HB 33 - REAL ESTATE LICENSING CHAIRMAN ROKEBERG indicated to the committee that the next legislation to consider would be HB 33, "An Act relating to real estate licensing and the real estate surety fund; and providing for an effective date." Chairman Rokeberg noted a possible conflict of interest that might exist with this legislation since he is currently a real estate broker in the state of Alaska. This legislation will have a direct affect on his conduct of business. He continued that he is the sole proprietor and broker for the Rokeberg Company located in Anchorage, Alaska. CHAIRMAN ROKEBERG noticed the committee substitute related to this legislation labeled LS-0197\B, Lauterbach, 3/11/97 and entertained a motion to adopt this version. Number 2407 REPRESENTATIVE COWDERY made a motion to adopt the committee substitute for HB 33 as noted. Hearing no objection it was so adopted and before the committee for review. CHAIRMAN ROKEBERG mentioned that this bill was introduced at the request of the Real Estate Commission. The primary reason for this bill was in the interest of consumer protection. He added that there had been some conversion embezzlement of funds from a number of businesses in the Anchorage area over a number of years. Over the course of an investigation under a task force appointed by the commission there was discovered a very large case that affected as many as nineteen different condominium associations. Large amounts of embezzled money was involved. TAPE 97-21, SIDE B Number 000 CHAIRMAN ROKEBERG continued that this particular bill provides for the establishment of endorsements related to both Real Estate Property Managers and Community Association Managers. He pointed out that the real estate statute is probably the most perused part of the Alaska statutes because it is required reading by all people who wish to come before the department and take the examination to become a real estate practitioner, broker or associate broker. As part of this examination there is a difficult and long portion of it that is taken out of the statute and the regulations that pertain to operating a real estate business in Alaska. Number 060 ELEANOR "GRAYCE" OAKLEY, Executive Administrator, Real Estate Commission, came forward to testify on HB 33. She referred to a letter in the committee packet which she prepared at the request of Chairman Rokeberg as an introduction to this legislation which sets out the recommendations from the Task Force. It took the Task Force about a year to study the issues affected by this legislation and the Task Force was made up of all realms of the property management population, big and small firms alike. They studied the issues to decide what would work and what wouldn't. They solicited comments from their colleagues and they were operating on a directive from the Real Estate Commission to draft recommendations to deal with Property Management and Community Association Management and how they should handle separate licensing for each. MS. OAKLEY continued that there had been a number of pleas from the property managers themselves and the association managers. They didn't mind taking an exam and being licensed, but they did resent the fact that virtually everything in the exam and in the pre- licensing education, along with the continuing education, seem to be oriented towards sales. This is not what they were practicing. They wanted the education to be part of what they would eventually be practicing. Number 161 MS. OAKLEY said she had looked at the number of surety claims that had been filed in the last ten years against sales persons and against property managers. She then broke these numbers down into five year increments, the first, from 1986 to 1990 there were 58 claims filed against sales persons and only sixteen against property managers. In the second five year period, from 1991 to 1996, there were 42 claims against sales people and 25 against property managers. The percentage for property managers has increased significantly and the dollar amount paid out was about a two to three ratio, about $127,800 for property managers in the first five year period, $177,000 against sales. In the second five year period it was $86,600 to $81,600. The amount of money paid out against property managers surpassed during the second five year period. Number 250 REPRESENTATIVE RYAN stated that he would like to claim a potential conflict since he holds an active real estate salesman license from the state of Alaska. Number 266 MS. OAKLEY mentioned that the bill is lengthy because the entire Chapter 88 is being opened up. Implementation of an endorsement program, as proposed, involves changes of terminology that are found throughout the legislation. She directed the committee's attention to Section .168, which starts on page 9, line 11. This is the very essence of what this legislation proposed to do. It spells out endorsements for three specialties, for Sales, Property Management and for Community Association Management. A person getting a new license after this bill becomes effective would have to declare at least one endorsement in order to get a license. They could get more than one, but there would have to be at least one attached to any active license. Number 343 MS. OAKLEY stated that a core body of knowledge would be required, such as property law and how title is held, fiduciary duties of agency, conflict of interest, etc., those types of things that would be common to all three endorsements would be covered in all three exams and then there would be topics applicable to each of the specialized practices for sales, such as financing, contracts used in sales transactions, for example. Property management would have such things