Questions on trust accounts for Colorado rental properties that are owned by a Broker
Vested
🗣️I have a two-part question.
Part 1: Colorado DRE Commission rule 5.11 (https://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=8900&fileName=4%20CCR%20725-1) plus the Commission’s subsequent clarification (https://docs.google.com/document/d/1dx3pptWjX5fhKNjxbEEncw-SqQZbQf4g) establishes that for Colorado rental properties owned by a Broker (i.e. has 20% or more ownership interest):
- Security deposits must be deposited into a Security Deposit Trust account
- Rent collected must be deposited into a NON-trust account, not into a Rental Receipts Trust account
- This is true even if the Broker’s license is inactive
My first question is: What about last month’s rent collected in advance? Should that also be deposited into a NON-trust account because it’s rent collected per the Commission’s clarifications document (in the link above)? Or should it go into a Rental Receipts Trust account because it’s future rent? Or is this a gray area that’s not clearly defined yet; therefore, the best answer is ¯\_(ツ)_/¯?
Part 2: Boulder (city) requires security deposits to be paid back to tenants with interest, and they set the required interest rate each year (https://bouldercolorado.gov/city-boulder-interest-security-deposits-calculation-formula). e.g. it’s 2.33% for 2024. This only applies to properties in Boulder city. Security deposits for properties outside Boulder don’t return interest to tenants.
My second question is: If a Security Deposits Trust account doesn’t earn interest, or doesn’t earn as much interest as Boulder requires tenants to be paid when their deposit is eventually refunded, is the Broker required to add funds to the trust account (from their own operating account) to make up for the difference in interest earned? Or is that not required? Or would that potentially be considered a violation such as “commingling”?
My third and final question is: If the Security Deposits Trust account generates interest and has deposits for both Boulder and non-Boulder properties, then does the interest earned by the trust account need to be tracked and handled separately for each deposit? i.e. interest earned on Boulder security deposits can be applied towards the tenant’s interest refund, while interest earned on non-Boulder security deposits must be donated to charity. Or can the aggregate of all interest earned be applied towards Boulder security deposits without that being considered a violation such as “conversion”?
These questions may seem esoteric, but they’re actual real-world situations. Thank you in advance for any thoughts, clarifications, or recommendations you may have. :-)
Best Answer
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@gnorizo
These questions indeed touch on nuanced aspects of property management and compliance with Colorado regulations. I'll break down each part for you:
Part 1: Last Month’s Rent Collected in Advance
The question revolves around whether the last month's rent collected in advance should be deposited into a NON-trust account (as rent collected) or into a Rental Receipts Trust account (as future rent).
Key Considerations:
- Colorado DRE Commission Clarification: The rule specifies that rent collected should be deposited into a NON-trust account, even if the Broker’s license is inactive.
- Nature of Last Month's Rent: Although the last month's rent is collected in advance, it is still considered "rent collected." The purpose of the rent, whether for the current month or a future month, typically does not alter its classification as "rent."
Conclusion: Based on the DRE Commission’s clarification, it appears that last month’s rent collected in advance should be deposited into a NON-trust account, following the same logic as regular rent payments. However, this is a nuanced situation, and the safest approach might be to consult with a legal professional specializing in Colorado real estate law to confirm this interpretation. Not a question I have seen on the PSI exam*
Part 2: Interest on Security Deposits for Boulder Properties
Boulder's requirement for security deposits to be returned with interest raises the question of what to do if the Security Deposits Trust account doesn't generate enough interest to meet this requirement.
Key Considerations:
- Interest Discrepancy: If the trust account doesn’t generate the required interest, the broker might need to make up the difference to comply with Boulder’s ordinance.
- Potential Commingling Violation: Using personal or operating account funds to supplement the trust account might be seen as commingling, which is prohibited.
Conclusion: The broker would likely be required to add funds to meet Boulder’s interest rate requirement. However, doing so might raise concerns about commingling. The safest approach would be to use a trust account that generates sufficient interest, or seek legal advice to ensure compliance without violating commingling rules. Also NOT a question I have seen on the exam - but a good one for practicing real estate in Boulder
Part 3: Handling Interest in Security Deposits Trust Account
If a Security Deposits Trust account generates interest for both Boulder and non-Boulder properties, handling the interest properly is crucial to avoid violations such as conversion.
