Offering Plans & New Developments - PowerPoint Presentation

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Offering Plans & New Developments

Presented by Keith A. Schuman, Esq.Schuman & Associates1536 Third AvenueNew York, New York 10028212-490-0100Keith@schumanlawfirm.comwww.schumanlawfirm.comSlide2

The Offering Plan

The sale of an interest in real property is considered a securities offering, the same as the sale of publicly owned stock in a corporation. The Offering Plan, like a prospectus for a public company, is an important, and highly regulated disclosure documentCo-op and Condo Offering Plans are subject to an important consumer protection statute named the Martin Act (NY General Business Law subsection 352) which gives the Attorney General the authority to oversee the sale of interests in real estate The Martin Act mandates that an Offering Plan contain a complete description of the project. Contracts may not be signed until the offering plan has been reviewed and accepted for filing by the New York Attorney General’s officeNote: No private action is permitted under the Martin Act. If the AG does not pursue a claim, unit owners are limited to common law fraud and breach of contract claims Slide3

The Offering Plan

The “Red Herring” – a preliminary offering plan for conversions The Prospectus or Black Book No Action LetterCondop – A co-op with condo rules is not a condop. A true condop is a condominium building that has separate commercial and residential units, with the residential units controlled by a co-op corporationSlide4

Condo Basics

Acceptance for Filing – An Offering Plan is not “approved” or “disapproved”. The AG’s authority is limited to “accepting” the Plan for filing if it meets the full disclosure requirements of the Martin ActDeclaring the Plan Effective (15% of units must be under contract by tenants or persons intending to occupy unit as primary residence) before transfers can take place Slide5

The Offering Plan(continued)

Components of an Offering PlanThe Offering Plan is divided into two parts: Part I contains a general description of the building, the building’s finances, the sponsor’s rights and obligations, the purchase procedure and estimated fees and closing costs Part II contains certifications of the professionals who worked on the project and copies of material documentsSlide6

The Offering Plan

Parts I and II of the Plan are significant because they detail everything the sponsor guarantees, and should be consistent with the marketing materials and information the purchaser has been told by the sales office Slide7

The Offering PlanPart I

Special Risks Section – highlights the areas of concern for a purchaser, not necessarily “risks”, but matters that may impact the purchaserDescription of the Property and ImprovementsSchedule “A” – schedule of apartments including share or percentage of common elements allocated to the unit, number of bedrooms and bathrooms, purchase prices, projected maintenance or common charges, projected real estate taxes with and without tax abatements (condo), and square footage of unitsSchedule “B” – Projected Operating BudgetProcedure to PurchaseUnit Closing CostsRights and Obligations of SponsorComposition of the Condominium BoardSlide8

The Offering PlanPart I

Real Estate TaxesOpinions of CounselTax Opinion of Sponsor’s Tax CounselAttorney’s Opinion regarding allocation of common interests, which describes how the allocation of shares or common interest of each unit is based on the relative value of each unit, or its floor area compared to the other unitsReal Estate tax opinionIdentity of PartiesSponsor, Attorneys for Sponsor, Selling Agent, Managing AgentSlide9

The Offering PlanPart I

Proprietary Lease (co-op)By LawsHouse RulesAmendments to the Plan: Required for any material changes to the Plan including price increases or changes in # of units or changes to the floor plans or amenities Slide10

The Offering PlanPart II

Floor PlansForm of Unit Owner Power of AttorneyDeclaration of CondominiumBy LawsSponsor’s Engineer (conversion) or ArchitectForm of Storage License Slide11

Offering Plans for New

Construction Timing of Completion of ConstructionTypically, neither the Offering Plan nor the Contract will contain a representation of a completion date for the construction of the buildingEven after closings have commenced, the Sponsor is permitted to temporarily shut down building systems and install or retain scaffolding to complete the construction of the building A purchaser must close even if construction of the building is incomplete, including the lobbies, corridors, decoration, or amenities, with no abatement or credit against the purchase priceSlide12

Buying New Construction “as is” and Other Legal IssuesSlide13

New Condominium Construction is Sold in its “as is” Condition

The Sponsor is obligated to construct the building and the units in accordance with building codes and the plans and specifications contained in the Offering PlanThe Sponsor has the right to modify the plans and specifications including substituting materials, equipment, fixtures, and appliancesAll substitutions must be substantially similar or of better quality or design The Sponsor may not materially change the size or location of the units if it affects the percentage of the unit’s common interest or adversely affects the value of any unitSlide14

New Construction (continued)

What are a Purchaser’s rights regarding Appliances and Fixtures?The unit must contain the appliances and fixtures stated in the Offering Plan (or substitutions of equal or better quality)Appliances and fixtures must be delivered in working orderA unit must contain working fixtures and appliances to be deemed substantially completed Slide15

New Construction (continued)

What are a Purchaser’s rights if the Sponsor has not finished the Unit or the Unit is damaged? Unlike a resale transaction the Purchaser has no automatic right to adjourn the closing as long as the unit is substantially completedPurchaser must close with a punchlistSponsors rarely will agree to hold money in escrow Slide16

New Construction (continued)

