LAW-49-15-00011-P Disclosure Requirements for Condominium Offerors Renting, Rather Than Selling, Unsold Condominium Units

12/9/15 N.Y. St. Reg. LAW-49-15-00011-P

NEW YORK STATE REGISTER

VOLUME XXXVII, ISSUE 49

December 09, 2015

RULE MAKING ACTIVITIES

DEPARTMENT OF LAW

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. LAW-49-15-00011-P

Disclosure Requirements for Condominium Offerors Renting, Rather Than Selling, Unsold Condominium Units

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Addition of section 20.1(c)(8); and amendment of section 20.3(c)(1), (d)(4), (n)(1) and (t)(1) of Title 13 NYCRR.

Statutory authority:

General Business Law, section 352-e(6)

Subject:

Disclosure requirements for condominium offerors renting, rather than selling, unsold condominium units.

Purpose:

To clarify a condominium offeror's disclosure obligations in a newly-constructed, vacant, or non-residential condominium.

Text of proposed rule:

A new section 20.1(c)(8) is added to title 13 to read as follows:

(8) Interim lessee means a purchaser under the plan who takes occupancy to his or her contracted-for unit prior to closing title. The rights and obligations of the interim lessee must be set forth in a writing executed by both sponsor and purchaser.

Section 20.3(c)(1) of title 13 is amended to read as follows:

(1) Disclose whether sponsor is reserving the right to rent rather than sell units after the plan has been consummated and whether sponsor is limiting its right to rent rather than sell after the plan has been consummated based on objective articulable criteria, such as a significant decline in market prices of a specific percentage and the conditions upon which the sponsor would resume sales. If sponsor has obtained construction financing, disclose the terms of the construction loan as they apply to the sponsor's obligation to market the units for sale, including any minimum number or percentage of units which must be under contract before the plan can be declared effective, the existence of either a minimum release price set by the lender or a required minimum payment per sale which must be made to the lender in order for the lender to release its lien from the unit being sold, and limits or requirements imposed by the lender for sponsor to rent rather than sell under specified market conditions. If sponsor is reserving an unconditional right to rent rather than sell, the cover of the plan must state in bold print:

BECAUSE SPONSOR IS RETAINING THE UNCONDITIONAL RIGHT TO RENT RATHER THAN SELL UNITS AFTER THE PLAN HAS BEEN CONSUMMATED, THIS PLAN MAY NOT RESULT IN THE CREATION OF A CONDOMINIUM IN WHICH A MAJORITY OF THE UNITS ARE OWNED BY OWNER-OCCUPANTS OR INVESTORS UNRELATED TO THE SPONSOR. (SEE SPECIAL RISKS SECTION OF THE PLAN.)

Further disclose, in the Special Risks section, that because sponsor is not limiting the conditions under which it will rent rather than sell units after the plan has been consummated, there is no commitment to sell more units than the 15 percent necessary to declare the plan effective and owner-occupants may never gain effective control and management of the condominium.

Section 20.3(d)(4) of title 13 is amended to read as follows:

(4) Disclose sponsor's intent with regard to the sale of units offered for sale in the plan. Disclose whether sponsor represents that it will endeavor in good faith to sell units rather than rent after the plan has been consummated. If sponsor makes a bulk sale of all or some of its unsold units, the transferee successor sponsor is bound by sponsor's representations regarding its commitment to sell units. If sponsor has obtained construction financing, disclose the terms of the construction loan as they apply to the sponsor's obligation to market the units for sale, including any minimum number or percentage of units which must be under contract before the plan can be declared effective, the existence of either a minimum release price set by the lender or a required minimum payment per sale which must be made to the lender in order for the lender to release its lien from the unit being sold, and limits or requirements imposed by the lender for sponsor to rent rather than sell under specified market conditions. If sponsor has not obtained construction financing or if the construction loan agreement does not include provisions on the terms set forth in the previous sentence, disclose any conditions under which sponsor reserves the right to rent rather than sell after the plan has been consummated based on objective articulable criteria, such as a significant decline in market prices of a specific percentage and the conditions under which sponsor would resume sales. If sponsor retains unconditional discretion to rent rather than sell units after the plan has been consummated, include on the cover of the plan the warning set forth in section 20.3(c)(1) above and discuss as a special risk.