as the contracts used in property management, landlord tenant law, Americans with Disabilities Act, etc. For the Community Associations there would be the Uniform Common Interest Ownership Act and the types of documents used in condominium projects, such as declarations, etc. This legislation proposes to establish these areas of expertise by regulation. MS. OAKLEY continued that there would be an entry level examination specific to each area. She has been in contact with the testing service contracted with the state of Alaska as far as the restructuring of the exam necessary to implement this. She stated that it is doable. The three tiers as are now defined in real estate licensing, an entry level, an associate broker and a broker would still remain intact in each of the three specialties. The chief person in a real estate office would be a broker with an endorsement for the specialty area in this office. If there is more than one specialty area in an office all the proper endorsements would be required. Number 465 MS. OAKLEY stated that Section 171 covers what the individual criteria would be for the specialty areas. She said she'd like to cover some of the areas outlined at the beginning of the bill which deal with some additional changes incorporated. One of the things that happened in 1994 was the issuance of two different Attorney General opinions that basically said that whereever the statute says the commission shall or the board shall do something, they cannot delegate this to a staff person. Language in Section .061 on page 2, makes it possible for the commission to use some discretion to delegate some of the authority and carry out some things that are necessary to implement the real estate statute. Section .071 also on page 2, not only incorporates endorsement changes, but two other things that are very important to the success of this, one of which is that unlicensed activity is a major problem. The number of complaints coming into the commission office of people conducting property management business without having a license is significant and on the rise. MS. OAKLEY offered that their frustration with the unlicensed individuals is that they can write a letter stating that they're required to be licensed, but in order to enforce them to get a license they are required to go to court. This takes the cooperation of the District Attorney's office. This office is so overwhelmed with criminal matters. This legislation allows the ability to levy civil fines and to administer this through administrative hearings in the Department of Commerce rather than relying on the Department of Law and the District Attorney. This would also be an effective vehicle for violations regarding advertizing, where someone is not following the provisions of the statute about the way they advertize with their company name. She then went into specific examples of these violations and the specifics of levying fines. Number 688 REPRESENTATIVE COWDERY asked how they would define how many units managed as applying to this section. MS. OAKLEY noted that this is outlined in the exceptions. Number 707 REPRESENTATIVE COWDERY used the example of managing property for his elderly mother, a 10 to 20 unit condominium facility. He asked if a situation such as this is addressed in this legislation. MS. OAKLEY responded that this is specifically addressed as to the number of units managed, but a person can certainly manage their own property. As for relatives in the exceptions under Section .900, it does spell out that anyone managing a total of four units or less are not required to have a license. The task force was aware that an arbitrary limit was needed in order to enforce consistently. CHAIRMAN ROKEBERG suggested that Representative Cowdery research this issue and propose a possible amendment concerning the same. Number 793 REPRESENTATIVE RYAN asked about the procedure for fining an individual that is out of compliance with advertizing. If the board finds someone in violation and they levy a fine, is that person is required to come before the board for a hearing? MS. OAKLEY responded that if the individual does not think they are guilty and shouldn't have to pay the fine, then they would have an administrative hearing as opposed to going to court. A hearing officer from the Department of Commerce would make a recommendation to the board. REPRESENTATIVE RYAN said he was not comfortable with this hearing officer concept. Number 909 KEN TRUITT, Assistant Attorney General, Commercial Section, Department of Law, came forward to testify on HB 33. He was assigned to review and track this legislation. He referred to Section 13 of the bill, page 9, lines 5 through 9 regarding the civil fine provision. As the language currently exists, he interprets this to mean that this would go through the Administrative Procedures Act which would be before a hearing officer. The commission is given the authority to hear issues before it; it delegates this authority to a hearing officer for expediency sake. The hearing officer takes evidence, makes findings of fact, conclusions of law and renders a proposed decision. CHAIRMAN ROKEBERG asked if Mr. Truitt thought it troublesome that the Department of Commerce would do this rather than the Department of Law. Number 1025 MR. TRUITT responded that they were referring to constitutional provisions for the rights of due process. He noted that they've been working with this specific Administrative Procedures Act for a number of years which is based on the California Act initiated in 1945. Alaska's Administrative Procedures Act affords more protections for due process than the constitution requires. REPRESENTATIVE RYAN noted as an example that most