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December 7-December 20, 2016 — COLORADO REAL ESTATE JOURNAL — Page 17
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P aying for referrals is
a common practice in
various competitive
industries where the struggle
to attract customers determines
which participants will flourish
and which will flounder. How-
ever, the business of real estate
is subject to various restrictions
that limit industry participants’
ability to engage in conduct
which may be common else-
where. For example, the Real
Estate Settlement Procedures
Act, title 12 of the Colorado
Revised Statutes, and the rules
of the Colorado Real Estate
Commission impose severe
restrictions upon various forms
of referral agreements between
settlement-service providers
involved in real estate transac-
tions.
Due to the nature of the deals
they are frequently involved in,
commercial brokers may have
a greater ability to formulate
inventive referral arrangements
designed to comply with both
state and federal law, including
RESPA. However, commercial
brokers should still consider
the ways in which both RESPA
and Colorado law may pro-
hibit such arrangements.
n RESPA. RESPA first became
law in 1975 with a stated pur-
pose to increase transparency
for consumers and combat the
practices of those involved in
real estate sales who provide
undisclosed kickbacks to each
other, thereby increasing trans-
action costs. Together with its
regulations, RESPA includes
a variety of laws applicable
to those nearly all professions
involved in the settlement or
closing of a real estate transac-
tion. Under Section 8 of RESPA,
any provider of “settlement
services” who gives or accepts
anything of value (e.g., refer-
ral fees, fee splits, kickbacks,
payments, commissions, gifts,
tangible items or even special
privileges) in exchange for the
referral of business is in viola-
tion of RESPA and may be sub-
ject to criminal and civil penal-
ties. This seemingly simple rule
is actually quite complicated.
RESPA only applies to those
transactions involving “feder-
ally related mortgage loans,”
which is defined to exclude
extensions of credit made pri-
marily for “business” or “com-
mercial” purposes. By contrast,
RESPA clear-
ly does apply
where credit
is secured
for “person-
al, family or
h o u s e h o l d
pu r po s e s . ”
Thus, in
many cases,
RESPA will
not apply to
the types of
transactions
in which
commercial
real estate
brokers are
ordinarily involved.
However, under certain cir-
cumstances, even a seemingly
“business” or “commercial”
transaction may still fall within
the scope of RESPA. If a broker
is accused of violating RESPA,
courts may closely examine the
nature of the particular trans-
action at issue to determine
whether the particular acquisi-
tion was made for a “business”
or “commercial” purpose.
To make this determination,
courts may consider five fac-
tors:
• The relationship between
the borrower’s primary occu-
pation and the acquisition.
Where the two are closely
related, it is more likely to be a
business purpose.
• Whether the borrower will
be personally involved in man-
aging the acquisition. A greater
degree of involvement indi-
cates a greater likelihood that
it is a business purpose.
• The ratio of income from
the acquisition to the borrow-
er’s total income. The higher
the ratio, the more likely it is to
be business purpose.
• The size of the transaction.
Larger transactions are more
likely to be for a business pur-
pose.
• Finally, the borrower’s
statement of purpose for the
loan is also considered.
When applied, these factors
could require the application of
RESPA even where the borrow-
er and broker believe that the
acquisition is being made for a
business purpose. Thus, even
the “bright line” rule exempt-
ing business and commercial
transactions has its exceptions.
Confusion frequently arises
in the context of the acquisi-
tion of rental properties. Differ-
ent rules apply to nonowner-
occupied and owner-occupied
rental property. The acquisition
of property that the borrower
does not intend to occupy is
generally treated as one for a
business purpose. A loan may
also be deemed to be for busi-
ness purposes if it is used to
acquire an owner-occupied
rental consisting of more than
two housing units, or if it is
extended to improve or main-
tain rental property containing
more than four units. If these
thresholds are not met, then
the determination of whether
credit has been extended for a
business or commercial pur-
pose must be made using the
five factors described above.
As can be seen, the appli-
cation of RESPA to brokers
involved in commercial trans-
actions may afford a greater
amount of leeway when for-
mulating business models
involving referral fees. But
commercial brokers should still
exercise caution when agreeing
to any form of kickback.
n Colorado law. Even
though RESPA frequently will
not apply in the context of a
commercial transaction, Colo-
T. Damien
Zumbrennen
Associate attorney,
Frascona, Joiner,
Goodman and
Greenstein PC,
Boulder
Adding value to the commercial
real estate industry for over 25 years.
Tax Planning & Structuring
Financial Statement Audits & Reviews
Estate & Gift Tax Planning
Tax Return Preparation
Litigation Support
303-721-6131
With decades of experience,
the real estate attorneys at
Davis Graham & Stubbs LLP
assist clients with the acquisition,
financing, development, leasing,
and disposition of all types of
real property.
As can be seen,
the application
of RESPA to
brokers involved
in commercial
transactions may
afford a greater
amount of leeway
when formulating
business models
involving referral
fees. But commercial
brokers should still
exercise caution
when agreeing to any
form of kickback.