Section 20.3(n)(1) of title 13 is amended to read as follows:

(1) State whether the owner of the building may rent any unit [that is vacant before the closing] to a purchaser under the plan as an interim lessee, including prior to consummation of the plan.

Section 20.3(t)(1) of title 13 is amended to read as follows:

(1) Disclose sponsor's intent with regard to the sale of the units offered in Schedule A, including whether sponsor will endeavor in good faith to sell all of the units in a reasonably timely manner. Disclose any conditions under which sponsor retains the right to rent rather than sell after the plan has been consummated based on objective, articulable criteria, such as a significant decline in market prices of a specific percentage and the conditions under which sponsor would resume sales. Disclose any obligations imposed on sponsor by the construction lender with regard to selling and/or renting units. If sponsor retains unconditional discretion to rent rather than sell units after the plan has been consummated, include on the cover of the plan the warning set forth in paragraph (c)(1) of this section and discuss as a special risk.

Text of proposed rule and any required statements and analyses may be obtained from:

Jacqueline Dischell, Department of Law, 120 Broadway, 23rd Floor, New York, NY 10271, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority. New York General Business Law (“G.B.L.”) Article 23-A regulates the advertisement, sale, purchase, and investment advice given to securities and other investment vehicles, including real estate syndication offerings such as condominiums. See N.Y.S. C.L.S. G.B.L. §§ 352(1) and 352-e. G.B.L. Section 352-e(2-b) authorizes the Department of Law to “adopt, promulgate, amend and rescind suitable rules and regulations” to carry out the legislative mandates of G.B.L. Section 352-e. See also N.Y.S. C.L.S. G.B.L. § 352-e(6).

2. Legislative Objectives. G.B.L. Section 352-e(1) mandates that before any person may engage in a public offering of cooperative interests in realty, including condominiums, he or she must file with the Department of Law an offering plan that contains “the detailed terms of the transaction” and “such additional information…as will afford potential investors, purchasers and participants and adequate basis upon which to found their judgment.” Pursuant to this authority, the Department of Law’s governing regulations, Part 20 of Title 13 of the New York Compilation of Codes, Rules & Regulations (“N.Y.C.R.R.”), mandate that offerors of newly-constructed, vacant, or non-residential condominiums disclose in their offering plans if they are reserving a right to rent, rather than sell, units in a condominium, and certain risks to purchasers associated therewith. Because these risks can be substantial, the regulations specify both the form and content of these disclosures. See 13 N.Y.C.R.R. §§ 20.3(c)(1); 20.3(d)(4); 20.3(n)(1); and 20.3(t)(1). In recent years, however, the purpose and wording of these disclosures have been misinterpreted. The Department of Law therefore proposes to modify the mandatory disclosure language in 13 N.Y.C.R.R. Part 20 to clarify its content, enhance its adequacy, and dispel any confusion about its purpose.

3. Needs and Benefits. The operational and financial control of a condominium, as well as the ability of its unit owners to resell their units, can be imperiled if an offeror unilaterally elects to rent, rather than sell, most of its condominium units after its offering plan has been consummated. Accordingly, as mentioned above, the Department of Law’s existing 13 N.Y.C.R.R. Part 20 regulations mandate that offerors of newly-constructed, vacant, or non-residential condominiums disclose in their offering plans if they are reserving a right to rent, rather than sell, units in a condominium, and certain risks to purchasers associated therewith. See 13 N.Y.C.R.R. §§ 20.3(c)(1); 20.3(d)(4); 20.3(n)(1); and 20.3(t)(1).

However, as mentioned above, the purpose and wording of these mandatory disclosures have been misinterpreted in recent years. Specifically, counsel for some condominium offerors have advanced a novel interpretation of the language as it presently exists: that it grants the offeror permission to rent units in a newly-constructed or vacant building offer before the offering plan is consummated. Most troublingly, this interpretation recently has been proffered to create confusion about a building’s legal status when the condominium offeror has neither consummated nor abandoned its offering plan, but instead operates the building as a rental property while obtaining certain legal, financial, and tax benefits (including Real Property Tax Law Section 421-a benefits) intended only for consummated condominiums. The Department of Law became particularly aware of this problem during its investigation into compliance with the rent-stabilization provisions of Real Property Tax Law Section 421-a.

