Owners, brokers file suit challenging Kentucky's 'turf state' rules.

LOUISVILLE, KY: A group of commercial property owners, real estate brokers and a national real estate investment firm filed a federal lawsuit here challenging "protectionist regulations and practices" instituted by the Kentucky Real Estate Commission in connection with the acquisition and sale of commercial real estate.

The suit alleges that the Kentucky Commission, a regulatory body controlled by local Kentucky real estate brokers, has misused its regulatory authority to exclude national commercial brokerage firms from the Kentucky market for the purpose of protecting local broker commissions.

In a letter warning off national brokerage firms, the Commission's general counsel, Lee Harris, stated "Kentucky is a so-called 'turf state' and our licensure laws are much different and much stricter than many other states' laws." Under this self-proclaimed "turf state" policy, says Harris.

"All real estate brokerage activity in [Kentucky] must be handled by [a] Kentucky broker. It is not enough [for a national firm] to have a Kentucky broker on staff, that broker must handle all aspects of the buying, selling, leasing or management of properties located in Kentucky."

According to the lawsuit, however, such prohibitions restrain trade and violate the rights of Kentucky property owners and others under the Commerce Clause of the United States Constitution by limiting access to capital markets, preventing interstate trade and harming property values.

Saul Kuperwasser, vice president of WK Holdings points out that the capital market for commercial real estate investment is international. If Kentucky property owners are to obtain fair market value for their property, therefore, they must have the ability to market those properties to the greatest number of active and interested out-of-state buyers as possible. Under the policies adopted by the Kentucky Commission, however, property owners would be prevented from reaching many of these potential buyers.

The result, explains Kuperwasser, "is to deny Kentucky property owners effective access to the national capital market for commercial real estate investment and harm values."

"Impeding the flow of capital stifles investment in vitally needed rental housing," remarks Douglas Bibby, president of the National Multi Housing Council, an industry association representing apartment owners, managers, developers, lenders and service providers in the multi-housing segment.

According to Bernard J. Haddigan, a senior vice president and managing director of the national real estate investment firm Marcus & Millichap, "The lawsuit is about open markets and fairness, not just for Kentucky property owners, but for Kentucky taxpayers and those who purchase property in Kentucky, regardless of where they live."

Haddigan is careful to emphasize that the lawsuit does not challenge the state's interest in legitimate regulation. I "Marcus & Miilichap has a fully staffed and licensed office in Kentucky that complies with the letter and spirit of the law.

"We expect no less from Kentucky's regulators, even if they are competing brokers."