Are new appliances covered by Warranties? At closing the Sponsor will assign to the Purchaser any warranties for appliances or fixtures within the unitThe Sponsor typically does not make any specific representations about the existence of appliance warranties after closingWarranties may begin to run on the date of purchase by the Sponsor and expire before closing or shortly thereafter. Some warranties do not begin until closing Slide17

New Construction (continued

)Is a Purchaser covered by any Warranties for the construction of the Building or the Unit? Sponsor will assign to the Condominium Board, any assignable warranties from contractors covering the roof, elevators, HVAC, and other building systemsWhat about defective construction or design defects? New York’s Housing Merchant Implied Warranty Law creates a warranty for new construction and covers materials, appliances, systems, and building components – but only for single family homes or units in buildings of five stories or lessNew Condominium Construction of 5 stories or more:The Sponsor’s sole obligation is to construct the property in accordance with all applicable building codes and the plans and specificationsThe Sponsor may not be liable unless there is a violation of Law, fraud, or misrepresentation in the Offering Plan Slide18

New Construction (continued)

The Sponsor is not responsible for (i) normal wear and tear or natural deterioration of materials, (ii) defects of an insubstantial nature including nail pops, slight separation between base molding and floors, deviations in the level or straightness of floors and ceilings, (iii) noise and vibrations from HVAC units including HVAC units on the roof, (iv) normal floor noises and creaking, and (v) variations in tone or color of natural stone surfaces Slide19

New Construction (continued)

Is the Sponsor required to establish a Reserve Fund for Repairs?By Law, the Sponsor of new construction is not required to establish up a Reserve Fund for repairsA Reserve Fund is required by Law for the conversion of an existing building (equal to minimum of 3% of sales price of all units)For existing Condominiums, their budget must contain a line item of 10% for the Reserve Fund to qualify for conforming (i.e.,fannie mae/freddie mac compliant) loansSlide20

New Construction (continued)

The Certificate of OccupancySponsor is obligated to obtain a temporary or permanent certificate prior to ClosingA Temporary Certificate of Occupancy typically expires 90 days after the date of issuance. The Sponsor is obligated to extend each Temporary CO prior to its expiration and obtain a Permanent Certificate of Occupancy covering the entire building A temporary CO may be extended for up to 2 years Sponsor may prohibit a unit owner from performing alterations until the building has obtained a permanent certificate of occupancyRestrictions on Re-SaleA Purchaser may be prohibited from listing their unit for resale for the earlier to occur one year from the date of closing or until all of the units in the building have been soldSlide21

Real Estate Taxes

Does the Offering Plan provide information to calculate future real estate tax increases? Offering Plans only show real estate taxes for the units with and without tax abatements. The city’s formula for calculating taxes makes it impossible to project future tax increasesReal Estate Taxes are calculated annually by a combination of the property’s Tax Rate, Market Value, Assessed Value, Tax Exemptions, and Tax AbatementsThe Tax Rate is determined annually by the Mayor and city counsel (currently 13.181% for class 2 properties, 18.5% for class 1 properties) Slide22

Real Estate Taxes

(continued)Market Value is based upon the income producing potential of the property, i.e., the taxing authority values co-ops and condos by comparing them to roughly equivalent rental buildingsThe Assessed Value is determined by multiplying the property’s Market Value by 45%Tax Exemptions lower the amount of tax owed by reducing the property’s Assessed ValueTax Abatements, such as the STAR Abatement, reduce taxes by the amount of the eligible credit Slide23

How did the 2013 Co-op/Condominium

Tax Abatement Law affect New Condominium Purchasers? Property owners who occupy a co-op or condominium unit as their primary residence are entitled to a real estate tax abatement between 17.5% and 28.1% depending on the property’s assessed value Property owners whose property is a second home, investment property, or who hold title as a limited liability company or other business entity are not entitled to the tax abatement Slide24

Additional Requirements to receive the

Co-op/Condo AbatementThe unit must have been purchased on or before January 5th to qualify for the abatement for the upcoming tax year.  If the unit was purchased after January 5th, the purchaser is not eligible for the abatement until the next tax yearCo-op or condo owners are not eligible for the abatement if they own more than three residential units in the building Purchasers of units in a Housing Development Fund Corporation (HDFC) building are not eligible for the abatementUnits held by sponsors, or their successors in interest are not eligibleUnits owned by a trust are eligible, but only if the unit is the primary residence of the beneficiary of the trust, trustee, or life estate holderSlide25

May a Sponsor Sell an Apartment for More than the Price Listed in the Offering Plan?

Before any price increase, the Offering Plan must be amended and accepted by the State Attorney GeneralThe Sponsor may sell an apartment for LESS than the price in the Offering Plan, offer concessions, and pay a portion of Purchaser’s closing costs (up to 6% of the Purchase Price if Purchaser is financing) Slide26

The Contract of SaleSlide27

What Terms in the Contract are Negotiable?

Adjournments Notice of Sponsor Adjournment Faxed signatures Assignment of the contract to an LLC and attorney’s fee for preparation of assignment Transfer TaxesSlide28

Why is there No Closing Date in a New Construction Contract?

