It’s clear that successful real estate companies must rely on core services for a portion of their profits. Many times, that looks like a joint venture. A successful joint venture can build value for your customers, give you access to new markets, and build your long-term revenue streams. Joint ventures also operate under a clearer regulatory environment than Marketing Services Agreements (MSAs), since the RESPA statute provides a specific exemption, known as a “safe harbor”, for affiliated business arrangements (ABAs).
But creating a profitable joint venture requires a substantial financial and management commitment by both partners, as well as compliance with a separate set of regulatory standards under RESPA.
Here is a summary of the basic RESPA rules governing ABAs, which you and your partner should become familiar with as you assess any potential partnership.
The Conditions of RESPA’s Affiliated Business Safe Harbor
First, you and your partner should be ready to comply with the three statutory conditions of RESPA’s affiliated business arrangement (ABA) safe harbor:
- ABA disclosure: The referring party must provide an ABA disclosure to the consumer in writing at or before the time of the referral that:
- Discloses in writing that the referring party has a business relationship with the provider of the service from which it may benefit, with a description of the relationship and the percentage of ownership interest if applicable;
- Provides an estimate of market prices for the referred service(s).
- Advises the consumer that he/she is not required to use the referred service(s);
- Advises the consumer that there may be lower prices available and that he/she should shop around.
A model Affiliated Business Disclosure Form is available in an appendix to RESPA regulations. The referring party also should obtain a written acknowledgment from the home buyer that he/she has reviewed the disclosure.
- No required use: The consumer should not be required to use the affiliated service. RESPA regulations do clarify that discounts, rebates, or other incentives offered by providers to consumers who purchase an affiliated settlement service will not be considered a “required use” if the purchase is optional, if the service is separately available at prices generally available from that provider, and if the incentive is genuine — meaning it is not offset by increasing prices of other services in the transaction. State laws and regulations may impose additional restrictions on consumer incentives in certain industries.
- Nothing of value received other than return on ownership or franchise interest: Neither party should receive any “thing of value” from the venture other than a return on ownership interest or franchise interest. RESPA regulators expect your investment not to be tied in any way to expected referrals. If the returns are disproportional to the amount invested, you will open yourself up to an investigation.
Sham Joint Venture Standards
You also should not consider a joint venture unless you and your partner are ready to substantially comply with the RESPA Sham Joint Venture Guidelines that RESPA regulators use to determine whether a joint venture is “bona fide” or a “sham” designed to circumvent RESPA’s referral fee prohibition. Here are some examples of what the regulators look for:
- Adequate and proportional capitalization: The joint venture should be adequately capitalized, with any returns being proportional to the capital investment. No specific amount is required, but many RESPA attorneys recommend an investment covering start-up costs and six months of expenses.
- Employees: The venture should perform its essential services with its own employees, not with employees loaned by either owner. Many RESPA attorneys advise hiring at least one full-time dedicated employee.
- Separate management: Its operations should be run by its own management, not the management of either owner.
- Separate office space: Its office(s) should be separated from those of either partner, and it should pay market value for the space.
- Performance of “core” services: It should perform the essential functions for which it receives a fee. If it contracts out services, it should pay for the fair market value of those services.
- Outside business: The entity should actively compete for outside business, and not send business exclusively to an owner or its affiliates.
There are other federal laws that can affect the creation and operation of joint ventures, and it’s essential to conduct a thorough review of state laws and regulations, many of which cap the percentage of business a title agent or insurer may receive from an affiliate or impose other restrictions and/or requirements on affiliated businesses. As always, it’s wise to consult with legal counsel knowledgeable in RESPA and state law early in your assessment process.