This article explains the difference between a corporation and personal broker’s license, and describes the process of obtaining and renewing a corporation license.
Consider a licensed real estate broker who has been working under his broker license buying and selling income properties on behalf of clients.He has long wanted to personally acquire ownership of some of the properties he has brokered.However, he has not been willing to pay the price his clients and the Real Estate Investment Trusts (REITs) were willing to pay for these properties.The rate of return was far too low for the long-term ownership he has contemplated.
However, the fundamentals in the real estate market changed in 2008. Rental income and prices came together to produce a capitalization rate that met historical standards for long-term ownership of income-producing real estate.
To purchase property for his own account of the size necessary to provide for efficient operations and management, the cash down payment required is more than the amount he is willing to place in any one property. Thus, as some of his clients have done, he is considering forming limited liability companies (LLCs) and selling membership interests to investors. The monies he receives from investors will fund the down payment necessary to acquire each property he locates and contracts to buy.
To sell memberships, the broker will hire sale agents to solicit investors. However, he is concerned by the (vicarious) liability exposure that sales agents will impose on him if they are employed under his individual broker license and act improperly on any sale of membership interests. He decides to create a corporation which he will own for the purpose of providing him with a shield against those liabilities. It will operate as a real estate brokerage office.
The corporation must be licensed as a real estate broker by the Department of Real Estate (DRE) to sell its membership interests in real estate investment companies such as LLCs to investors. The broker will qualify the corporation to be licensed as a corporate real estate broker in California by becoming its designated officer (DO).
The membership interests will be listed for sale with the corporate brokerage office. In turn, the corporation, of which he will be the president, will hire licensed real estate agents to solicit investors and sell them membership interests in the LLCs he creates. Discussions with the real estate attorney and the CPA he has worked with in the past help him to organize his syndication programs. He incorporates his real estate business and licenses the corporation as a real estate broker, becoming the DO qualifying it to do so. The broker starts out with a small operation for his initial acquisitions. Two highly respected and productive real estate agents he knows are employed by the corporation with the primary task of soliciting investors to buy membership interests in the LLCs he is creating for each property he acquires.
Soon, he enlarges the syndication operations and the corporate brokerage office. The brokerage office is expanded by hiring additional agents, an office manager for daily oversight of the agents’ activities, and a full-time book-keeper. Another property is located and the standard investment circular disclosing the syndicated real estate investment program is prepared by the broker. The contents are based on his due diligence investigation disclosing all aspects of the property to be purchased. The completed circular and operating agreement for the LLC are reviewed and approved by his attorney as had been done in the past.
The broker no longer has personal contact with any of the investors who buy membership interests. The sale to the investors in handled directly by the sales agents and is overseen by the office manager of the corporate investment division in the same manner and fashion as the previous sales of LLC membership interests to investors by the sales agent.
A membership interest is sold by one of the corporation’s licensed real estate sale agents to an investor. The agent structures the investor’s funding of the investment by requesting one-half the funds on subscribing to be payable to the corporate broker.The final funding will be payable directly to the escrow company at the time of closing.
The investor’s participation in the LLC is represented to the office manager by the agent as being only for the amount of the initial funding. No mention is made of the investor’s oral commitment to additional funding into the investment program.
The agent then requests the additional funds from the investor, which are made payable to an escrow company. The agent deposits the funds with that escrow company into an escrow for a transaction unrelated to the membership interest sold to the investor. The brokerage office is uninvolved in this escrow transaction and knows nothing about it. The agent receives the benefits from that escrow on its closing.
Several months later, the investor reviews the extensive closing documentation from his investment in the LLC. He then discovers the missing amount of capital investment he gave to the sales agent. The investor makes a demand on the individual broker for a return of the lost investment, claiming the broker is liable for the loss since, as the DO of the corporate broker, the broker owed an agency duty to the investor which was breached by failing to properly supervise the activities of the sales agent employed by the corporation in the sale of the membership interest.
The DO claims he is not liable to the investor since he did not act in the capacity of the investor’s agent in the sale of the membership interest, only as an officer of the corporation, and any failure on his part as the DO to supervise the corporate agents does not establish an agency duty owed to the investor which would create a liability.
Is the DO liable to the investor for any failure to properly supervise the sales agent’s activities?
No! The DO did not act as the investor’s agent at any time since he did not meet with the investor and he did not handle the funds lost by the investor. Thus, the DO did not undertake an agency duty to care for and protect the investor which would make him liable to the investor. Any failure on his part as the DO to supervise the sales agent is a breach of the duty the DO owed to the corporation as its officer and to the DRE, subject to sanctions for any failure to properly supervise the sales agents. The DO owed no dutyto the clients of the corporate brokerage office with whom he did not meet and did not participate in the deceitful conduct. [In re Grabau (1993) 151 BR 227]
Licensing a corporation
A corporation is licensed as a real estate broker through a designated officer who qualifies the corporation to hold a license.
