September 2012 | D.R. Legal News
By Steve Bochenek, IAR Chief Legal Counsel
Three issues have been hot topics for members of the Illinois Association of REALTORS® (IAR) based upon calls and e-mails to IAR as well as discussions on IAR’s LinkedIn group. These topics deal with property management, the new community association manager (CAM ) license and advertising by managing broker licensees who are not designated as managing brokers with the Illinois Department of Financial and Professional Regulation (IDFPR). This article will provide updates with regards to these three hot topics.
1. Community Association Management
In the last issue of the D.R. Legal News (July 2012) the lead article dealt with the Community Association Manager Licensing & Disciplinary Act (CAM Act). That article contained the basics regarding the CAM Act and the requirement for a community association manager license beginning October 1, 2012. I would refer you to that article for a discussion of the basics of the CAM Act as this article will not cover those same basics but will rather look at some specific situations and questions that you will be facing.
The first question or consideration is what constitutes property management versus what constitutes community association management. When referring to property management we are referring to those situations in which services are being provided for which a license is required under the Real Estate License Act of 2000 (License Act). Section 1-10 of the Act, which is the definition of “broker,” indicates that leasing or renting or attempting to lease or rent real estate is an activity for which a license is required. Also, the collection of rents and security deposits would be an activity for which a license is required under Section 1-10 of the Act. These are the types of activities we are referring to when discussing property management. Obviously, property management often involves many other activities such as maintenance of the facility and its outside environment, maintenance of infrastructure, providing financial statements, and so on. However, these are activities for which a real estate license is not required.
In contrast, community association management includes activities other than those for which a real estate license is required under the License Act. In addition, you need to be working on behalf of or with a community association. For example you may be providing property management services for a number of different buildings or structures for an owner, none of which include a community association. In that situation no community association management license would be required. However, if you are providing management activities, such as collecting fees and assessments, providing financial statements, attending meetings, negotiating contracts, and maintaining infrastructure for a community association then a community association manager license will be required beginning October 1, 2012, unless there is an exemption that applies.
Two key exemptions are if the community association has 10 or fewer units or if the managers are residents of the community association and are not being compensated for those services. Licensees under the License Act are not exempt from licensure under the CAM Act. However, licensees under the License Act are exempt from the education requirements to obtain a license under the CAM Act. In addition, having a community association manager license (“CAM Licensee”) does not entitle one to engage in real estate brokerage activities, such as leasing. Rather, if a person wants to engage in both community association management and real estate brokerage activities, such as property management, they must have both a CAM Licensee and a real estate brokerage license.
One key difference between the License Act and the CAM Act is that there is an entity license under the License Act and there is no entity license under the CAM Act. The CAM Act allows for the establishment of an entity for the purpose of providing community association management services but the license would be an individual license for those individuals dealing with the community association in regard to the management activities. This presents several opportunities to real estate brokerage companies who wish to provide community association management services. First, the real estate brokerage company could establish a separate entity for providing community association management activities. This entity would not need to be licensed but there would need to be one or more individuals working with that entity, either as employees or independent contractors, who would provide community association management services. If a real estate brokerage company handles community association management through a separate entity the location of that entity would need to be distinct from the brokerage company, although they may be in the same building and very close in proximity, in order to meet the requirements of Section 5-45 of the License Act. Another option for a real estate brokerage company would simply be to have one or more of its sponsored licensees, or other employees of the brokerage company, obtain a CAM license. If there is more than one CAM Licensee within the brokerage company one individual would need to be designated as the “licensee-in-charge” for the company.
A third option for the brokerage company would be a situation in which the brokerage company chooses not to provide community association management activities. However, the brokerage company may want to have those services available to clients of the brokerage company. These services then might be provided by a sponsored licensee or other employee of the brokerage company who would establish their own separate business from the brokerage company and obtain a CAM license. That individual—or individuals—would establish a separate office or location for the community association management business and could provide the community association management activities to clients of the brokerage company. In a scenario like this the brokerage company might have a property management agreement with its client to provide property management services requiring a real estate license and the sponsored licensee or employee of the brokerage company, through their separate business, would enter into a separate agreement to provide community association management services.
Another practical problem that your brokerage company may have in connection with property management activities and community association management activities is the maintenance of special accounts. Obviously, under the License Act a real estate brokerage company is required to maintain an escrow account for any security deposits, rents or earnest money that may be held on behalf of the parties. The CAM Act has a similar requirement with regards to funds of the community association. For example, a CAM licensee would be required to hold funds of the community association in a special account for the benefit of the community association. These funds can be aggregated into one account with the permission of the community associations but the CAM licensee would have to account for the funds separately to each community association. The practical issue that might face your company is a tenant in a community association writing a single check for rent and monthly fees or assessments to the community association. There is no real guidance on this issue from IDFPR at this time but it would seem that the rent, if held by the property manager, would need to go into one account and the fees and assessments would need to be placed by the CAM Licensee into a separate account for the benefit of the community association.
Another practical question referenced previously in this article is the matter of agreements. If your real estate brokerage company has one or more CAM licensees working for the company then the brokerage company would be in a position to enter into a property management agreement and a community association management agreement. However, if you are working through a separate entity to provide the community association management then separate agreements will be needed, one for property management and one for community association management. Another issue would be the matter of compensation. Compensation for the community association management activities will only come through your brokerage company if you have CAM licensees working for the company. In other situations that compensation would have to be paid by the community association to another entity that you may establish or to a licensee or employee of your company who establishes a separate entity. The question then becomes how to compensate those individuals actually doing the work based upon where the compensation is paid. Also, this is a scenario in which one of your sponsored licensees may be compensated directly for the community association management activities, if they are the licensee and operate the business, either as a separate entity or as a sole proprietor.
