Helping clients change property management companies

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There are all sorts of reasons property owners may need to transition from one management company to another. Perhaps there are issues with high vacancy or tenant relations, or they may be entangled in legal troubles and are no longer able to run the property.

Regardless of the reason behind the transition, there are a number of factors that need to be looked at when it comes to actually executing the change. Accountants can play a critical role in making the transition as smooth as possible — and minimize the auditing headaches that come with it. Here are a few aspects to focus on with clients.

Timing of the transition

When changing management companies, timing can mean everything. If there’s some flexibility in timing, encourage clients to schedule the change to coincide with either the end of the calendar or fiscal year. There are a number of benefits for favorable timing:

  • Resource efficiency: Matching up the timing of the transition to the new management company with the annual financial statement reporting period enables the new company to start off with a new, audited opening balance.
  • Cost efficiency: The parties involved can save money by not splitting the transition over the course of multiple reporting periods, whether it is a calendar or fiscal year.
  • Payroll efficiency: Poor timing can affect payroll, which is often the largest financial obligation. Companies can be forced to deal with complex situations, figuring out who needs to be paid and when. If a transition can’t happen at the end of a calendar or fiscal year, it is worth considering doing it on a calendar quarter to coincide with payroll reporting requirements.

Delivering documents and fulfilling legal obligations

When a property switches management companies, it is imperative to make sure that all the necessary documents and records change hands. There needs to be an agreement in place that all backup documents will be delivered, and it needs to specify who (i.e., the owner, the agent, etc.) will receive them and when. This step should not be overlooked, as affordable housing property owners have a fiduciary responsibility to maintain most records for a period of five years and some records even longer.

Depending on the regulatory and lender requirements, there is most likely a formal procedure to be followed and approval requirements to qualify the new management company.

Relaying and changing access to sensitive information

Following a transition, the predecessor management company will likely be in possession of multiple account access credentials and other proprietary information. These codes are critical, as they can deal with everything from bank accounts to mortgage company and vendor information. There may be information in the former company’s possession that never makes its way to the new management company simply because no one thought to ask for it. Accountants can play a critical role in making sure logins and other important data changes hands appropriately and securely.

It’s also important to look at the accounting software both management companies use. Getting the books on the same platform or creating a plan for migrating data from one system to the other can prevent significant challenges in the midst of the transition and down the road.

Establishing a reconciliation plan

Without a detailed plan and timeline, a property manager transition can get messy very quickly. Lingering transactions and balances can lead to issues, such as employees who are owed money and do not get their checks on time. Owners should work from a detailed checklist that addresses items such as security deposits, signatory rights, differences in the chart of accounts, lockboxes and tenant notifications. When dealing with affordable housing properties, the owner may also have additional fiduciary responsibilities imposed by HUD or other regulatory agencies to submit reports in a timely manner. If records are not proper or up to date, they will be unable to meet the requirement.

This plan should keep the transition on a set timeline as well. Having a slow or messy transition can cause a slew of problems. It creates gray areas around repair issues and can strain tenant relationships. There are a number of other issues that can arise as a result of a poor transition, from budget-related problems to vacancies created on a property. These issues can become amplified and cause long-lasting trouble for the new management company. Once the new management company has taken over, there isn’t much of an incentive for the former company to pick up the phone and help set everything up.

Ultimately, being prepared for a transition can make the weeks and months — even years — after a management change much easier. By focusing on having a detailed plan in place and open lines of communication, the transition can benefit all parties.

Streamlining the audit process

If the transition to a new property management company isn’t timed around a new fiscal or calendar year, auditors have to come to terms with the fact that they’re basically conducting two audits for the price of one, including an internal control study of the successor management company. This “bonus” audit often comes with specific trouble spots that are worth paying close attention to, from testing of receipts and disbursements to ensuring the companies have reconciled cash transfers.

In some cases, there are more than two detailed general ledgers that need to be audited. The management company and the client’s books may not be aligned to the same fiscal year. In other cases, the management company may have changed accounting programs, creating even further complications. Also, pay attention to how the departing management company addressed past audit results, including if it booked suggested adjusting journal entries from the previous audit or other post-closing adjustments. Additionally, check if the new management company imported the trial balance from the previous company or started its general ledger with zeroes.

Supporting a better transition

Ultimately, accountants can play a proactive and positive role in guiding clients through changes in the property management companies. When it’s done right, it’s a win-win. Clients have a better experience and a more profitable transition, and accountants have an easier time navigating the subsequent auditing process.

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