Key Considerations:
- Segregation of Interest: Interest generated on Boulder deposits might need to be tracked separately from interest on non-Boulder deposits. Using the aggregate interest for Boulder tenants could be seen as improper if non-Boulder deposits are involved.
- Conversion Concerns: Applying interest earned from non-Boulder deposits to Boulder tenants’ interest refunds could be considered conversion, a serious violation.
Conclusion: It’s advisable to track and handle interest separately for Boulder and non-Boulder properties. Each deposit’s interest should ideally be isolated to ensure compliance. Aggregating interest could potentially lead to a violation. *Also NOT a question I have seen on the exam - but a good one for practicing real estate in Boulder
Overall Recommendation
Given the complexity and potential for legal risk, these questions warrant consultation with a real estate attorney who specializes in Colorado law. They can provide guidance tailored to the specific circumstances and help ensure compliance with both state regulations and local ordinances like Boulder’s.
Please let me know how else I can be of assistance!!
4
Answers
-
@gnorizo
These questions indeed touch on nuanced aspects of property management and compliance with Colorado regulations. I'll break down each part for you:
Part 1: Last Month’s Rent Collected in Advance
The question revolves around whether the last month's rent collected in advance should be deposited into a NON-trust account (as rent collected) or into a Rental Receipts Trust account (as future rent).
Key Considerations:
- Colorado DRE Commission Clarification: The rule specifies that rent collected should be deposited into a NON-trust account, even if the Broker’s license is inactive.
- Nature of Last Month's Rent: Although the last month's rent is collected in advance, it is still considered "rent collected." The purpose of the rent, whether for the current month or a future month, typically does not alter its classification as "rent."
Conclusion: Based on the DRE Commission’s clarification, it appears that last month’s rent collected in advance should be deposited into a NON-trust account, following the same logic as regular rent payments. However, this is a nuanced situation, and the safest approach might be to consult with a legal professional specializing in Colorado real estate law to confirm this interpretation. Not a question I have seen on the PSI exam*
Part 2: Interest on Security Deposits for Boulder Properties
Boulder's requirement for security deposits to be returned with interest raises the question of what to do if the Security Deposits Trust account doesn't generate enough interest to meet this requirement.
Key Considerations:
- Interest Discrepancy: If the trust account doesn’t generate the required interest, the broker might need to make up the difference to comply with Boulder’s ordinance.
- Potential Commingling Violation: Using personal or operating account funds to supplement the trust account might be seen as commingling, which is prohibited.
Conclusion: The broker would likely be required to add funds to meet Boulder’s interest rate requirement. However, doing so might raise concerns about commingling. The safest approach would be to use a trust account that generates sufficient interest, or seek legal advice to ensure compliance without violating commingling rules. Also NOT a question I have seen on the exam - but a good one for practicing real estate in Boulder
Part 3: Handling Interest in Security Deposits Trust Account
If a Security Deposits Trust account generates interest for both Boulder and non-Boulder properties, handling the interest properly is crucial to avoid violations such as conversion.
Key Considerations:
- Segregation of Interest: Interest generated on Boulder deposits might need to be tracked separately from interest on non-Boulder deposits. Using the aggregate interest for Boulder tenants could be seen as improper if non-Boulder deposits are involved.
- Conversion Concerns: Applying interest earned from non-Boulder deposits to Boulder tenants’ interest refunds could be considered conversion, a serious violation.
Conclusion: It’s advisable to track and handle interest separately for Boulder and non-Boulder properties. Each deposit’s interest should ideally be isolated to ensure compliance. Aggregating interest could potentially lead to a violation. *Also NOT a question I have seen on the exam - but a good one for practicing real estate in Boulder
Overall Recommendation
Given the complexity and potential for legal risk, these questions warrant consultation with a real estate attorney who specializes in Colorado law. They can provide guidance tailored to the specific circumstances and help ensure compliance with both state regulations and local ordinances like Boulder’s.
Please let me know how else I can be of assistance!!
4