Real Estate Commission Compliance Back on the Radar

compliance_rulesReal Estate Commission compliance is once again a hot topic; partly because of the flood of new owners and property management companies coming to Colorado; and  partly driven by the Colorado Real
Estate Commission’s step-up of enforcement efforts.  Due to budget cuts and political considerations, the Real Estate Commission (the “Commission”) had stopped random audits for a number of years.  Since property management is one of the leading sources of complaints received by the Commission, the Commission has recently reinstated random audits as part of its proactive and stepped up enforcement efforts. As a result of the complaints received, the Commission considers property management to be a complex area of practice.  A blog cannot address the complexity of the Commission regulatory scheme.  However, we can answer some of the most common questions client ask.

Do we need a Colorado Real Estate Broker’s License, is by far the most common question we are asked.  The quick answer to this question is straightforward.  If you own the property you manage, you do not need a broker’s license.  This is commonly referred to as the “owners’ exemption”.  If you third party fee manage, you need a license.  The question is not complicated for fee managers.  Fee managers must be licensed.  Whether an ownership and management relationship meets the owners’ exemption can be extremely complicated.

The key to the owners’ exemption is whether the management and ownership have common control.  Apartment communities are owned by legal entities.  In some cases, the ownership entity of an apartment community is owned and controlled by a complex web of other legal entities.  Given the complexity of ownership entities, management company structures, and the relationships between the two, determining whether a specific owner and management relationship meets the owners’ exemption is problematic.  Unlicensed individuals are not subject to Commission enforcement actions (audits).  Accordingly, the Commission has not ruled on the issue of whether owners and management companies in these complex relationships are in fact exempt.  However, either through public complaint or litigation, the issue will eventually be brought before the Commission.

Does the management company’s broker need to be an employing broker?  Yes.  Assuming a property management company needs to be licensed, the company must employ a Colorado licensed real estate broker.  Colorado has two kinds of real estate broker’s licenses: an employing broker’s license and an employed broker’s license.  Only an employing broker can be the licensed broker for a property management company.  The key differences between an employing broker and an employed broker are education and experience.  An employing broker must take additional education and pass additional testing.  Most importantly, employed brokers can only become an employing broker after serving under the tutelage of an employing broker for two years.

A management company’s failure to understand company licensing requirements, and the distinction between employing and employed brokers can cause a significant problem for a management company.  Specifically, many management companies only have one broker who is both an employing broker and the broker for the company.  If the company’s employing broker leaves, you are likely to have significant difficulty finding a new company broker, in the short run, for several reasons. To avoid this problem, a management company should always have at least two brokers.  An employing broker, and an employed broker who can step in and take over as the employing broker for the company if the company’s current employing broker leaves.  For more information check out a more comprehensive article on this subject in our resource library on our website.