New York Attorney General Real Estate Enforcement updates

Last week, the Real Estate Finance Bureau of the New York Attorney General’s office (the “NYAG”) made an appearance at the New York State Bar Association’s Committee on Cooperatives and Condominiums. In addition to regular updates on offering plan statistics and regulatory matters, the Bureau’s enforcement section shared insights into some recent enforcement trends. These trends were not necessarily programs, initiatives, or priorities of the NYAG, nor were they an exhaustive list of all actions taken by REF over the past year, but merely illustrative examples of enforcement trends of particular interest to attorneys that represent developers, sponsors, and landlords in the real estate industry.

This bulletin provides an overview of these enforcement trends and a word of caution to developers, sponsors, landlords, and attorneys who represent these parties.

1. Filing of knowingly false documents with the Bureau: The NYAG made reference to parties that knowingly submit false filings to the Bureau, which is distinguishable from errors or omissions in offering plans. In such cases, the NYAG has stated that they will collect a penalty of at least $75,000.00 from any party that makes a knowing false statement to the Bureau.
2. Misuse of escrow funds and the improper release in violation of New York General Business Law §§ 352-e(2)(b) and (h): Although no specifics were given, the NYAG discussed the use of escrow funds to build projects, which is indicative of a sponsor engaging in a possible unregistered syndication and using “down payments” in a manner inconsistent with the requirements of the Martin Act.
3. Marketing, offering, and selling real estate securities prior to filing the requisite Cooperative Policy Statement or Offering Plan: Another area of focus by the NYAG is the marketing, offering, and selling of real estate securities prior to the acceptance of an offering plan or other filing in violation of the Martin Act.In addition to the NYAG’s statements regarding marketing, offering, and selling real estate securities prior to a requisite filing being accepted for filing by the NYAG, Nixon Peabody has seen in practice the NYAG interpreting 13 NYCRR § 20.5(c) to require a sponsor to cease all marketing in situations where an offering plan expires while an amendment is pending review by the NYAG.Assistant Attorneys General have asked sponsors to remove all listings from the web, cease having any open houses, and to refrain from engaging in any other form of marketing until the amendment is accepted for filing.
4. Failure to file price change amendments: The NYAG has said that it will aggressively pursue any sponsor that raises prices without filing an amendment to an offering plan to disclose an increase in price. In such cases, the NYAG will require a sponsor to award the purported price increase to the purchaser as restitution and may also collect separate penalties and fines. In addition to the NYAG’s statements regarding price increases without filing a price change amendment, Nixon Peabody has seen in practice the NYAG pursue relief where the marketing materials and/or incentives offered are lower than that set forth in the offering plan or the latest amendment. This has also extended to NYAG reviewing listings and critiquing whether sponsors have disclosed all incentives such as a reduction in common charges or transfer tax credits. Therefore, sponsors must carefully coordinate the entire marketing and sale process with counsel and the selling agent for the project and should avoid providing any incentives to buyers or advertised price reductions without first updating the offering plan.
5. Declaring an offering plan effective with § 421-a tax exemption but failing to consummate: Dating back to the § 421-a compliance program from 2015, the NYAG is still actively pursuing sponsors that seek to avoid rent stabilization by operating a condominium as a de facto rental property. Again, declaring an offering plan effective is not enough under the NYAG regulations or § 421-a statute; a developer must consummate to avoid rent stabilization, which requires the recording of the condominium declaration and having a unit closing with a bona fide purchaser.

As mentioned above, these are merely illustrative examples of conduct the NYAG has pursued and therefore developers, sponsors, landlords, and attorneys should continue to exercise extreme due diligence and caution with any real estate transactions involving the foregoing. In addition, Attorney General James has also demonstrated an unfettered commitment to protecting the rights of tenants with the creation of the Housing Protection Unit, which will work state-wide on an array of issues impacting tenants and homeowners. Moreover, these insights are by no means a complete list of recent enforcement activity from the NYAG, which has been incredibility active in various areas involving real estate.

Nixon Peabody’s full-service Cooperatives and Condominiums team and Government Investigations team stand ready to help developers, sponsors, and landlords on an array of transactional, compliance, and enforcement issues throughout the State of New York.