Administrative Law Judges for the Federal Aviation Association (FAA) were formally prosecutors. He found it very difficult to believe that these people were being objective. He felt as though someone in these situations is seen as guilty before they're charged and they have to spend a lot of time and expense. Number 1138 CHAIRMAN ROKEBERG noted that the request for the Department of Commerce to hear these cases rather than the Department of Law was due to timeliness. The main purpose of this legislation is to shift the portion of responsibility to the Department of Commerce. MR. TRUITT responded that this was not really a question of law. He stated that he was not necessarily allowed to make comments regarding policy. The Department of Law handles all the Administrative Procedures Act cases for the Department of Commerce as it stands now. Number 1226 CATHERINE REARDON, Director, Department of Commerce and Economic Development, Division of Occupational Licensing came forward to testify on HB 33. She said that there seemed to be some confusion. The Department of Law serves in the role of prosecutorial assistants. It's not because they don't have time to be judges, this is not a role that the Department of Law has ever served. The hearing officers are employed by the Department of Commerce. The Division of Occupational Licensing provides the funding, but the Department hires and supervises the hearing officers. MS. OAKLEY stated that it was their intent, but the thought was that "there are a number of things that are violations of the statute but they're not the kind of violations that are robbing people of their life savings, yet they are still violations." These usually aren't important enough to warrant taking Attorney General time that is available to go ahead and prosecute. She suggested that maybe they should allow levying a fine with a cap for lesser offenses. The language suggested and recommended by the task force is already in the statute. This might be looked at. Number 1412 REPRESENTATIVE RYAN suggested that they allow an individual to take a case against them directly to court rather than require a hearing before an officer. Number 1538 MS. OAKLEY continued that the she would briefly review particular sections to this legislation. Section .081 simply makes more specific the scope of the commission's authority to adopt regulations. Section .091 would expand the areas where the education appropriation from the surety fund could be used for. It's presently very broad and general. This would also authorize the commission to deposit any monies that might be collected at a course that was offered to be deposited back into the surety fund. She noted an AG opinion that says money can be taken out of the surety fund to pay for these courses, but if any monies are collected or publication products are sold, this money has to be deposited back into the general fund. MS. OAKLEY continued that Section .161 outlines those things that would require a license and it's broken out from the existing statute to make it specific for each of the three specialized endorsement areas. Section .171 lists what the minimum qualifications are to get a license in each of these endorsement areas. Also, currently the language says that a person has to have 24 consecutive months, but it doesn't say when and the commission had a regulation that was "shot down" which attempted to make this more definitive. Now they are asking that in this statute this be defined and tightened up to 24 consecutive months within the last 36. Number 1721 MS. OAKLEY stated that Section .173 would provide for mandatory Errors and Ommissions (E&O) insurance if it could be made available at a reasonable premium. The rational behind this is that the surety fund is a protection for consumers to be reimbursed for losses. The E&O insurance is a means for licensees to give themselves some guarantee of being able to pay what might be held against them. This would be contingent strictly on whether a policy could be made available at a premium that would not exceed $200 a year which could be billable along with the license figures. MS. OAKLEY continued that Sections .181 through .201 deal with the examination process and being able to contract with a testing service. Section .221 is the authorization to the Department of Commerce to set fees which is no different than what is done right now except they would be setting them for the individual endorsements. These fees have not been determined at this point. Number 1868 REPRESENTATIVE RYAN asked that if someone has to take a course and pass a test, he asked to what purpose did the Department of Commerce put an endorsement on a license and charge a fee. MS. OAKLEY stated that this person would be getting a license just like Representative Ryan received his license for real estate, except under new circumstances this license would be for a particular endorsement. There would undoubtedly be some graduated fees if a person had more than one endorsement. Number 1950 CHAIRMAN ROKEBERG asked if they intended to set these fees by regulation. MS. OAKLEY responded yes. Number 2006 MS. OAKLEY noted that the section regarding inactive licenses was housekeeping language to make it clear. A person can have a license in a "holding pattern" for up to two years. Section .262 is an enabling section for reciprocity. There are a number of states that have reciprocal agreements with other states that allow for license holders of one state to practice in the other. The key phrase in this section is that a negotiated agreement between the two states is involved. Alaska does not have any reciprocal agreements at this time. Section .263 allows for an endorsement which provides for recognizing