Commercial Property Licensing Laws

Written by Commercial Property Management Magazine on . Posted in Blog

Commercial Property Licensing Laws

By: Flavia Berys, Esq.

Commercial real estate owners often hire third-party property management companies to handle the leasing and operation of office, industrial, multi-family or other commercial properties located in California.  Others choose to self-manage by having an employee or officer of the owner entity perform these functions.

But in some cases, rather than using an outside vendor or having an employee or officer serve in this management role, an owner prefers to form an affiliated special purpose entity (such as a subsidiary) to perform the property management duties.  That affiliate entity would be compensated by the owner entity.  There are tax and other considerations which may make this an advantageous structure.  When setting up this arrangement, an owner might desire to have the special purpose entity be a limited liability company rather than a corporation, particularly if the owner is more familiar with the limited liability company form.

However, while this structure may make sense from a tax and business standpoint, owners of commercial property should be cautious about inadvertently violating licensing regulations that apply to property managers.  In particular, any person or entity receiving compensation for typical property management activities, such as leasing or advertising available commercial or residential property, must be duly licensed by the California Department of Real Estate unless a specific exemption applies.

This requirement exists even in the case of affiliates or subsidiaries managing property for a related or parent property owner, because no exemption allows unlicensed affiliates to manage property for related or upstream property owners.  The type of entity selected to perform property management duties is also critical, because only corporations and natural persons can be licensed as brokers in California, prohibiting the use of a limited liability company as the affiliated management entity.

The information below should prove useful to property owners who need general information on licensing restrictions to set up a property ownership and management structure that will comply with California broker licensing laws.  The information provided here is general, and owners should consult their legal and tax advisers with respect to their specific ownership structures and related issues.

Question: Is A License Required To Manage Real Property In California?

Answer:  Yes, any entity or person being compensated to perform most typical property management activities for another (such as advertising or leasing real property) must be licensed as a California real estate broker (or must be a licensed California real estate salesperson working under a licensed broker).

Specifically, any entity or person performing any of the acts below in California on behalf of another and in exchange for compensation needs to be duly licensed:1

Leasing or offering to lease real property

Soliciting rental listings for real property

Soliciting for prospective tenants

Negotiating leases

Collecting rent

Further, a licensed real estate broker may not employ or compensate, directly or indirectly, any person or entity for performing any of the acts that require licensure if the person receiving compensation is not duly licensed.2  Additionally, all people licensed as “salespersons” performing these activities must be supervised by a broker of record, and all compensation must be received only by the broker of record, who then pays its salespersons.  Salespersons cannot be paid directly by the clients or other third parties for services.3

Therefore, a property owner should review the chain of payments made for the leasing and management services that require licensure.  If any person or entity receiving payment for those services is unlicensed, this could require restructuring or the need to have that person or entity obtain the necessary license.

Question: Are there any exemptions from licensure for certain property management activities?

Answer:  Yes, there are limited exemptions.

Unlicensed individuals may provide limited and specific property management functions under the reasonable supervision of a licensed broker, such as showing units or accepting applications, deposits, and rent. Also, individuals performing strictly clerical functions, such as a bookkeeper or receptionist, do not need to be licensed.  Certain exemptions exist for resident apartment managers who live onsite or manage transient housings such as a hotel.  For owner entities desiring to self-manage property, there is also an exemption for a regular officer of a corporation performing services for property owned by the corporation, but the exemption is available only if the officer does not perform those services in expectation of special compensation such as a commission. Other exemptions exist for a person having power of attorney to perform the acts on behalf of the owner (but only for isolated events in the event the owner is incapacitated or indisposed to act) and for an attorney at law in rendering legal service to a client.4

When determining whether a structure will fall under one of these exemptions, owners should be cautious not to stretch the definitions.  Under section 10133, these narrow exemptions “are not applicable to a person who uses or attempts to use them for the purpose of evading” licensure.”  Case law supports this result, meaning that in the case of doubt or if the activities fall in a grey area, there is a likelihood that the Department of Real Estate or a court might err on the side of requiring licensure.

Question:  May entities other than natural persons be licensed as real estate brokers or salespersons?

Answer:  The only entity that can be licensed as a real estate broker in California is a corporation. Thus, only individuals or corporations may hold broker licenses, although unlicensed partnerships may operate as brokers as described below.

Limited Liability Companies:  

Limited liability companies cannot hold California real estate broker licenses.5  In 2004, California Assembly Bill AB2261 (Parra) was proposed, which would have amended California law to allow companies organized as limited liability companies to become real estate brokers. The bill was not passed by the legislature.

