Enter an Affiliated Business Arrangement with Care

Barbara Jorgensen -- Expert Business Source, 2/1/2007 5:47:00 AM

Builders of all sizes can earn extra income by referring their customers to affiliated service providers such as mortgage companies, title insurance agencies or closing attorneys. But owners of smaller businesses should take extra to ensure that an affiliated business arrangement (AfBA) is worth their while.

AfBAs, which are joint ventures formed between a title agent and a lender, builder or real estate company, allow affiliated builders to generate revenue through the sale of settlement and other related services. For consumers, an AfBA provides the benefits of a one-stop shop for home and real estate purchases. For the participating partners, AfBAs provide opportunities for joint advertising and marketing and a certain level of control over the financial transactions conducted through the venture.

“The advantages of an AfBA are applicable whether you are a major housing developer or ‘ABC’ Building Co.,” says Phillip Schulman, Esq., a partner in the Washington, D.C., office of Kirkpatrick & Lockhart Nicholson Graham LLP.

Because the law requires an AfBA be run as a bona fide business, however, such partnerships should not be entered into lightly. Business owners, Schulman says, should run the numbers to make sure that the venture is set up to sustain itself while generating income for its investors.

First and foremost, builders should make sure the AfBA complies with Section 8 of the Real Estate Settlement Procedures Act (RESPA), which includes the following requirements:

• The builder, in writing, discloses the existence of the business arrangement and provides a written estimate ofan affiliate’s charges;

• The person being referred is not required to use any particular provider of settlement services;
• No payments, other than a return on ownership interest or payments otherwise permitted under Section 8 of the law, are received under the arrangement.

On top of these three requirements, the Department of Housing and Urban Development has established additional criteria for an affiliate venture, including the following:

• Capitalization. The AfBA must have sufficient capital to conduct the settlement service for which it was created.
• Employees. The joint venture must have its own employees who work exclusively for the new company.
• Management. The AfBA must manage its own affairs or, if one of its partners provides management services, pay the partner fair market value for those services.
• Office. The venture must have its own office space, separate from its partners.
• Substantial Services. The AfBA must provide essential functions and types of services generally performed by the kind of arrangement it is.
• Subcontracting. The company must provide all of the substantial services itself and not subcontract those services to AfBA partners or other providers.
• Marketing. The joint venture must actively compete in the marketplace for business and attempt to market its services to others besides its AfBA partners.

Before creating an AfBA, Schulman advises that smaller companies take a hard look at their resources and business objectives for starting such a venture. In particular, a builder should:

• Consider how much capital it can contribute to start an AfBA. Combined capital from all the partners should be enough to sustain the AfBA’s operations for 90 to 120 days without any income.
• Anticipate that the partnership will generate enough deals each month to support at least one full-time, well-trained AfBA employee.
• Find potential partners that are knowledgeable, well-resourced and responsible.
• Closely evaluate the AfBA’s target market. The AfBA should receive and process a substantial number of deals not only through the referrals of the builder and other AfBA partners; it also should receive business from other sources of referrals and general advertising leads.

Barbara Jorgensen is a freelance writer based in Mansfield, Mass.