that someone has a license in another state with whom they have no reciprocal agreement, but the state recognizes that they have qualified for a license in another state. By providing proof of this license and passing the Alaska law portion of the exam, they can get an Alaska license. MS. OAKLEY continued that Section .281 outlines that any outstanding obligations of a licensee to the surety fund must be cleared before a license can be reinstated. Sections .291 through .321 deal with the location and registration of branch offices and the timing of registration or notice of changes. Section .331 spells out that any transaction must be through the employing broker. This will have some ramifications with going to the endorsement system because the broker needs to have these same endorsements as the licensee in his office and if they're working outside of a particular endorsement some clarifying needs to be done. A broker is the one who is responsible for making sure their licensees "tow the mark" and therefore the transactions have to be run through the brokers office. This is not a change of what's in place presently. Number 2266 CHAIRMAN ROKEBERG noted that this is the section where he parts company from the commission's recommendations. MS. OAKLEY noted that in Section .341 "the personal services contract that terminology has been used in another context recently and I may give some, some rise to concern, the Task Force thinking on this particular instance, the section was formally headed, 'listings.' The listing is the typical personal service contract in a sales transaction. In using, substituting the label 'personal service contract' was simply to broaden the scope so that it would cover the contracts for Property Management and for Community Association Management as well. Listings would not be ruled out, but they would be one of three different kinds of contracts that might be under the general heading of a personal services contract." MS. OAKLEY continued that Section .351 delineates the types of records that need to be maintained. Section .361 addresses when a commission or other fee is earned and it's contingent on this, there needs to be a written contract in order for commissions to be collected if it's challenged. Section .381 has to do with signs and their standardized measurements in order to regulate. TAPE 97-22, SIDE A Number 000 MS. OAKLEY generally commented on audits of the agency. A recommendation was made that the commission should define what constitutes a conflict of interest. This is the reason for the thorough definition that's incorporated into Section .391. Section .394 is a new section that ties in with the agency disclosure. "One of the things that the industry has asked for and that the commission has attempted and not been able to achieve is to have a standardized form for the initial disclosure of agency, of who a person is working for and this one would simply make that a requirement. It would be, the form itself would be a regulation as the property disclosure form is a regulation of AS 34.70 that is not part of the real estate commission, but part of the property law section. But, that's what is being, would be accomplished by enactment of Section .394." MS. OAKLEY noted that Section .396 is essentially the same as it now is with the housekeeping of the terminology to match the endorsements. In subsection (c) the word "joint" agency was used originally and this has caused a lot of confusion about what is actually used interchangeably with "dual" agency. The phrase "dual" is used in this section to avoid this confusion. Section .401 expands and clarifies the types of behavior that are not condoned and also reiterates that compensation for licensed activity must be paid by the broker to the appropriate licensee and on the part of the licensee can be accepted only from the broker. Number 211 MS. OAKLEY continued that Section .450 deals with the surety fund and adds language that corresponds to the language in Section .091 regarding fees received from educational offerings. Section .460 includes a filing deadline for a surety claim which is something that was done at one time with regulations. This was overturned by a Supreme Court decision and this would put it into statute that if a claim was going to be filed it had to be done so in two years after the infraction occurred. MS. OAKLEY added that Section .472 outlines a change that would allow the costs of surety fund hearings to be charged to the fund as they occur. Now when a claim is awarded the costs can be charged to the fund. But as indicated, very rarely are the checks from the surety fund cut in the same fiscal year as the claim is filed. A lot of the hearing activity is not necessarily in the same year that the check is cut and yet the appropriation and the money funding source is on a fiscal year basis. It is not realistic to try to calculate what the hearing costs are when it's finally determined whether a claim is going to be awarded and have it be paid based on the activity in the fiscal year when the check is cut because it doesn't track with the amount of time and expense incurred. Number 391 MS. OAKLEY added that Sections .474 through .495 were editorial changes. Number 395 REPRESENTATIVE RYAN noted that the last class he took dealt with the dissatisfaction of the people in the real estate industry and the uses that the surety fund was set up for. They felt as though they were being taxed over and above the purposes for which the fund was set. His understanding was that the fund was set up to pay claims. CHAIRMAN ROKEBERG stated that Representative Ryan's concerns were noted. Number 511 MS. OAKLEY responded that as for the surety fee escalating