Such a reading of these requirements is in conflict with G.B.L. Section 352-e and 13 N.Y.C.R.R. Part 20, both of which require additional disclosures and protections for tenants of an occupied residential rental building. See G.B.L. §§ 352-eeee(2); 352-eee(2); and 352-e(2-a)(b). In addition, both G.B.L. Section 352-e and 13 N.Y.C.R.R. Part 20 contemplate that a condominium offeror shall either consummate its public offering, or, in certain circumstances, withdraw or abandon its offering plan. See 13 N.Y.C.R.R. §§ 20.1(l)(2) and 20.5(g).

The Department of Law therefore proposes to modify the mandatory disclosure language in its 13 N.Y.C.R.R. Part 20 regulations in order to: (i) clarify what risk a purchaser assumes when reading the mandatory disclosure language; (ii) advance the statutory objective of G.B.L. Section 352-e; (iii) reduce the potential for abuse stemming from a misinterpretation of the existing regulations’ purpose; (iv) clarify that only interim renting by a purchaser in contract is permitted in a newly-constructed or vacant building offer before the offering plan is consummated, unless the offering plan is abandoned; and (v) give greater effect to those other provisions in 13 N.Y.C.R.R. Part 20 which contemplate the eventual consummation, withdrawal, or abandonment of an offering plan.

4. Costs.

(a) Costs to regulated parties. Under the proposed regulatory revisions, certain condominium offerors that may have misinterpreted the existing regulations to permit renting of residential units by non-interim lessees prior to the time an offering plan is consummated would be required to file an amendment either: (i) amending and restating their offering plan to include the legally required disclosures and protections for tenants of an occupied residential rental building, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. Such condominium offerors would incur one-time costs associated with such a filing, including a $225.00 amendment filing fee as prescribed by G.B.L. Section 352-e(7) and the legal fees associated with preparing the amendment.

The proposed regulatory revisions do not prevent a condominium offeror who has not rented any residential units prior to consummation of the offering plan (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement) from consummating the offering plan. Such offerors would not incur any additional costs as a result of the proposed regulatory revisions.

(b) Costs to the agency, the state and local governments. The Department of Law believes that it may incur nominal administrative costs related to processing amendments withdrawing or abandoning offering plans. The Department of Law foresees no costs to any other state or local governments.

(c) Information and methodology upon which the estimate is based. The estimated costs to regulated parties, the agency, and state and local governments is based on the assessment of the Attorney General, in reliance upon data and information maintained by the Department of Law’s Real Estate Finance Bureau.

5. Local government mandates. The proposed regulatory revisions do not impose any programs, services, duties, or responsibilities on any county, city, town, village, school district, fire district, or other special district.

6. Paperwork. Besides the aforementioned paperwork associated with filing an amendment to withdraw or abandon an offering plan, the proposed regulatory revisions require no additional reporting or paperwork requirements.

7. Duplication. The proposed regulatory revisions will not duplicate any existing state or federal rule.

8. Alternatives. The Department of Law has considered various alternatives to its proposed regulatory revisions. In particular, the Department of Law issued a guidance document on this topic, as defined by the State Administrative Procedures Act Section 102(14), on March 4, 2014 (and amended on July 10, 2015). Nevertheless, the Department of Law has concluded that the proposed revisions are necessary because they are the most effective means of simultaneously supplying more meaningful disclosure to condominium purchasers, achieving the statutory objective of G.B.L. Section 352-e, and reducing the unintended consequences that stem from a misinterpretation of the existing regulations.

9. Federal Standards. The proposed regulatory revisions do not exceed any minimum standards of the federal government for the same or similar subject.

10. Compliance Schedule. The proposed regulatory revisions will go into effect upon their filing with the Secretary of State and the publication of a Notice of Adoption in the New York State Register. Once adopted, the revised regulations will apply to any and all offering plans submitted to the Department of Law pursuant to 13 N.Y.C.R.R. Part 20. No additional time is required to enable regulated parties to achieve compliance with the proposed regulatory revisions.

