By Blackwe11 M. Brogden, Jr.
Deputy Legal Counsel
Nearly every day we hear or read news reports regarding the federal government, or state or local governments which are spending more money than they are taking in. This practice has been appropriately termed "deficit spending". All too frequently, however, the Real Estate Commission also encounters a similar practice employed by property managers who spend more money on a given client's property(ies) than they have collected from such property.
For example, some properties will at times simply not generate sufficient income to cover mortgage payments and operating expenses. Or a property might suffer periodic shortfalls in revenue due to extended vacancy, tenant financial hardship, or other factors. When this occurs, and there is not enough money in the property manager's account for the owner of that particular property to make repairs, pay mortgage payments and utilities, and otherwise maintain the property, what is the property manager to do?
If there are funds in the trust account which have been collected on properties owned by other clients th~broker is sometimes tempted to pay bills which are immediately due from these other funds, and to float the "deficit" until future income is received from the deficit properties to repay the "loan". Or the property manager may opt to cover the "deficit" by deferring his commission or property management fee until additional funds have been collected on a client's property(ies). However, neither of these methods is legal! In the first case, the broker would be guilty of making an improper disbursement of trust funds because he would be disbursing one client's funds for the benefit of another client's property. And in the second case, the broker would be guilty of commingling if he were to allow his earned commissions (i.e., his funds) to remain in the trust account with the funds of his clients and customers.
The solution to the "deficit spending" dilemma lies in smart planning on the part of the property manager, beginning with an adequate property management agreement with the owner which anticipates such negative cash flow situations as emergency repairs and nonpayment of rent. There are a number of ways in which property managers and owners can arrange to cover these shortages. For instance, the owner could defer a certain portion of his proceeds each month and allow the property manager to retain these funds in his trust account in reserve. Or the owner could retain direct financial responsibility for payment of bills and authorize the property manager to contract in the owner's name with repairmen and suppliers with bills going directly to the owner.
Or, if the property manager determines that the owner is credit-worthy, he may wish to advance funds to the owner to cover expenses on the property. Any money loaned by the broker to the owner shout be handled through the broker's operating account or personal account with the funds being disbursed directly from the operating or personal account to the vendor. While the Commission does not recommend the practice of advancing funds to owners, the practice would be valid if it is specifically provided for in the written property management agreement between the broker and the owners. But remember: The broker is an agent, and the agent's authority is derivative. If the owner does not authorize the advance or the work performed, the owner may not be liable to reimburse the agent.