there is a cap in the statute and there is no proposal to change this. MS. REARDON noted that in regards to conducting hearings and the associated costs to determine whether someone wins or loses their claim are very legitimate things to be paid out of the surety fund. Without the hearings the whole surety fund structure cannot operate. Number 639 MS. OAKLEY continued regarding the transitional sections and the effective date of the bill. In this committee substitute the effective date is different than what it was in the original House bill. If this statute were put in place, the regulation project to set the educational curriculum, this would mean revamping the exam. The effective date would be January 1, 1999. Anyone currently licensed would renew in January 1998, and anyone new coming into the business after January 1, 1999, would have to meet the new initial criteria. The first time that the currently licensed people would have to meet the new education criteria would be for the renewal in January 2000. This gives a long lead time to get ready for this bill. Number 808 KRISTAN TANNER, Real Estate Practitioner, testified via teleconference from Wasilla on HB 33. She stated that real estate practitioners pay two fees when they renew their licenses. They pay one to the surety fund and one to renew their licenses. Whether or not the money is paid out of the surety fund for the hearings or out of their budget the net result is the same. If these costs are paid out of the budget this means that the cost for renewing licenses will go up. This has to come from one of these two places and regardless of which it comes from the organization will have to pay the cost. MS. TANNER continued that under the exceptions in the legislation, when the task force compiled their recommendations, they noted that there were many things over a period of years which were exceptions and are currently in violation of the law. She gave an example that took place during the downturn of the real estate industry in the late 80's. They found that many people were in the process of trying to keep their homes by renting after they moved out of state. Unfortunately, they could not afford a property manager. With the law that is in place today, this is a violation of the law. One of the exceptions in this new proposed plan is for an exception of a total of four units. Generally anything over a four plex is considered commercial property. Number 968 MS. TANNER generally listed the other exceptions such as bookkeeper performing bookkeeping functions, tradesman or vendors performing maintenance, etc. They wanted to make sure these exceptions were in this legislation so there wasn't any misunderstanding of who needed a license or who didn't. In response to a question raised by Chairman Rokeberg regarding management of larger real estate units and people looking for exceptions so that family members or friends could manage them, Ms. Tanner responded that for the protection of the public a property of this size, for example, a building with ten units needs to be managed by a licensed practitioner who has the education and the understanding of the laws in order to apply them when needed. REPRESENTATIVE RYAN asked about the surety fund and stated that this bill was a major expansion of power for the commission. He wasn't sure that if they took a vote of the licensed practitioners that they would find this legislation to be very popular. He had some concerns that with the more authority they take on and exercise, the higher the cost might be. Number 1138 MS. TANNER stated that the majority of the information that is in this work draft came out of "and let me just say that the two and a half years that I was on the commission we saw a number of different violations by practitioners which clearly harmed the public and, yes, the surety fund did pay for that, but what we try to do is look at what were the causes. Forget that the money is being paid, but let's look at what are the really the root causes of these claims that are being filed." They set out to develop some different education and endorsements so that clearly the people operating in Property Management, Community Association Management or in Sales get the education that they need for each of these. She stated that she as a general nature did not support more regulation or to expand the statute, but unfortunately she has seen a lot of abuses. REPRESENTATIVE RYAN stated that this was reasonable and understood her concern. Number 1326 CHAIRMAN ROKEBERG pointed out that this bill did not expand the scope of the real estate licensure except as to Community Associations, it merely defines what previously was under the statute regarding property management in such a way that clarifies this responsibility to the public. MS. OAKLEY also noted that this legislation does allow for current license holders to be grandfathered in. Number 1398 TERRY MCGILLIVARY, Staff Member, Real Estate Commission, testified via teleconference from Anchorage on HB 33. She stated that she worked directly with the task force. She was asked to discuss the anticipated transition process from the current system to a system of specialty endorsements. Under the current law real estate licensees are permitted to practice real estate sales, property management or both. Therefore, the task force came up with a transitional plan under where existing licensees during the first year after the proposed effective date of this measure would either have an endorsement for sales or property management or both simply by applying for it. Community Association Managers on the other hand are not currently licensed or regulated by the state. The transitional measure for existing Community