Regulatory Flexibility Analysis

1. Effect of rule. The proposed regulatory revisions will clarify the existing disclosure obligations of certain condominium offerors, supply prospective purchasers with more adequate risk disclosure, reduce regulatory misinterpretation and certain unintended consequences stemming therefrom, and clarify when interim renting is permitted. The proposed regulatory revisions may affect certain small businesses: specifically, condominium offerors that may have misinterpreted the existing regulations as permitting renting prior to the time an offering plan is consummated. However, the majority of offering plans submitted to the Department of Law are sponsored by single-purpose limited liability companies that are directly affiliated with larger entities. The State Administrative Procedure Act (“S.A.P.A.”) Section 102(8) defines a defines a small business as, “[a]ny business which is resident in this state, independently owned and operated and that employs 100 or less people.” Accordingly, the Department of Law believes that very few small businesses, as defined by S.A.P.A. Section 102(8), will be affected by the proposed regulatory revisions.

Under the proposed regulatory revisions, the aforementioned condominium offerors would be required to file an amendment either: (i) amending and restating their offering plan, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. The proposed regulatory revisions do not prevent a condominium offeror who has not rented any residential units prior to consummation of the offering plan (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement) from consummating the offering plan. The proposed regulatory revisions will have no adverse effect on any local or state government, and require no action on their part.

2. Compliance requirements. The proposed regulatory revisions do not require local governments to undertake any new reporting or record keeping procedures.

As mentioned above, certain condominium offerors that may have misinterpreted the existing regulations as permitting renting prior to the time an offering plan is consummated would be required to file an amendment either: (i) amending and restating their offering plan, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. Such condominium offerors would incur one-time costs associated with such a filing, including a $225.00 amendment filing fee as prescribed by New York General Business Law (“G.B.L.”) Section 352-e(7) and the legal fees associated with preparing the amendment.

The proposed regulatory revisions do not impose any additional compliance requirements on condominium offerors who have not rented any residential units prior to consummation of the offering plan (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement). Nothing in the proposed regulatory revisions prevents such offerors from consummating their offering plan.

3. Professional services. Local governments will not need to employ any professional services to comply with the proposed regulatory revisions. The proposed regulatory revisions will require certain condominium offerors to incur the professional costs associated with the preparation of an amendment to the offering plan, such as the aforementioned legal fees.

4. Compliance costs. The Department of Law foresees no initial capital costs nor any additional annual costs to local governments as a result of compliance with the proposed regulatory revisions. The Department of Law also foresees no annual cost to regulated businesses as a result of continuing compliance with the proposed regulatory revisions.

In terms of initial capital costs to regulated businesses, the proposed regulatory revisions would require certain condominium offerors that may have misinterpreted the existing regulations as permitting renting prior to the time an offering plan is consummated to file an amendment either: (i) amending and restating their offering plan, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. Such condominium offerors would incur one-time costs associated with such a filing, including a $225.00 amendment filing fee as prescribed by G.B.L. Section 352-e(7) and the legal fees associated with preparing the amendment. These costs will not vary depending on the type and/or size of the regulated business. Condominium offerors who have not rented any residential units prior to consummation (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement) will not incur any additional costs as a result of the proposed regulatory revisions.

5. Economic and technological feasibility. Compliance with the proposed regulatory revisions is technologically feasible for small businesses and local governments, as the proposed regulatory revisions contain no technological requirements. Compliance is also economically feasible; the proposed regulatory revisions impose no demonstrable costs on local governments and impose minimal costs to certain small businesses (as detailed above).

6. Minimizing adverse impact. The proposed regulatory revisions do not affect local governments, and therefore have no adverse economic impact on them. The adverse economic impact on small businesses will be minimal: other than the aforementioned potential filing and legal fees, the proposed regulatory revisions will have no adverse economic impact on small businesses.

The Department of Law has considered various approaches fashioning the proposed regulatory revisions, including those set forth in S.A.P.A. Section 202-b(1). In particular, the Department of Law issued a guidance document on this topic, as defined by S.A.P.A. Section 102(14), on March 4, 2014 (and amended on July 10, 2015). Nevertheless, the Department of Law has concluded that the proposed regulatory revisions are the most effective means of simultaneously supplying more meaningful disclosure to condominium purchasers, achieving the statutory objective of G.B.L. Section 352-e, and reducing the unintended consequences that stem from a misinterpretation of the existing regulations.

7. Federal standards. The proposed regulatory revisions do not exceed any minimum standards of the federal government for the same or similar subject.