Uncertainty of when the project will be finishedDelays in obtaining building permits and sign offsConstruction delays Delay in Offering Plan being declared effectiveSlide29

What has to Occur for the Sponsor to be able to Transfer Title to the Units?

The Offering Plan is declared effective Apartments substantially completed Permanent or Temporary C of O issued Condominium Declaration recorded Sponsor must send Purchaser a 30 day notice to closeSlide30

Can a Sponsor Send a 30 Day Notice to Close Before the Apartment Is Ready to Close?

The Sponsor has an unlimited adjournment rightProblem: 30 day notice can cause a problem with an interest rate lockSlide31

Does a Purchaser Have the Right to a

30 Day Adjournment of the Closing?There is no automatic 30 day right to adjournTime of the Essence clauses are standard Adjournment must be negotiated in the ContractSlide32

Does a Purchaser Have the Right to Cancel the Contract If the Closing Does Not Occur Within a Certain Period of Time?

Projected Operating Budget for the Condo’s first year of operation increases by 25% or more since the Purchaser signed the ContractNo closings have occurred within one year of the date of the Operating Budget Slide33

Financing New ConstructionSlide34

Are there any Unique Issues with Obtaining Financing to Purchase New Construction?

Purchasers are rarely given a financing contingencyMost Sponsors make no representation as to the availability of financingLenders typically have minimum pre-sale requirements as high as 70%A Purchaser must apply for a loan with an uncertain closing dateA Purchaser cannot lock-in an interest rateIf a Purchaser is given a mortgage contingency, it’s generally conditioned upon the Purchaser using the Sponsor’s preferred lenderSlide35

Financing New Construction(continued)

A typical financing contingency permits a Purchaser to cancel the contract if the Purchaser has not received a loan commitment letter for the requested loan amount within 30 – 45 days Any Lender, including a Preferred Lender, has the right to withdraw a loan commitment letter because of an adverse change in the Purchaser’s financial condition such as the loss of one’s job or loss of assetsA Lender may also withdraw a loan commitment because of conditions that relate to the building or unit such as a decrease in the unit’s appraised value or the failure of the project to meet the lender’s pre-sale requirement Slide36

Closing Costs for New ConstructionSlide37

What are Typical Closing Costs for a Condominium Purchase?

Cash Purchase: typically 4% - 5% of purchase price Title InsuranceFee Insurance ($4 per $1,000) Municipal SearchesRecording charges for the Deed, Unit Owners Power of AttorneyMansion Tax - 1% if sales price is $1,000,000 or more When the Purchaser pays transfer taxes, they are calculated based upon a “Bulked-up price” Mansion Tax may be triggered based upon the “Bulked-up price” ($982,000)Slide38

Closing Costs for Condominiums (continued)

New York State Real Property Transfer Tax0.4% of sales priceNew York City Real Property Transfer Tax1% if purchase price is $500,000 or less 1.425% if purchase price is greater than $500,000Commercial Transfer Tax Rate applies to the simultaneous purchase of two or more non-combined units

1.425% if $500,000 or less

2.625% if greater than $500,000 Slide39

Closing Costs for Condominiums (continued)

Sponsor’s Attorney Fees Share of Resident Manager’s Apartment Working Capital Fund Contribution Purchaser’s Attorney FeesSlide40

Closing Costs for Condominiums (continued)

Purchase with Financing: 5% - 7% of purchase price includes the following additional closing costs: Lender’s Mortgage Insurance ($1 per $1000 of loan amount)New York State Mortgage Recording Tax (1.925% of loan amount)Recording charges for the MortgageLender’s FeesApplication/Commitment/Origination feeFlood Certification feeTax service feeAppraisal feeLender’s attorney’s feeSlide41

Keith A. Schuman, Esq.

Schuman & Associates LLC

1536 Third Avenue

New York, NY 10028

Tel: 212.490.0100 x302

Email:

Keith@schumanlawfirm.com

Website:

www.schumanlawfirm.com

Keith A. Schuman is a graduate of University of Pennsylvania (B.A.,

summa cum laude

, 1978) and Cornell University Law School (J.D., 1983). Keith has extensive experience in transactional real estate law and represents developers, owners, operators, purchasers, and sellers of commercial and residential properties throughout the United States. He also represents landlords and tenants in commercial lease transactions, borrowers and lending institutions in commercial and residential financings, boards of cooperative buildings, and sponsors in the development of residential cooperatives and condominiums.

Schuman & Associates LLC was established in 1987 and is dedicated to achieving its client

’

s goals and objectives through experienced and caring legal counsel.

The firm takes pride in the depth of experience and talent of its attorneys and their ability to work together as a team, responding to the needs of their clients. The firm

’

s reputation has been built on providing thorough and personalized service, addressing in detail every aspect of each transaction.

Schuman & Associates welcomes inquiries from its clients and their agents any time they have questions concerning their transaction. Slide42

Keith A. Schuman, Esq.Schuman & Associates 1536 Third Avenue

New York, NY 10028Tel. 212 490 0100Keith@schumanlawfirm.comwww.schumanlawfirm.com