensation).
• Vendor conflicts. If the manager or a family member owns part of the vendor, the manager must disclose that in writing (Rule 6.17(C)).
• Fees paid up front. Money collected before a service is done goes in a trust account, and may be paid out only for authorized expenses of that service. A written non-refundable retainer is the exception (Rule 5.20).

Never pay out more than the ledger holds

Each owner's money is separate. If Owner C's ledger holds $2,760 and a roofer bills $3,500, you cannot pay the $3,500. Doing so would use Owner A's or B's rent to pay C's bill, which is diversion, and it creates a negative ledger, which Rule 5.14(B) forbids at all times. What you do instead: ask the owner to send money first, pay only what the ledger holds, or follow a written agreement for owner advances. A reserve held in the owner's ledger helps.

Security deposits

A security deposit is money a tenant pays to cover possible damage or unpaid rent. It belongs to the tenant until the lease ends and the rules for deductions are followed. Key rules:

• Kept in a separate deposit account. Not the rent account, not operating (Rule 5.5).
• Return deadline. A landlord must return the full security deposit within one month after the lease ends or the premises are surrendered and accepted, whichever is last, unless the lease sets a longer time that is not more than 60 days (C.R.S. 38-12-103(1)).
• What may be kept. No part of the deposit may be kept for normal wear and tear. If there is real cause to keep part, the landlord must give the tenant a written statement listing the exact reasons, with payment of the rest. Mailing it to the tenant's last known address counts (C.R.S. 38-12-103(1)). Deposits may also be kept for unpaid rent, abandonment, or unpaid utilities, repairs, or cleaning contracted for by the tenant.
• Penalty for missing the statement. Failing to give the written statement on time forfeits the right to withhold any part of the deposit (C.R.S. 38-12-103(2)).
• Penalty for willful wrongful keeping. Triple the amount wrongly withheld, plus attorney fees and court costs. The tenant must give at least seven days' notice before filing. In court the landlord has the burden of proving the withholding was not wrongful (C.R.S. 38-12-103(3)).
• Waivers do not work. A lease term that waives the tenant's rights under this section is void (C.R.S. 38-12-103(7)).
• When the owner sells or the manager changes. The person holding the deposit must, within a reasonable time, either transfer it to the successor and notify the tenant by mail, or return it to the tenant (C.R.S. 38-12-103(4)).

Commission rules add detail. A firm may not hand deposits to an owner unless the tenant authorized it in the lease or was given written notice saying who holds the deposit and how to ask for it back (Rule 5.8(A)). When a new management company takes over, it must tell the owner and tenant in writing within 30 days what deposit the old firm held. The old firm must transfer it within 60 days and confirm the amount, and the new firm must check each deposit against the lease and report any difference (Rule 5.8(B)).

Other deposits count too: guest deposits for short-term rentals and security deposits on a broker's own rentals must also go into trust accounts, either the firm's or the broker's own, following the listed Chapter 5 rules (Rule 5.11). Rental income from a broker's own property managed by a firm the broker is not licensed with goes in a trust account for others (Rule 5.10(D)).

Example with real numbers

Mountain View Property Management handles three rentals for three owners, charging an 8% management fee on rent collected. In March:

Rental	Rent	Deposit held	Fee (8%)	Vendor bill	Owner draw
A, Longmont	$2,000	$2,000	$160	$0	$1,840
B, Arvada	$1,500	$1,500	$120	$400 (plumber)	$980
C, Golden	$3,000	$3,000	$240	$1,200 (furnace repair)	$1,560

1. Collect. Rents total $2,000 + $1,500 + $3,000 = $6,500, deposited to the rental escrow within 5 business days. Deposits total $6,500, deposited to the security deposit escrow. The two accounts are never touched for each other.
2. Fees. $160 + $120 + $240 = $520, withdrawn once that month and recorded on each owner's ledger, with a schedule showing the three pieces.
3. Vendors. $400 + $1,200 = $1,600, each with an invoice.
4. Owner draws. $1,840 + $980 + $1,560 = $4,380.
5. Check. $520 + $1,600 + $4,380 = $6,500. The rent account is back to $0 for the month, and every ledger is at $0 or above.

Problem case. Suppose instead Owner C skipped the furnace repair and left the month's money in the ledger, then gets a $3,500 roof bill. The ledger holds only $2,760 ($3,000 rent minus the $240 fee). The manager may not pay it from the pooled money. She asks Owner C to send $740 first. If she pays anyway, Owner C's ledger reads -$740, which violates Rule 5.14(B), and she has used A's and B's money.

Deposit return. Tenant B moves out on April 30 and the lease allows the standard one month. The carpet has $300 of damage beyond normal wear. By May 31 the manager mails an itemized statement and a check for $1,500 - $300 = $1,200. If she keeps the $300 without a statement, she forfeits the right to keep any of it. If she willfully keeps $300 she had no right to keep, the tenant can seek $900 (three times $300) plus attorney fees and costs.