North Carolina, Referral Fees, and Ownership Structures: Part 1
By: Pat Finn – North Carolina Licensed Partner
with Brownlee Whitlow & Praet
Our firm recently published a blog related to the statutory requirements in North Carolina when a broker-in-charge is required for owner-operators of rental housing. That blog can be found here: https://bwpf-law.com/im-new-to-north-carolina-is-my-management-company-required-to-have-a-broker-in-charge/
The desire and/or ability to pay referral fees for prospective future residents is a tangential issue to the brokerage requirements that we see arise regularly throughout the state. As housing supply starts to match demand, applicants have stronger bargaining power as they (finally) have additional options when searching for rental housing. The industry is trending towards robust concessions and other enticements to attract new residents, and as the housing supply increases, the available applicants become more limited. This continues to create and increase the need for owner/operators to locate new qualified applicants to fill their apartment homes, which inevitably triggers the question from an owner/operator along the lines of – “I’d like to start a referral program for anyone that finds us new residents.”
The general rule of thumb on referral fees is that if you are required to have a broker-in-charge (see the prior blog entry linked above) then you are bound by the rules of the North Carolina Real Estate Commission and NCGS Chapter 93A. If your corporate structure is such that you are an owner managed property, then those rules would not necessarily apply to you – however, the act of referring the renter is itself a violation of the statutes. What that means is that even if your actions are not themselves in violation of the requirements, you would be aiding another in the violation. NCGS 39A-8 makes a violation of those laws a Class 1 Misdemeanor, and aiding and abetting someone else’s commission of a crime is also a criminal act. We’ll discuss ownership structures in a future blog entry, as there are downsides and liabilities related to having the ownership and management of all of your rental properties all fall under a singular corporate entity.
North Carolina General Statute § 93A-2 defines a real estate broker as “any person, partnership, corporation, limited liability company, association, or other business entity who for a compensation or valuable consideration or promise thereof lists or offers to list, sells, or offers to sell, buys or offers to buy, auctions or offers to auction, or negotiates the purchase or sale or exchange of real estate, or who leases or offers to lese, or who sells or offers to sell leases of whatever character, or rents or offers to rent any real estate or the improvement thereon, for others.” That is a very long winded and detailed way of saying that doing anything in the rental housing market for others, that involves advertising or leasing likely counts as brokerage activity, which would then mandate the need for brokerage licensing.
The biggest exceptions to the definition are contained in subsection C(6) and C(7) of the same statute. C(6) states that a salaried person employed by a licensed broker, who is acting on behalf of the owner through a management company is exempt. This would capture the on-site teams for management companies contracted by owners to manage their properties. This simply means that the on-site team can work on leasing/advertising/etc. without the need for ownership to staff their own licensed employee. In these relationships where management is contracted by ownership to manage a property, the management entity would already have a broker-in-charge, so the salaried employee is simply working under that licensed individual.
The exemption in C(7) focuses on an individual owner who is personally leasing and/or selling their own property. This owner managed exemption goes hand-in-hand with the ownership formation discussion that will be the focus of a future blog.
Where that leaves referral fees, outside of the allowable exemptions, is that they are covered as brokerage activities. If the referral itself is tied to valuable consideration (really anything of value), then it would be prohibited without a license. The compensation or valuable consideration terms would be found to include money, credits, gift cards, prizes, or anything that has value. If the referral is provided out of the goodness of someone’s heart, then no consideration is being provided and the rules wouldn’t apply. But other than online reviews and actual word-of-mouth, the types of referrals that owner/operators need in today’s world are more akin to bulk qualified sales leads than to someone suggesting they like their apartment enough that their cousin should check it out too.
The North Carolina Real Estate Commission receives inquiries on this often enough that they list the question twice on their website’s “Frequently Asked Questions” section. Question 4 in the “Laws and Rules – Consumer Information” section discusses that no one may accept compensation for brokerage activities in North Carolina unless licensed. Question 1 in the “Laws and Rules – Broker Information” section discusses the need for an active license in order to receive a referral fee from a broker friend. The entirety of the NC Real Estate Commission’s FAQs can be found here: https://www.ncrec.gov/Resources/Faq.
In conclusion, if your corporate structure requires that you have a broker-in-charge for your operations, it is a safe bet that you are prohibited from paying any form of consideration to anyone who is not licensed by the North Carolina Real Estate Commission. Doing so puts your license at risk, which has much farther reaching consequences than you might gain for a limited number of improper/illegal paid referrals. And as outlined above, even if you are not required to have a broker-in-charge, you could be committing a criminal aiding and abetting act by paying someone else to violate the prohibitions within Chapter 93A. In Part 2 of this series, we’ll discuss examples (both good and bad) of referral programs and lease-ups, as well as dive further into the corporate structure decisions when forming your rental operations.
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