A recent ruling on a broker “turf law” in Kentucky might spell trouble ahead for a handful of other states. For years, the Bluegrass state required that anyone wishing to practice real estate there had to get a Kentucky license, by extension preventing local brokers from splitting fees with unlicensed out-of-state colleagues. The law became particularly cumbersome in recent years because getting the license requires an FBI background check, and in the aftermath of Sept. 11, the FBI could not quickly process applications.
But this September, U.S. District Judge Charles R. Simpson ruled that preventing brokers from splitting fees was unconstitutional, citing a Commerce Clause that forbids states from acting like isolated economic units in their dealings with other states.
The ruling came after two real estate investment firms, Chicago-based River Oaks Management Co. and Atlanta-based 8177 Mall Road Investors, filed a lawsuit against the Kentucky Real Estate Commission, complaining that the law discriminated against out-of-state brokers and prevented them from using the same brokerage firm for all their transactions. Marcus & Millichap Real Estate Investments Services represents both plaintiffs.
But the impact of Kentucky's turf law was not limited to Marcus & Millichap. Countless commercial real estate brokers from other states ran into problems in Kentucky because they weren't even aware of the necessity for a local license, says Craig Collins, a broker in the retail/investment services group with Commercial Kentucky, a locally-based, independently-owned member of the Cushman & Wakefield Alliance. Those who did realize the need for a new license had to amass a certain number of credit hours in spite of having extensive brokerage experience, he adds.
If the Kentucky Real Estate Commission appeals Simpson's ruling, the case might eventually come before the Supreme Court, affecting other states around the country that still place heavy restrictions on license portability. These include Pennsylvania, New Jersey, Nebraska, Missouri and Utah, among others.
So far, the commission remains mum on whether an appeal is in the works. But in reality, the ruling might prove far less earth-shattering than what some believe, local sources say. Judge Simpson's ruling still upholds the necessity for out-of-state brokers to be licensed in Kentucky and it doesn't specify how much leeway the Kentucky Real Estate Commission should have in governing them.
Members of the legal community, however, think the ruling might have far-reaching implications. “This case is very, very important because it rises to the level of federal constitutional issues and, as I read the opinion, declares the law unconstitutional,” says James Hochman, a partner in the Lisle, Ill.-based law firm Coman & Anderson, P.C. and an expert on license portability laws.
Meanwhile, the Kentucky Association of Realtors issued an official statement, saying that it was pleased with the judge's decision. “We feel a favorable decision was reached for all parties involved,” said Carl Tackett, president of the Association. “The U.S. District Court in Louisville has handed down a ruling that will benefit property owners and will hopefully drive more business opportunities to the state.”
River Oaks Management did not return calls for comment, and Marcus & Millichap could not respond in time for the publication of this article.