8. Small business and local government participation. To ensure that small businesses and local governments have an opportunity to participate in the rule making process as required by S.A.P.A. Section 202-b(6), a copy of the proposed regulatory revisions will be sent to members of the Bar who represent offerors and purchasers of condominiums. Copies of the proposed regulatory revisions regulations will also be posted on the Department of Law’s website.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas. The proposed regulatory revisions apply uniformly throughout the state, including all rural areas. Executive Law, Article 19-F Rural Affairs Act, Section 481(7) defines a rural area as a county with a population of less than 200,000. New York currently has 44 rural areas. However, the vast majority of the offering plans submitted to the Department of Law are for properties in New York City and its suburbs. Accordingly, the impact of the proposed regulatory revisions on both rural condominium offerors and rural condominium purchasers is likely to be very minimal.

2. Reporting, recordkeeping, and other compliance requirements. The proposed regulatory revisions do not require new obligations in terms of reporting or recordkeeping in rural areas.

Under the proposed regulatory revisions, certain condominium offerors operating in rural areas that may have misinterpreted the existing regulations to permit renting of residential units by non-interim lessees prior to the time an offering plan is consummated would be required to file an amendment either: (i) amending and restating their offering plan to include the legally required disclosures and protections for tenants of an occupied residential rental building, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. Such condominium offerors would incur one-time costs associated with such a filing, including a $225.00 amendment filing fee as prescribed by New York General Business Law (“G.B.L.”) Section 352-e(7) and the legal fees associated with preparing the amendment.

The proposed regulatory revisions do not prevent a condominium offeror who has not rented any residential units prior to consummation of the offering plan (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement) from consummating the offering plan. Therefore, such offerors are not subject to any additional reporting, record keeping, or other compliance requirements as a result of the proposed regulatory revisions.

3. Costs. The Department of Law foresees no initial capital costs nor any additional annual costs to rural public entities as a result of compliance with the proposed regulatory revisions. The Department of Law also foresees no annual cost to rural private entities as a result of continuing compliance with the proposed regulatory revisions.

In terms of initial capital costs to private entities operating in rural areas, certain condominium offerors operating in rural areas that may have misinterpreted the existing regulations to permit renting of residential units by non-interim lessees prior to the time an offering plan is consummated would be required to file an amendment either: (i) amending and restating their offering plan to include the legally required disclosures and protections for tenants of an occupied residential rental building, (ii) withdrawing their offering plan, or (iii) abandoning their offering plan. Such condominium offerors would incur one-time costs associated with such a filing, including a $225.00 amendment filing fee as prescribed by G.B.L. Section 352-e(7) and the legal fees associated with preparing the amendment. These costs will not vary depending on the type and/or size of the regulated business. Condominium offerors who have not rented any residential units prior to consummation (other than to a purchaser in contract pursuant to the terms of an interim lease or interim rental agreement) will not incur any additional costs as a result of the proposed regulatory revisions.

4. Minimizing adverse impact. The proposed regulatory revisions do not affect local governments in rural areas, and therefore will have no adverse economic impact on them. The adverse economic impact on small businesses will be minimal: other than the aforementioned potential filing and legal fees, the proposed regulatory revisions should have no adverse economic impact on the very few condominium offerors operating in rural areas.

The Department of Law has considered various approaches fashioning the proposed regulatory revisions, including those set forth in the State Administrative Procedure Act (“S.A.P.A”) Section 202-bb(2). In particular, the Department of Law issued a guidance document on this topic, as defined by S.A.P.A. Section 102(14), on March 4, 2014 (and amended on July 10, 2015). Nevertheless, the Department of Law has concluded that the proposed regulatory revisions are the most effective means of simultaneously supplying more meaningful disclosure to condominium purchasers, achieving the statutory objective of G.B.L. Section 352-e, and reducing the unintended consequences that stem from a misinterpretation of the existing regulations.

5. Rural area participation. To ensure that persons and entities in rural areas have an opportunity to participate in the rule making process as required in S.A.P.A. Section 202-bb(7), a copy of the proposed regulatory revisions will be sent to members of the Bar who represent offerors and purchasers of condominiums. Copies of the proposed regulatory revisions will also be posted on the Department of Law’s website.