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Thursday, November 19, 2015

Subleasing Office Space

QUESTION
We are a lender with some concerns regarding our office sharing arrangements. One of our branches shares space with a realtor, another subleases from a certified public accountant, and still another subleases from a real estate appraiser. Each branch has an individual locked office with shared access to conference room and break areas. Are these arrangements permissible?

ANSWER
Provided the lender is paying the fair market value for the space pursuant to a written lease agreement, each of the scenarios is permissible. The appraiser and realtor landlord arrangement raises greater concern as both of them are also settlement service providers; but again, such arrangements are not prohibited as long as there are no payments for referrals and the rent charge is the actual fair market value for the spaces and services provided that a non-settlement service provider would pay.

Section 8 of RESPA prohibits the giving or accepting of a “thing of value” to another person for the referral of settlement business. RESPA defines “thing of value” to include “lease or rental payments based in whole or in part on the amount of business referred”. RESPA does permit payments for goods or for services actually performed. Thus, the question is whether the lender is leasing space at a higher than market rate in exchange for referral of business from the realtor or appraiser. 

The rental payment must reflect the general market value for the spaced leased. If you are leasing at a higher than market rent, there will be a presumption that the rental payments represent disguised referral fees. You cannot arbitrarily assign the fair market value: you need to make sure it is researched and well documented. In determining the fair market value of rental space, one must look at what a non-settlement service provider would pay for the same amount of space and services rendered in the same or a comparable building as opposed to what a settlement service provider would pay for the space and services.

The value of a referral cannot be considered in determining whether there is a reasonable relationship between the rental payments and the facilities and services provided. The value may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, and office equipment. If the rental payments exceed the fair market value of the space and services provided, the excess amount will be considered as payment for the referral of business in violation of Section 8.

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance 
Lenders Compliance Group