Real Estate Commission Compliance on the Radar

Real 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.  We can’t address the complexity of the Commission regulatory scheme in a short newsletter.  However, this month we 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.

First, you can’t just have somebody quickly get licensed and be the new company designated broker because the company’s broker has to be an employing broker, which requires two years of experience.  Second, the pool of potential employing brokers, who might be interested in being the broker for you company, is extremely limited.  Most employing brokers are active, and make their living buying and selling real estate.  Most property management companies don’t engage in sales transactions.  An employing broker can only engage in brokerage activities for one company.  While there are lots of employing brokers, there are few employing brokers who are willing to forgo income from sales activities to be the employing broker for a property management company.  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.  
Our company is not in compliance with Real Estate Commission rules, where do we start?  If you are third party fee manager, obviously the first thing you need to do is hire an employing broker to be the company’s broker.  Again, the Real Estate Commission views property management as complex area of practice so we can’t cover all compliance requirements in this article.  However, the following is a good short list of issues that will result in problems with the Commission if you’re not in compliance:

• Failure to make proper brokerage relationship disclosures to both owners and tenants.  Brokerage relationship disclosures to owners are made through use of the Real Estate Commission BDA-55 Form (Brokerage Duties Addendum to Property Management Agreement).  Brokerage relationship disclosures to tenants are made through use of the Real Estate Commission Form BDT-20 Form (Brokerage Disclosures to Tenant).

• Failure to have Brokerage Office Policies for your company.

• Failure to comply with Real Estate Commission banking requirements.

• Commission banking requirements are the number one issue that we encounter when reviewing management contracts for our clients.

• Failure to follow Commission rules regarding security deposits.

Does our company need more than one licensed broker?  A management company of any size needs more than one broker.  As previously discussed, if you only have a single employing broker and that broker leaves the company, you will have a difficult time replacing that broker.  Thus, you should always be developing your bench. To avoid being left without an employing broker, ideally, you should always have at least two brokers with two or more years of experience.

A property management company should also have multiple brokers to meet the key legal requirement of supervision.  Both Colorado statutes, and Real Estate Commission requirements impose significant supervisory burdens on both employing and employed brokers.  If you manage several thousand units, you’re going to have a difficult time convincing the Commission that a single person is properly supervising dozens or hundreds of employees.  Finally, every deal with an owner requires a management company to designate the brokers involved with the deal (BDA-55).  If the BDA-55 designates a single individual and they leave the company, you now have no designated broker.  For these reasons, we recommend that all regional or district managers be licensed brokers.

Do we have to use Commission approved forms?  Yes, if the Commission has a form for a specific purpose, you must use it.  Clients frequently want to use their own forms or customize Real Estate Commission forms because Commission forms are not attractive, and contain irrelevant and arguably confusing information.  While the rules could be clearer, based on our significant involvement and interaction with the Commission, the Commission’s position is that approved forms must be used without material changes for the most part.  A management company may add logos, address, and other identifying information.
Currently, as discussed at recent Firm events, the Commission is proposing Rule F-8 (Standard Forms).  If this rule is adopted, it will have significant impact on the multifamily industry.  The proposed rule would eliminate all doubts that Commission Forms must be used, when applicable.  The proposed rule would also require virtually every single form that a management company uses (leases, addenda, contracts, and other forms, including 3-day demands for rent or possession) to be drafted by attorneys.  The current draft of the proposed Rule F-8 may be downloaded from {filedir_2}F-8_Standard_Forms.pdf.

This article is meant to make you aware of key Real Estate Commission issues and provide general information.  Due to the complex nature of this topic and space limitations, this article does not address all legal requirements for any given client to be in compliance with the Colorado real estate law in general, or the Colorado Real Estate Commission’s rules in particular. The article should not be relied upon in determining if your company either needs a license or is in compliance with current law.  Compliance can only be determined by specific legal advice based on particular factual circumstances.  If you need such advise, please do not hesitate to contact us.

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