FACTORS TO CONSIDER IF YOU’RE EXPLORING A JOINT VENTURE

Is a joint venture a viable alternative to a marketing service agreement?

By Sue Johnson, strategic alliance consultant

The Consumer Financial Protection Bureau’s (CFPB) aggressive enforcement against Marketing Service Agreements (MSAs), coupled with its 2015 Bulletin warning providers to “proceed with caution” in this area, has led many companies to explore a joint venture as an alternative to an MSA.

The CFPB has not outlawed MSAs per se, and the Supreme Court may decide this year whether or not the agency has overstepped its bounds in its strict interpretation of how RESPA’s referral fee prohibition applies to this type of agreement.

But given the uncertainty of today’s MSA regulatory environment, should you actively explore a joint venture? The answer is, “Maybe.” Here are some factors you should consider as you begin your assessment.

Will you be able to capitalize adequately the joint venture?

To create a RESPA-compliant joint venture, you’ll need to capitalize the entity. No specific amount is required, but many RESPA attorneys recommend an investment covering start-up costs and six months of expenses. Be aware that 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 open yourself up to an investigation.

Will your volume of business support a joint venture?

You obviously will need a certain volume of business to make the capital investment and operational costs worthwhile. A pro forma income statement done in conjunction with your prospective partner will enable you to assess how many transactions the new entity will need to close to cover your costs and to achieve your profit goals.

Do you have a viable joint venture partner?

Your partner will be critical to the venture’s long term success. You could start by assessing the suitability of companies that already do business with your sales force and customers. One possible partner is a company with an established track record of creating and managing RESPA-compliant joint ventures.

Are you and your partner ready to make a long-term commitment?

Beware of potential partners that approach you with proposals involving quick profits. A successful and compliant joint venture involves a long-term commitment by the senior management of all owners. If one is a real estate brokerage company, it takes time and excellent service to win the business of its real estate sales force.

Are you ready to comply with RESPA’s ABA standards?

First, you should comply with the three statutory conditions of RESPA’s affiliated business arrangement (ABA) safe harbor:

  1. Provide an ABA Disclosure in writing at or before the time of the referral.
  2. Do not require the consumer to use the affiliated service.
  3. Do not receive any “thing of value” from the venture other than a return on ownership interest or franchise interest.

You also should not consider a joint venture unless you and your partner are ready to 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. They include:

  1. Adequate and proportional capitalization: As discussed above, the joint venture should be adequately capitalized, with any returns being proportional to the capital investment.
  2. Employees: It should perform its essential services with its own employees, not employees loaned by either owner. Many RESPA attorneys advise hiring at least one full-time dedicated employee.
  3. Separate management: Its operations should be run by its own management, not the management of wither owner.
  4. Separate office space: Its office(s) should be separated from those of wither partner, and it should pay market value for the space.
  5. 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.
  6. Outside business: The entity should actively compete for outside business, and not send business exclusively to an owner or its affiliates. Many states require that a certain percentage of revenues be obtained from unaffiliated sources.

Do you need to meet all of these guidelines? Not necessarily. Some, such as capitalization, employees, and the performance of core services, are considered more important than others. But you should be prepared to meet as many as possible to prevent the RESPA police from knocking on your door.

A successful joint venture can bring you long-term financial benefits and enable you to build value for your customers. But it also requires a substantial financial and management commitment, as well as compliance with a separate set of regulatory standards. If you decide to explore this option, make sure you do so with the advice of an attorney with an established RESPA practice.^

This article originally appeared in the September 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

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