Partnerships:  

Although partnerships are not individually licensed as real estate brokers, a partnership can perform broker activities as long as all regulated activities are performed by a partner who is a licensed broker, or by a licensed salesperson (who must be an employee and not a partner) under the supervision of the partner who is a licensed broker. 6

Corporations:  

In order for a corporation to become licensed, it must be qualified by an officer of the corporation who is a licensed real estate broker and will be the supervising broker of the corporation.  Acts which require a license may be conducted only in the name of the corporation by an officer of the corporation duly licensed in the corporate name, or by salespersons employed by the corporation and supervised by the licensed officer.  Individuals employed by the corporation to perform the management duties must have individual licenses, either as real estate brokers or salespersons. The supervising broker supervises and controls the activities conducted by the corporation and the employees of the corporation engaged in activities for which a license is required.  Failure to exercise reasonable supervision and control for corporate license activities may justify suspension, revocation, or denial of the corporate license.7

An application for a corporate license is submitted on the Corporation License Application, Form RE 201 (Rev. 6/09) in accordance with Corporate License Instructions, Form RE 218 (Rev. 6/09).  Copies of the application and instructions may be obtained at the website of the Department of Real Estate at http://www.dre.ca.gov/lic_corp.html.

Foreign Corporations:

California does not have reciprocity with any other state that would allow a waiver of any of the requirements to obtain a license. (See the California Dept. of Real Estate website at http://www.dre.ca.gov/gen_out_of_state.html).  Foreign corporations that are registered with the California Secretary of State to conduct business in California may be licensed as brokers, but must be qualified by an officer of the corporation who is a licensed California real estate broker and must accept service of process in California (and have the same qualification and supervision requirements as for domestic corporations above).8

Question: What are the penalties when an unlicensed individual or company performs the activities that require a real estate license?

Answer:  The penalty for acting as a real estate broker or salesperson without being duly licensed is a fine up to $20,000 for natural persons and $60,000 for corporations. In addition, a natural person may be imprisoned up to six months in the county jail.9

The penalty for compensating an unlicensed person or entity for performing any of the acts which require licensure is a fine up to $100 for each offense.10

In addition, a plaintiff seeking to recover compensation for any acts which require a real estate license must allege that the required license was in effect at the time the acts were performed. This means an unlicensed individual would be unable to maintain an action to recover unpaid compensation for property management acts that require a real estate license.11

 

About the author

Flavia Berys is an attorney in the Real Estate and Land Use groups for the San Diego, Palo Alto, and Los Angeles offices of DLA Piper LLP (US). She is also a licensed California Real Estate Broker, D.R.E. License #01786065, and accredited as a LEED AP by the U.S. Green Building Council.  She can be contacted at flavia.berys@dlapiper.com, (619) 699-2919 or (650) 833-2419.

 

 

 

 

(Endnotes)

1          Cal. Bus. and Prof. Code §10130; §10131.

2          Cal. Bus. and Prof. Code §10130; §10131; and §10137.

3          Cal. Bus. and Prof. Code §10132 and §10137; Regulation of the Real Estate Commissioner §2725 and §2753.

4          Cal. Bus. and Prof. Code §10131(a)(1); §10131.0; §10133 and §10133.2; see also See Miller & Starr, California Real Estate, 3rd Ed., §§4.4 to 4.6.

5          The Corporate License Instructions of the California Department of Real Estate, Form RE 218 (Rev. 6/09), state:  “There are no provisions in the Business and Professions (B&P) Code which authorize a limited liability company to become licensed as a real estate broker.”  An informal review of Department’s on-line listing of licensees showed only individuals, corporations and dbas listed as licensees.

6          See Miller & Starr, California Real Estate, 3rd Ed., §§4.10 (“There is no provision for a separate license issued to a partnership”).  See also Cal. Bus. and Prof. Code §10137.1.

7          Cal. Bus. and Prof. Code §10137.1; §10158; §10159; §10159.2; §10177; and §10211.  See also Cal. Code Reg., tit. 10, §2740; §2743; and §2746(a).

8          Corporate License Instructions of the California Department of Real Estate, Form RE 218 (Rev. 6/09).

9          Cal. Bus. and Prof. Code §10139.

10        Cal. Bus. and Prof. Code §10138.

11        Cal. Bus. and Prof. Code §10136; see also MKB Management, Inc. v. Melikian, 184 Cal. App. 4th 796 (2010).

 

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