White Paper: Property Management License Law

Monday, June 18, 2007

by Jason Bowman

Category : Property Management License Law Publisher : Peg Ritenour Source : White Papers Print : Friendly Version Introduction Whether it's a desire to avoid the volatility of the stock market or to the proliferation of the "get rich quick" in real estate books, more and more people are investing in real estate. Often these investors find out that managing property is not as easy as they thought and are required to bring in professionals to manage and lease their property. The company they hire must have a real estate broker's license as the management of commercial or residential property is an activity that requires a real estate license. In this White Paper, the license law provisions regarding property management will be addressed. License Law Requirements For Property Management Ohio Revised Code Section 4735.01(A) provides a list of activities that if performed for another for a fee requires a real estate license. This list includes anyone who "operates, manages, or rents, or offers or attempts to operate, manage, or rent other than as a custodian, caretaker, or janitor, any building or portions of buildings to the public as tenants." Also included on the list of activities that require a license are any attempts to lease property, any acts directed at procuring tenants for a property, the negotiation of leases, or advertising or holding oneself out as in the business of leasing property. Under Ohio law, performing any of these acts without a license constitutes a first degree misdemeanor and subjects the offender to a civil penalty of up to one thousand dollars per violation. Each day a violation occurs or continues is a separate violation. Because Ohio law requires a real estate license to engage in property management activities, it also requires that the property management services be conducted through the real estate brokerage. A real estate salesperson cannot manage property in his own name or in the name of a separate management company that he has formed. When a salesperson is performing acts that require a license (i.e. property management services), these acts must be performed in the name of the brokerage with whom he is affiliated. A real estate broker may also not manage property in a name other than the name that appears on the brokerage license. Nor can a broker form a separate unlicensed company for management services. Instead, the property management agreement and all property management services must be performed in the name of the real estate brokerage. As property management is an activity that requires a real estate license all services must be performed in compliance with the requirements of Ohio license law, Chapter 4735 of the Ohio Revised Code. The provisions in Chapter 4735 with regard to property management services are discussed below. Property Management Account(s) A property manager generally collects rents, security deposits and possibly advances from the owner to cover the property expenses. Ohio license law includes requirements for the handling of these funds. All brokerages engaging in property management must have a separate property management trust account or an account in the property owner's name on which the brokerage has signatory authority. Ohio Administrative Code Section 1301:5-5-11 requires that the property management trust account be a separate trust account in the brokerage's name and must be designated as the brokerage "property management trust account." The account must be at an Ohio depository and the name, account number, and location of the depository must be provided to the Ohio Division of Real Estate and Professional Licensing. Security deposits, rents and money received from the owner or on the owner's behalf for payment of expenses related to the management of the property must be deposited in this account. The brokerage can maintain one property management trust account for all owners they manage for or may have several property management trust accounts (i.e. one for each owner whose property it manages). A broker may maintain the broker's own funds in the trust account only when they are clearly identified as the broker's funds and only for the following reasons: If the depository in which the account is maintained requires that a minimum balance be maintained in order to keep the account open, the broker may maintain that amount in the account and designate the amount as the broker's funds. If the depository in which the account is maintained requires a service charge be paid for the account, the broker may maintain a reasonable amount to cover the service charge and designate the amount as the broker's funds. Unlike the trust account a broker must maintain for earnest money deposits, a property management trust account may, but is not required to earn interest. Unless the owner(s) and broker agree otherwise, any interest earned must be payable on a pro rata basis to the owner(s) of the property on whose behalf monies are deposited in the property management trust account. The interest shall be paid or credited on a regular basis but in no event less than quarterly. However, the property owner(s) and broker can agree that the interest due the owner(s) can be paid in a manner other than specified above and to party(ies) other than the property owner(s). Any such agreement must be in writing and signed by the owner(s) and the broker. In the course of managing property a property manager will usually make expenditures on the owner's behalf. This may include paying maintenance and repair bills, utility bills, mortgage payments and property taxes. If the