As an apartment syndicator, you need bank accounts to deposit your passive investors' initial equity investment, money for capital expenditures, ongoing revenue, as well as to send out investor distributions, pay operating expenses and debt service, pay contractors, etc.
Today's ask the expert question is "how many operating accounts are there per property and what are the purpose of each account?"
We asked my business partner Frank Roessler at Ashcroft Capital about the main operating accounts and what they are and here is what he said:
Typically, you will have two accounts. You will have an operating account and either a capital account or a DACA account.
The first main account is the operating account. This is the account where all the rents and other revenues are deposited and where all of that expenses are paid out of. Since this is the account that holds all the asset’s revenues, it will also be used to pay out investor distributions. When underwriting a deal, one of the cost assumptions is the operating account fund. I’ve received a lot of questions about this assumption. This is an upfront fund to cover the costs of unexpected issues or shortfalls that arise before you’ve accumulated enough revenue in the operating account. Whatever money you raise for the operating account fund will be held in this account.
The second main account is the capital account. If you secure an agency loan or other loan that doesn’t include funds to cover renovations, this account will hold the money you raise from investors to cover capital expenditures. When it is time to pay the contractors for their work, they are paid from this account. Also, this is the account that your investors will wire their investment to.
The other main account you may have is a DACA account. If you secure a bridge loan or other loan that does include the funds to cover renovations, the lender may require you to deposit rents into this account before funneling them to your operating account. The purpose of the DACA account is to control (and stop) income to you, the borrower, if you fall into cash management for not passing the DSCR test.
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