Only corporate entities can be licensed as real estate brokers, not limited liability companies, partnerships, or trusts. A corporation license is different and distinguishable from an individual broker license just as an entity is distinguishable from an individual.An individual acts on his own or through an agent, but a corporation can act only through an agent who is an individual.
The individual who intends to qualify a corporation for a broker license applies to the Department of Real Estate (DRE) to be the designated officer of a corporation.The application process includes submitting:
- a Corporation License Application (RE 201);
- a Corporation Background Statement (RE 212), if applicable;
- a Live Scan Service Request (RE 237) for fingerprints, if applicable;
- Articles of Incorporation (if filed with the California Secretary of State within six months before the date the application is submitted to the DRE), OR a Certificate of Status, Certificate of Foreign Corporation, or a Certificate of Qualification (if issued within 30 days before the date the application is submitted to the DRE);
- a Branch Office Application (RE 203) for each additional office location being added;
- a certified copy of the Fictitious Business Name Statement (DBA), if the corporation intends to do business under a name other than the corporate name;
- a completed Salesperson Change Application (RE 214) for any licensed sales agent the corporation intends to employ to conduct licensed real estate activity as an employee of the corporation; and
- proof of legal presence for all license applicants, along with a State Public Benefits Statement (RE 205), unless previously submitted to the DRE.
The designated officer/applicant is to complete and sign a certification regarding any criminal activities on the part of the corporation’s officers. A Corporation Background Statement is required for all officers, and any individual who owns or controls more than 10% of the corporation’s shares, who have been the subject of any of the following:
·received a court or governmental order or judgment during the preceding 10 years which temporarily or permanently restrained or enjoined any business conduct, practice, or employment;
- has had a license to practice real estate or any other regulated profession, occupation, or vocation denied, suspended, or revoked during the preceding 10 years;
- engaged in acts requiring a real estate license without a valid license during the preceding 10 years; or
- been convicted of a crime which is substantially related to the qualifications, functions, or duties of a licensee of the DRE (excluding drunk driving, reckless driving, and speeding violations), i.e.:
- the fraudulent taking, obtaining, appropriating, or retaining of funds or property belonging to another person;
- counterfeiting, forging, or altering an instrument or uttering a false statement;
- willfully attempting to gain a personal financial benefit through the nonpayment or underpayment of taxes, assessments, or levies;
- the employment of bribery, fraud, deceit, falsehood, or misrepresentation to achieve an end;
- being required to register as a sex offender;
- willfully violating or failing to comply with California real estate law [Business and Professions code §§10000 et seq.];
- willfully violating or failing to comply with a statutory requirement that a license, permit, or other entitlement be obtained prior to engaging in a business or course of conduct;
- engaging in any unlawful act with the intent of gaining a financial or economic benefit, or with the intent of doing substantial injury to another person or property;
- contempt of court or willful failure to comply with a court order;
- conduct which demonstrates a pattern of repeated and willful disregard of law; or
- two or more convictions involving drugs or alcohol when at least one of the convictions involve driving under the influence of either. [DRE Regs. 2746 and 2910]
The applicable fees for the processing, issuance, and renewal of a corporate real estate broker license are as follows:
- if the applicant is currently licensed as an individual broker, the licensing fee is $165;
- if the applicant has never been licensed or his license has been expired for more than two years, the licensing fee is $165, plus $51 for fingerprinting;
- if the corporation’s license has expired or if the applicant’s license has expired within the past two years, the licensing fee is $248;
- if the corporation is currently licensed and only a substitution of a currently licensed additional officer is required, no fee is required; and
- the renewal fee for a corporation/officer’s license is $165 if it is on-time and $248 if it is late.
If the qualifying broker lives in California, the $51 fingerprint processing fee must be paid directly to the live scan fingerprint service provider. Should the qualifying broker live outside of California, the fingerprinting fee must be submitted to the DRE along with a fingerprint card.
Upon submitting all of the above and being duly processed by the DRE, a corporation license will be issued, valid for four years from the date of issuance. The corporate license will need to be renewed prior to expiration or within the two-year grace period after expiration.
Editor’s note: The expiration date of the corporation is always the same as that of the designated officer. One license is issued for the corporation and the designated officer. The expiration date for the designated officer’s individual broker license, if he holds one, will most likely be different as the individual broker license is separate and distinct from the designated officer (corporation) license.
A designated officer defined
The designated officer:
- must be licensed as an individual broker with the California Department of Real Estate (DRE) or have qualified for a broker license by passing the broker exam within 12 months of the corporation submitting a corporation license application (DRE Form RE 201); and
- hold an actual officer title in the corporation.
The term “broker-officer” or “broker of record” is not considered an official officer’s title by the DRE.
Official officer’s titles include, but are not limited to:
·director;
·chief executive officer;
·president;
·first level vice president;
·secretary; and
·chief financial officer.
