Good trust accountants identify and correct the mistakes before they escalate. However, there are some horror stories where errors made have turned into major issues for property managers and the landlords they are servicing.
Having supported commercial PMs for over a decade through a trust accounting business, I thought there would be value in identifying some of the most common areas where mistakes have been found.
It is worth assessing the risk of the below events happening in your business and whether it is time to consider using specialists to de-risk your business.
1. Management fees understated, potentially costing real estate agencies thousands
Management agreements often set the management fees to be a percentage of the receipts from tenants. However, PMs often understate the management fees due to their lack of understanding, resulting in potentially thousands of dollars of lost revenue for the real estate agent.
Property managers are often under the impression that they cannot charge management fees on the “management fees portion” of outgoings. They think that that would be calculating management fees on management fees which is not permitted.
However, outgoings are normally a lump amount charged to tenants monthly based upon a budget, for which the real estate agency is entitled to collect management fees based upon their agreed percentage on receipt.
2. GST on tenant on-charges for commercial leases
Often property managers do not include GST when on-charging some expenses — for example, land tax, council or water rates — because the expenses are GST-free when paid.
The on-charge to the tenant, however, is a separate taxable supply for which GST applies if the owner is registered for GST and the supply is not “input taxed” as for residential leases.
3. Missing rent reviews or other critical lease dates
Property managers have been known to miss conducting rent reviews or other important events such as option notifications or insurance expiries as stipulated in leases. This occurs most frequently when the PM is not using a good property management system. The system should have checks and balances and remind them of the dates and events coming up, or if the dates are not set up correctly or completely when the lease is first set up in the system.
4. Coding of transactions
For commercial and retail properties, property managers frequently code transactions to the incorrect cost centre. The costs centres are normally owners, outgoings and recoverables for those costs directly recovered from tenants.
Where properties are being managed that contain a mixture of net and gross leases, then an outgoings cost should be coded fully to the outgoings cost center rather than apportioned between owners and outgoings cost centers. The reason for this is so that the tenants receive their correct apportionment of the full outgoing cost determined when performing the variable outgoing reconciliation.
5. Treatment of outgoings on the sale of a property
When a property is sold, a line should be drawn in the sand to establish the outgoings adjustment to the settlement date. Or there should be a calculation of the amount of outgoings funds to be transferred to the purchaser or to the seller if the variable outgoings reconciliation were to be left for completion at year-end.
6. Incorrect application of rent reviews
Rent reviews, particularly CPI and market reviews, are performed after the date has passed, making it necessary to calculate a back-charge amount for the tenant.
These calculations are often done incorrectly due to incorrect dates being applied, incorrect mathematics, or the method of calculation being applied for partial periods not being consistent with the method specified in the lease.
7. Variable outgoings reconciliation performed on a cash basis
Some property managers perform variable outgoing reconciliations on a basis which is a combination of cash (for expenses) and accruals (for income).
It is not always possible to perform an accurate and fair reconciliation on a cash basis as expenses paid. For example, insurance does not always relate to a financial year, plus there are often timing differences arising from when the payments are actually made.
Thus, the only fair way to compute expenses applicable to the variable outgoings reconciliation period is to compute expenses on the accruals basis which complies with accounting standards and which is a condition in applicable legislation.