Companies need to be aware of the CAM licensing requirement. Conversations with IDFPR have indicated that IDFPR has already received one or more complaints in regards to community association management activities. However, since there is no requirement for licensure until October 1 there is no basis for any disciplinary action by IDFPR. IDFPR is indicating that you need to have the CAM license in hand by October 1, 2012 in order to provide community association management services as of that date. Learn more from IDFPR:
2. Property Management
An important distinction needs to be made at this point as between community association management and property management activities and the role of the sponsored licensee. As discussed earlier, your sponsored licensee could decide to obtain a community association management license (if not precluded by contract) with your company and set up their own business for the purpose of engaging in community association management activities. Your sponsored licensee then could be compensated directly for those services. In contrast, your sponsored licensee cannot provide property management activities in the same fashion. As defined earlier in this article, property management activities include activities requiring a real estate brokerage license. Under the License Act your sponsored licensee is required to provide real estate brokerage activities through your company. Thus, if your company chooses not to provide property management activities your sponsored licensee cannot provide those services through a separate brokerage company established and operated by your sponsored licensee. One of your sponsored licensees could establish a separate real estate brokerage company and own that company, assuming that is not a violation of your company’s policies, and hire a managing broker and the sponsored licensees necessary to operate that company. However, your sponsored licensee could not themself provide property management services through the separate company. These services would need to be provided by other licensed individuals.
One absolutely key consideration to keep in mind in connection with your property management activities is a knowledge of local ordinances. In particular, you will need to know whether there are any local landlord-tenant ordinances or fair housing ordinances that would impact your property management activities. The ordinances that you need to be aware of are ordinances in those communities in which property is located that you will be leasing through your property management activities. Thus, you may need to have knowledge of a number of local ordinances in different communities.
Local ordinances can have a significant impact upon your management of properties and the agreements and advertising used in providing property management services. For example, if the local fair housing ordinance provides that “source of income” is a protected class you would need to manage, advertise and lease properties in those areas without regard to source of income. However, in other communities in which you manage properties in which there is no fair housing ordinance or no creation of “source of income” as a protected class you would be able to manage and lease those properties while considering the source of income of a prospective tenant. Another key consideration from the local ordinance perspective would be security deposits and whether there are any particular requirements under a local landlord-tenant ordinance with regards to the interest to be paid, when security deposits are to be returned, the types of expenses that can be offset against security deposits and the notices that have to be provided if using security deposits to pay expenses. The fair housing issue is a key to licensees under the License Act. The reason for this is that the License Act provides that if “there has been an adjudication in a civil or criminal proceeding that a licensee has illegally discriminated while engaged in any activity for which a license is required” that IDFPR will be required to either suspend or revoke that license. Property management activities are a licensed activity under the License Act and violation of a local fair housing ordinance that results in an adjudication that the ordinance has been violated in the course of providing those licensed activities will result in a suspension or revocation of your real estate brokerage license.
One additional issue that we continue to receive questions about with regards to property management is the issue of security deposits. You need to remember that if you are accepting security deposits as a licensee that security deposits are defined in the License Act as escrow monies and must be maintained in an escrow account and accounted for under the Act and its Rules. Specifically you should refer to Section 1450.750 of the Rules which details the recordkeeping requirements regarding escrow accounts. If you are receiving the security deposits but are not going to retain those in an escrow account then there needs to be specific written permission from the tenant that security deposits do not need to be retained in the escrow account. If this permission is in the lease agreement then it needs to appear in bold print so that the tenant is aware that the property manager will not be keeping the security deposit. If the security deposit is to be paid to the landlord/owner of the property then the lease should indicate that and the check should be made out to the landlord and not to the licensee. In any situation, you are strongly advised that checks for security deposits should not be simply endorsed and used by a licensee as payment of a commission or fee.
3. Managing Broker - Advertising
There have been a number of questions regarding the issue of advertising by an individual licensed as a managing broker but who is not designated by the sponsoring broker as a managing broker for the sponsoring broker. That designation would have to be made by the sponsoring broker with IDFPR.
The License Act provides that a managing broker who is not designated as such by the sponsoring broker cannot use the term “managing broker” in advertising. IDFPR on its website has indicated that a managing broker who is not designated as such with IDFPR should use the term “broker” in their advertising. This is an indication by IDFPR of a term that is acceptable to IDFPR. However, it is not an indication that a descriptive term used in connection with “broker” would not be acceptable. You need to analyze the situation to determine if the descriptive term you propose to use with “broker” is accurate and not misleading or deceptive to the public. As long as the descriptive term meets the advertising guidelines of the License Act and Rules the use of that descriptive term should be acceptable. Please note that a managing broker who is designated as such with IDFPR must use the term “managing broker” in any advertising done in which the name of the managing broker appears. One exception to this is a yard sign on which the name of a managing broker appears does not need to include the designation “managing broker.”
If you have additional questions regarding any of these areas you may want to listen to my August 16 IAR Legal Webinar (member login required for the members-only IAR Legal Webinar series) with IAR Legal Hotline Attorney Betsy Urbance regarding these issues. That webinar is available to members on the IAR website. Additionally, if you have questions please feel free to e-mail or call the IAR Legal Hotlinefor additional legal information.