In my experience managing the reinstatement process for property management and real estate investors in Texas, many companies that are forfeited do not have a system of internal controls. The forfeited status is a symptom of the lack of internal controls. In order to run an accounting department effectively, the books should be closed every month and reviewed by property managers and owners.
Not closing the books on a monthly basis can lead to unidentified errors that go unnoticed until the vendors, tenants, or the Texas Comptroller comes knocking. Having strong internal controls prevents these errors from affecting the operations of the entities.
- Cash – number one on the list of consequences of unreconciled or closed books for the month is the actual cash balance. The bank balance does not reflect pending payments to vendors, mortgage payments, or upcoming ACH payments. The worst thing to happen is to have an overdrawn account leading to a scramble to transfer funds to cover the overdraft. Cash needs to be reconciled and payments recorded that were made to escrow to the mortgage company and for association reserves. Property managers can then see how much operating cash is available.
- Tenants/Residents Accounts Receivable – the outstanding amounts due from tenants or residents must be up to date and recorded correctly. Rents, dues, late fees, and collection fees should be charged according to the lease or governing documents. The Aging Report should be reviewed at least once a month but it needs to also be compared to the general ledger balance to make sure the correct amounts are charged and the income is correct on the financial reports.
- Security Deposits – tenant and resident security deposits must be recorded in a separate general ledger account and this amount has to tie back to the rent roll. Whether deposits are kept in a separate cash account depends on the type of asset and the acceptable risk management for the investor.
- Accounts Payable – amounts due to vendors in the normal course of business need to be aged and paid accordingly. Vendors have different payment terms so payables should be paid to maximize cash flow.
- Vendors – there should be an approved vendor list but beyond this, a monthly review of the financial reports will reveal any discrepancies. Expenses should be compared to budget. If an expense account is over budget by an unexpected amount, this is usually due to duplicate payments. On the other hand, lower expenses are due to underpaid vendors.
- CAM reconciliations – a major tenant charge in commercial real estate is billing back the recoverable expenses to each tenant annually. If the CAM reconciliations (common area maintenance), taxes, and insurance are not reconciled, the owner loses money. In multi-family, if the monthly utility expenses are not billed back, the owner is paying the bill for the tenants.
- Lastly, there should be a monthly calculation and recording of the estimated franchise tax due to the Texas Comptroller. The threshold for 2026 is $2.65 million so commercial, retail, and multi-family management must account for these taxes along with property taxes.
As a CPA with over 25 years in financial reporting and general ledger review for 10 million square feet in assets and master planned communities, I can tell you the cost of cleanup is always more expensive than the cost of a monthly close. Do not wait to get the point where you are sending the Texas Comptroller Form 05-377 to reinstate your entity to realize your books are 12 months behind. By closing the books every month and making sure all tenant, vendor, and investor ledgers are accurate and up-to-date, you are able to present audit ready reports to file your franchise tax reports. The first step is making sure the internal controls are documented and being followed by employees.
View my Property Accounting and the Comptroller’s page for more information regarding monthly reporting and forfeited entities’ reinstatement.