Association Managers would permit them to obtain a real estate license with an endorsement for Community Association Management by providing evidence that they are currently practicing as Community Association Managers. MS. MCGILLIVARY stated that those endorsed during the transitional period would be required to accomplish the continuing education for each specialty endorsement they hold before the first license renewal after the effective date. If the required education was not accomplished, no licensee would be eligible to renew. The proposed transitional schedule would require that new licensees requesting licensure after January 1, 1999, would be required to take pre-licensing courses for each endorsement and pass the examination weighted for each endorsement requested. New licenses would be issued only with endorsements beginning January 1, 1999. Any licensee re-activating an inactive license or re-instating an existing license after January 31, 1999, would do so under the transitional provisions just described who apply for endorsements according to those requirements. MS. MCGILLIVARY continued that all licensees renewing at the bi- annual renewal deadline date of January 31, 2000, would renew only on completing required continuing education hours for each endorsement. She reiterated that the purpose of this legislation is to protect Alaska consumers by ensuring the competency of the real estate professionals. This legislation is the product of cooperation of consumer representatives and industry representatives who participated extensively in the drafting of this legislation. This legislation is supported by the Alaska Association of Realtors, the Alaska Chapter of the Institute of Real Estate Management and the Alaska Chapter of the Community Associations Institute. Number 1559 CHAIRMAN ROKEBERG asked if Ms. McGillivary's salary was paid out of the surety fund. MS. MCGILLIVARY stated that, yes, it was and she stated that she worked mainly in real estate education. She publishes the Alaska Real Estate News which is a newsletter published six times a year. It keeps licensees up to date on legal information and keeps consumers from inadvertently becoming victimized. This newsletter is the only direct communication between the department and the industry. She also works on the landlord/tenant brochure distributed statewide, as well as, a broker manual to help people set up their real estate businesses. Number 1719 CHAIRMAN ROKEBERG asked Ms. Tanner to respond to what the nature of the task force's conclusions were about allowing for an additional endorsement for commercial real estate practices. MS. TANNER noted that they did have this discussion and they concluded that, whether it be residential sales or commercial sales, the point of contention in the industry over licensing education to renew wasn't a dispute over sales, but there was a big dispute with the property management licensees who did not feel that the education provided was helpful to them in their business. Rather than make a fourth category, it seemed from all the testimony given, that the sales category was an umbrella for both residential and commercial brokers. Number 1719 CHAIRMAN ROKEBERG noted that under the new endorsement regime for property management, these individuals are exclusively allowed to conduct the renting and leasing of space so to be a commercial lease agent someone would have to have a property management endorsement. MS. TANNER responded that this would be correct. MS. MCGILLIVARY concurred and added that the commission has also discussed this matter. Although this was not addressed by the task force specifically, it does seem to be the opinion of many, that this would be very logical for someone in this situation have a commercial endorsement. Number 1935 CHRIS STEPHENS, Commercial Real Estate Broker; President, Bond, Stephens and Johnson testified via teleconference from Anchorage on HB 33. He noted that he would testify more extensively at a later time, but did comment on the issue of commercial endorsements. He felt as though commercial real estate practice is distinctly different from residential. He shared his experience of selling his home through a broker, even though he is a commercial agent himself. In commercial transactions agents deal in business transactions in leasing and acquiring commercial real estate. These skills are totally different. He also noted that many times the continuing education he is required to take has nothing to do with commercial real estate transactions as well. MR. STEPHENS mentioned the issue of establishing agency disclosure provided to a client which has been controversial. He felt they needed to be careful. How this is done between commercial and residential is greatly different. He said he was not sure about the ramification of this. Number 1975 CHAIRMAN ROKEBERG said he also shared this concern and noted that they would take a look at this issue carefully. MS. OAKLEY pointed out that approving courses for continuing education over the years all of the various national organizations providing education have consistently had courses approved which are ones that commercial brokers thrive on. She noted that these types of courses are offered, but not necessarily allocated to schedules that are always convenient for everyone. Number 2038 CHAIRMAN ROKEBERG stated that the committee has taken it upon themselves to inject a provision for the National Association of Realtors approved courses leading to designations and making them acceptable for elective hours in the statute. He also mentioned some technical amendments to the bill which will be addressed at a later time. House Bill 33 was held over for further discussion.