An individual can be the designated officer for multiple corporations. A new corporation license application would need to be completed and submitted for each.
The designated officer’s duties
The corporation license issued to a corporation’s designated officer allows him to conduct licensed activities on behalf of the corporation.
The designated officer is responsible for the supervision and control of the activities requiring a real estate license that are conducted on behalf of the corporation by its broker-officers.
However, by resolution of the board of directors, the designated officer may assign supervisory responsibility over salespersons licensed to the corporation to an additional licensed broker-officer or broker-officers.
A certified copy of the resolution and a completed Certification (Assignment of Supervisory Responsibility), RE 210, must be forwarded to the DRE within five days after the adoption or modification of the resolution if supervisory responsibility has been delegated to other broker-officers.
Additional broker-officers
Additional broker-officers may be licensed to act for the corporation in any capacity which would require a broker license.
They may be licensed by submitting a completed Corporation License Application with the current fee.
Like the designated officer, they must also hold an officer title in the corporation and the term “broker/officer” or “broker of record” is not an official officer title.
These additional broker-officers are not the same as the designated officer who licensed the corporation and who holds supervisory duties.
There is no limit to the number of broker-officers who can be added.
An individual can be a broker-officer for multiple corporations.
How to change corporation information
A Corporation Change Application, RE 204A, should be used to:
- change the corporation’s mailing or main office address;
- change the corporation’s name;
- add or cancel a DBA; or
- change the designated officer to another licensed officer.
How to substitute designated officers
Consider a designated officer who wishes to leave the corporation prior to the expiration of the corporation license. In order to substitute a fellow broker-officer in as the new designated officer, the following must be submitted to the DRE in the same package:
- an RE 201 form from the broker-officer wishing to be the new designated officer of the corporation; AND EITHER
- a copy of the personally signed resignation of the designated officer leaving the corporation;
- a copy of the Resolution of the Board bearing the corporate seal indicating the resignation of the designated officer leaving the corporation; OR
- a signed statement providing the date of death of the currently licensed designated officer.
Both items must be received by the DRE in the same package in order to keep the corporation continuously licensed with the DRE. No fee is required to be submitted with the package when a new officer is completing the balance of the corporation’s license period with the leaving designated officer.
If the two documents are properly completed and received together, the effective substitution date will be the date the package was received by the DRE.
If the two documents are not properly completed and are received piecemeal, the corporation’s license, along with any branch offices, will be immediately cancelled and the working status of all employed sales agents will be terminated.
However, if the corporation wishes to add a new broker-officer to be the designated broker and allow the current designated officer to remain as a mere additional broker-officer, the following must be submitted to the DRE:
- a completed RE 201;
- a license fee; and
- a personally signed statement from the current designated officer indicating he will remain with the corporation as an additional broker-officer.
Branch office licenses will then be reissued to match the term of the new designated officer.
How to renew a corporation license
To renew an officer license, either as a designated officer or a broker-officer, the following must be submitted to the DRE:
- an Officer Renewal Application, RE 207;
- a State Public Benefits Statement, RE 205;
- a Continuing Education Course Verification form, RE 251, if applicable; and
- the renewal fee.
If licensed only as an officer, without maintaining an individual broker license, the officer will need to complete the same education required of an individual broker and submit evidence of its completion to the DRE, i.e., RE 251.
However, if currently also licensed as an individual broker, so long as the individual broker license is kept current by completing the required continuing education courses every four years, no evidence of the completion of these courses needs to be submitted with the officer license renewal application.
Editor’s note: The Continuing Education Course Verification form only needs to be submitted when a person who is licensed only as a corporation officer needs to renew the existing corporation license, apply for a new corporation license, or apply for an individual broker license.
How to reinstate an individual broker license
If you have a corporation license as a designated officer through your corporation, but you are not currently licensed as an individual broker and wish to have it reinstated, fill out the individual broker license app, and write in the top, right-hand side, “Second License” and pay $120 to have the individual broker license reinstated.
Canceling a corporation or broker-officer
In order to cancel a corporation license, a letter signed by all licensed broker-officers must be submitted to the DRE stating the corporation is no longer conducting business which would require a real estate license.
Upon acceptance of the cancellation by the DRE, the working status of all the sales agents licensed with the corporation will be terminated and all branch offices cancelled.
To simply cancel an additional broker-officer, not the designated officer or corporation, the broker-officer needs to submit a personally signed letter of cancellation, or the corporation can submit a Resolution of the Board stating the severance.
Reactivating an expired/cancelled corporation
To reactivate an expired corporation license, the following must be submitted to the DRE:
- a completed Corporation License Application;
- a Certificate of Status from the Secretary of State; and
- the late fee.
To reactivate a cancelled corporation, the following must be submitted to the DRE:
- a completed Corporation Change Application, if being reactivated by the previously licensed designated broker; or
- a completed Corporation Change Applications AND Corporation License Application, if being reactivated by a new designated broker.