brokerage property management trust account contains funds for more than one owner, a property manager must make sure that each owner has enough funds in the trust account to cover that owner's expenses. One owner's funds can not be used to pay another owner's expenses. Therefore, before disbursing any funds to pay an owner's expenses the account balance for that owner must be sufficient to cover the disbursal. The other option to maintaining an owner's funds in the brokerage property management trust account is to establish a property management account in the owner's name on which the broker has signatory authority. The requirements for this account are provided in Ohio Administrative Code Section 1301:5-5-23. The broker is required to have a written agreement with the owner giving the broker signatory authority to make withdrawals from the owner's property management account. This can be provided in the brokerage's property management agreement with that owner. The agreement must specify the purposes for which the brokerage may make withdrawals from the owner's account and any dollar limits that exist on the amounts the brokerage may withdraw. Any modifications to these terms must be agreed to in writing. Ohio license law has very specific record keeping requirements for a brokerage regarding deposits and disbursements from a property management account. License law requires a separate ledger for each owner of property managed by the brokerage. Each ledger sheet must identify the following information in columnar form: Name and/or address of the property Parties to the transaction Amount, date, and purpose of deposit(s) Party from whom deposits are received Amount, date, check number, and purpose of disbursements Party to whom disbursements are made Running balance of funds on deposit for the particular owner of property Amount of interest earned on behalf of the owner(s) of the property(ies) if any The Ohio Division of Real Estate has developed a sample property management trust account ledger form which is attached hereto as Exhibit A. Ohio license law requires all brokerages that engage in property management activities to provide an accounting to each owner of managed property on at least a quarterly basis. The purpose of this requirement is to assure that owners are regularly updated on the funds the brokerage receives and disburses on their behalf. Brokers who engage in property management activities should make certain they understand the property management account requirements and that they fully comply with these regulations. Property management account violations are one of the most common license law violations by property managers. Security Deposits Security deposits are routinely collected when leasing property to secure performance by the tenant of his obligation under the lease. Ohio Administrative Code Section 1301:5-5-11(D) provides that security deposits received by the brokerage must be deposited and maintained in the property management trust account unless the lease and property management agreement provide otherwise. A brokerage may have a separate property trust account just for tenant security deposits. Security deposits which are maintained in the property management trust account must be clearly identified and credited to the tenant. If the owner does not want tenant security deposits to be deposited and/or maintained in the property management trust account, the property management agreement and lease must provide how security deposits will be handled. For example, the lease and property management agreement could provide that tenant security deposits will be paid directly to the owner. If the owner would like the security deposits to be deposited in the brokerage property management trust account but not maintained there (i.e. used to pay expenses of the property) the property management agreement and lease must provide for this. Requirements of a Property Management Agreement Ohio Revised Code Section 4735.55 provides that all written agency agreements contain certain requirements. An agency agreement is defined as "a contract between a licensee and a client in which the client promises to pay the broker a valuable consideration, or agrees that the licensee may receive a valuable consideration from another, for performing an act that requires a real estate license under this chapter." A property management agreement would fall within the definition of an agency agreement and therefore must contain the following requirements: A definite expiration date If the property management agreement is for managing residential property, the required fair housing language and logo. The required fair housing language and logo are attached hereto as Exhibit B. A place for the licensee and the owner to sign and date the agreement. The licensee must provide a copy of the signed agreement to the owner. Consumer Guide to Agency Relationships Ohio Revised Code Section 4735.56 requires brokerages to develop their own policy on agency. This policy must be titled "Consumer Guide to Agency Relationships". With regard to property management services, there are two occasions when the brokerage's Consumer Guide to Agency Relationships may have to be provided. The first situation is when the property management agreement is entered into. The license law requires that the brokerage's Consumer Guide to Agency Relationships be provided to the owner before the property is shown or marketed. Therefore, the Consumer Guide must be given to the owner up front before the brokerage advertises the property or shows units to potential tenants. The owner must sign acknowledging receipt of the brokerage's Consumer