CREJ - Multifamily Properties Quarterly - January 2015
Colorado Real Estate Commission compliance is a hot topic again, partly because of the flood of new owners and property management companies coming to Colorado and partly driven by the commission’s increased enforcement efforts. Due to budget cuts and political considerations, the commission had stopped random audits for a number of years. Since property management is one of the leading sources of complaints received, it recently reinstated random audits as part of its proactive and stepped up enforcement efforts. Commission compliance is a complex area; the purpose of this article is to address only the higher-level general issues. The article should not be relied on in determining if your company needs a license or is in compliance with current law. How do you know if you need a Colorado real estate broker’s license? If you’re a third-party fee manager, you need a license. The question is not complicated for fee managers. Fee managers must be licensed. If you own the property you manage, you do not need a broker’s license, under an owners’ exemption. The key to the owners’ exemption is whether the management and ownership have common control. Whether an ownership and management relationship meets the owners’ exemption can be extremely complicated. 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 eventually will 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 types 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 classes, pass additional testing and be licensed for at least two years under the supervision of another employing broker. A management company’s failure to understand company licensing requirements, and the distinction between employing and employed brokers can cause significant problems. 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, it likely will be difficult to find a replacement in a timely manner. Having someone quickly get licensed and become the new company-designated broker isn’t plausible, because of the two-year supervision requirement. Additionally, while there are many employing brokers, there are few who are willing to forgo income from sales activities to become an employing broker for a property management company. They can only be employed by one company. To avoid this problem, a management company should always have at least two brokers. Our company is not in compliance with the commission’s rules: Where do we start? If you are a third-party fee manager, the first thing you need to do is hire an employing broker as the company’s broker. Here are some 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 relationship disclosures to tenants are made through use of the Real Estate Commission Form BDT-20. • Failure to have brokerage office policies for your company. • Failure to comply with Real Estate Commission banking requirements. • Failure to follow commission rules regarding security deposits. Does our company need more than one licensed broker? Management companies, no matter how big or how small, need more than one broker. As previously discussed, if a management company only has a single employing broker and that broker leaves the company, it will be difficult replacing that broker. A property management company also should have multiple brokers to meet the key legal requirement of supervision. Both Colorado statutes and Real Estate Commission requirements impose significant supervisory burdens on employing and employed brokers. If managing several thousand units, your company is 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 he or she leaves the company, you now have no designated broker. Do we have to use commission approved forms? Yes, if the commission has a form for a specific purpose, you must use it. Currently, the commission is proposing Rule F-8 (Standard Forms). If this rule is adopted, it will have a significant impact on the multifamily industry. The proposed rule would require virtually every single form that a management company uses (leases, addenda, contracts and other forms, including three-day demands for rent or possession) to be drafted by attorneys. Compliance can be determined only by specific legal advice based on particular factual circumstances.