Guide. This acknowledgement can either be on the Consumer Guide itself or on a separate document. However language acknowledging receipt of the Consumer Guide can not be included in the property management agreement as the receipt language may not be included in any other agreement to which the owner is a party. The other situation in which the Consumer Guide to Agency Relationships may be required is when dealing directly with potential tenants. A Consumer Guide is only required to be provided to a potential tenant if the property is commercial, industrial, retail or involves a residential lease over 18 months. If the tenant would be entering into a residential lease of 18 months or less, a licensee is not required to give the tenant a Consumer Guide. If the rental property is commercial, industrial, retail or involves a residential lease over 18 months, a licensee is required to provide the potential tenant with the Consumer Guide to Agency Relationships before the earliest of the following events: Pre-qualifying the tenant; Requesting specific financial information; Showing property (other than at an open house); Discussing the making of an offer to lease; or Preparing an offer to lease Whichever of the above events occurs first will trigger a licensee's obligation to provide the Consumer Guide to a potential tenant. When a transaction requires use of the brokerage's Consumer Guide with a tenant, the tenant must sign the Consumer Guide or a separate document acknowledging receipt of the brokerage's Consumer Guide. Language acknowledging receipt of the Consumer Guide can not be included in the lease as the receipt language may not be included in any other agreement to which the tenant is a party. Agency Disclosure Statement The Agency Disclosure Statement is a state form which was developed to disclose to buyers, sellers, landlords and tenants who the licensee(s) represent in the real estate transaction. The requirements for use of the Agency Disclosure Statement are provided in Ohio Revised Code Section 4735.58. As with the Consumer Guide to Agency Relationships, a licensee is not required to use the Agency Disclosure Statement for residential leases of 18 months or less. However, the Agency Disclosure Statement is required for commercial, industrial or retail leases of any duration and all residential leases over 18 months. On those leases licensees working directly with a tenant, whether as a tenant's agent or the landlord's agent, must provide the tenant with the Agency Disclosure Statement no later than the time the tenant is ready to make an offer to lease the property. After completing the appropriate sections of the form the licensee is required to ask the tenant to sign the form. Once the form is signed the licensee can begin discussions with the tenant regarding his offer to lease the property. The tenant signed Agency Disclosure Statement must be given to the landlord prior to him being presented with the tenant's offer to lease. The landlord should also be asked to sign the form. Maintaining Property Management Records Brokers engaging in property management deal with an array of paperwork. These documents can include the property management agreements with owners, Consumer Guide to Agency Relationships, tenant leases, Agency Disclosure Statements, work orders, security deposit disbursements, invoices for work done on the property and receipts for bills paid, property management trust account records, to name just a few. Ohio Revised Code Section 4735.18(A)(24) requires brokers to keep complete and accurate records of all transactions for a period of three years. Therefore brokers engaged in property management must keep all documents relative to the management of property for three years. Residential Rental Property – Licensure Exemption A common question of brokers engaged in property management is what duties can their unlicensed staff perform. For example: Can an unlicensed employee show an apartment? Can the receptionist collect rent checks or provide information over the phone regarding rental properties? Ohio licensure law contains a rule which answers these questions for residential property management. Ohio Administrative Code Section 1301:5-5-07 provides a list of activities that an unlicensed person can and cannot perform with regard to residential property management. This rule creates an exemption from the licensure requirement for certain activities performed by people working in residential property management. The licensure exemption does not apply to commercial, industrial or retail property management or in real estate sales of any type. The rule also provides that the exemption only applies to individuals working under the supervision of a broker and whose compensation for service is primarily on a salaried or hourly basis. The duties an unlicensed employee can perform when working with residential rental property are the following: maintenance clerical or administrative support collect or accept rents and/or security deposits which are made payable to the owner or real estate brokerage exhibit or show residential rental units to prospective tenants furnish published information regarding the property supply applications and leases receive applications and leases for submission to the owner or broker for approval The rule also provides that an unlicensed employee may not perform the following duties: negotiate contracts or leases deviate from the rental price and/or other terms and conditions previously established by the owner or broker when providing information to prospective tenants approve rental applications or leases settle or arrange the terms and conditions of a lease on behalf of the owner or broker offer inducements to prospective tenants unless they are previously advertised or arranged with the owner or broker interpret or provide their opinion concerning the terms or conditions of a lease indicate to the public that he is in a position of authority which has the ultimate managerial responsibility of the rental property This rule clarifies what duties unlicensed employees of the brokerage can perform with regard to residential rental properties. Clearly unlicensed employees can provide information to prospective tenants, show units and supply and accept tenant applications and leases. However, unlicensed employees are not the decision makers. They can not set the terms of a lease or management agreement or sign a lease or property management agreement on behalf of the brokerage. These are activities that require a license. Brokers engaged in property management must understand what activities their unlicensed employees can perform. Brokers must be able to provide clear guidance to their employees regarding the duties they are permitted to perform under Ohio law. It is the broker's responsibility to make sure that their employees do not cross over this line and perform activities limited to only licensed agents. Advertising Requirements Ohio license law contains several advertising requirements which apply to brokerages, including those engaged in property management and leasing. Advertising is defined in Ohio Administrative Code Section 1301:5-1-02. Advertising includes any means by which a licensee makes known to the general public properties for sale or lease or any services for which a real estate license is required. The method used to convey the advertising may include newspapers, magazines, radio, television, signs, Internet websites, unsolicited mail, voicemail, e-mail or facsimile transmissions. Advertising does not include forms of private communication between a licensee and a client, customer or prospective client provided such communications are initiated at the request of the client, customer or prospective client. Any promotional materials that go out to the general public regarding the brokerage or a property is considered advertising. The promotion may be distributed by print, radio or display and may include business cards, stationary, yard and office signs, personal brochures, newsletters, calendars and fliers. All advertising must include the brokerage name and indicate that they are a licensed broker. The brokerage name in the ad must be the same as it appears on the brokerage license unless one of the following exceptions apply: If the broker has been granted approval to use a "dba", then that trade name as it appears on the license is the name that must appear in all ads Words or abbreviations included in the licensed name that indicate the legal framework under which the licensee conducts business, such as "Inc." or "Co.", are not required to appear in the ads. The words "Realty" or "Real Estate" or the authorized use of a trade name or insignia indicating membership in a real estate organization (i.e. "Realtor" or "R") may be included by broker's even though not part of the broker's licensed name. Any salesperson's name appearing in an advertisement must consist of his name as it appears on his license. Ohio Revised Code Section 4735.16(B)(1) requires that the brokerage name be displayed in equal or greater prominence than the salesperson's name. Therefore, the name of the salesperson cannot be displayed more prominently than the brokerage name. In determining prominence, the type size, color and style will be considered as well as location of the names on the advertising piece. Ohio Revised Code Section 4735.18(A)(21) provides that a licensee can be disciplined by the Ohio Real Estate Commission if the licensee publishes advertising which is misleading or inaccurate or in anyway misrepresents any properties, terms, policies, or services of the business conducted by the brokerage. To warrant disciplinary action, it is not necessary to find that the inaccurate information was included intentionally or even knowingly. It need only be shown that the advertising was incorrect or misleading. Therefore, all ads should be reviewed for errors or typographical mistakes. Ohio Administrative Code Section 1301:5-1-02 provides additional requirements specific to internet advertising. All internet advertising must disclose the brokerage name on every viewable page of the website. A web page is defined as one that may or may not scroll beyond the borders of the screen. Information on a website maintained by a licensee which becomes outdated or expired, must be updated within fourteen days of the information becoming outdated or expired. Each website maintained by a licensee must disclose the date upon which the information contained on the site was most recently updated. If a licensee's website is maintained on the licensee's behalf by a third party, the licensee must provide to the third party written notice of any updates to outdated or expired information so that the site can be updated in a timely manner. A licensee who provides such timely notice will not be in violation of the license law if the third party fails to make the change as notified. The license law internet advertising requirements only apply to websites within the licensee's ownership or control. A licensee is not responsible for the accuracy of information taken from his website or advertising and placed on a website or in advertising not within the licensee's ownership or control. Real estate licensees who own rental properties are often uncertain how to advertise their own property for lease. The Division of Real Estate and Professional Licensing addressed this issue in the Fall 2000 Division Newsletter which is attached hereto as Exhibit C. A licensee advertising to lease real estate that he owns must be identified in such ads by his name as it appears on his license and by indicating that he is a real estate broker or salesperson. The name of the brokerage with whom the licensee is affiliated would only be required to appear in the ads if the property is listed with the brokerage. Ohio license law does not require licensees to list their property for sale or lease with the brokerage with whom they are licensed. They can sell or lease their own property on their own as any other owner of real estate can do. However, handling a licensee's own property through the brokerage may be a condition of affiliation with that brokerage. Division Compliance Audits Brokers engaged in property management are subject to compliance audits by the Division of Real Estate and Professional Licensing as any other licensed brokerage. The purpose of a compliance audit is to provide education and awareness of real estate law and to ensure compliance with all license law requirements. The goal of the Division is to audit each brokerage every three to five years. The compliance audit entails a thorough review of the brokerage documents. Some of the information investigators review during an audit includes the following: Real Estate Licenses: The brokerage license must be prominently displayed in the main office and any affiliated salespersons' licenses must be available for inspection. Advertising: Examples of brokerage advertising, which may include office and yard signs, newspaper and magazine ads, fliers, newsletters, business cards, stationary and envelopes. Brokerage Contract and Required Forms: This may include the Property Management Agreement, Tenant Leases, Consumer Guide to Agency Relationships, Agency Disclosure Statement and the Brokerage Company Policy as required by Ohio Revised Code Section 4735.54. Fair Housing Sign/Pamphlet: In each brokerage office a fair housing sign must be displayed in the same area as the brokerage license is displayed. Pamphlets with the same fair housing information must be available to the public. The fair housing sign and pamphlet are attached as Exhibits D and E. Transaction Files: Random checks may be conducted of property management and leasing files. Property Management Account(s): The investigator will review the most recent bank statement(s), deposit tickets and the required columnar ledger (see Exhibit A). Property management account balances must reconcile. If the investigator determines that the brokerage is not in full compliance with the license law requirements, the broker will be notified of any deficiencies and asked to correct those issues. The broker should promptly rectify any non-compliance issues as the Division requests. Licensure Exemption – Regular Employee of Owner A real estate broker's license is required to manage property owned by another, for a fee or other valuable consideration. However, Ohio Revised Code Section 4735.01(I) provides an exception for an individual who qualifies as a "regular employee" of the owner of the property. The Division of Real Estate and Professional Licensing detailed in their Fall 1998 Newsletter (attached as Exhibit F) the factors that will be considered to determine if an individual is a regular employee of the owner. The article lists the following factors: The employee is paid via a W-2 versus a 1099 The employer pays all taxes The employer pays unemployment and worker's compensation insurance The employer schedules the hours If an individual qualifies as a regular employee of the owner, the individual can manage property for that owner without holding a real estate license. Otherwise, a real estate license is required. Finder/Referral Fees Ohio Revised Code Section 4735.01(A) provides a list of activities that if performed for another for a fee or other valuable consideration requires a real estate license. One of the activities listed is directing or assisting in the procuring of prospects for the sale or lease of real estate. It is this license law provision that prohibits a broker from paying a finder's fee to an unlicensed person for referring prospective tenants to the broker. This provision also prohibits giving a free month's rent to a tenant who refers prospective tenants to the broker. A real estate license is required to be compensated for referring tenants to a property manager or owner. Therefore, an unlicensed person or tenant may not legally accept a finder's fee or free month's rent and a licensed agent or broker may not pay an unlicensed person for such conduct. Conclusion Every real estate broker who provides property management services must have a thorough understanding of the license law requirements discussed in this paper. These requirements apply whether the broker manages one property or thousands. As some of these requirements are very specific and demanding a broker considering offering property management services must be willing to invest the time and effort required to properly manage real estate. Specifically, a broker must make sure he can meet the record keeping and bookkeeping demands imposed by the law to protect property owners and tenants. A broker must also be cautious in his delegation of management duties to salespersons and unlicensed staff. It is the broker who has ultimate responsibility for compliance with the license law requirements. Proper oversight by the broker of the property management business is essential to a successful real estate management company.