While most of the state of New York is “on pause” by Executive Order of Governor Andrew Cuomo, the Real Estate Finance Bureau of the New York Attorney General’s Office (“REF”) continues to operate. Because health takes precedence over normal business operations, REF has issued much-needed relief in the form of modified policies and procedures for certain regulated activities and submission of offering plans, amendments, broker-dealer statements, no-action letters, cooperative policy statements, and syndication filings.
This alert serves to highlight key provisions of the business operations of REF during the relief period.
Suspends enforcement of marketing and sales violations under the Martin Act and regulations
REF has had a long-standing policy of requiring sponsors who enter into contracts or close on a “stale” plan to enter into an assurance of discontinuance (“AOD”) and pay a monetary relief to the State of New York equal to $3,000 per violation. Prior to the COVID-19 pandemic, REF was also taking enforcement action against sponsors that continued to market and advertise (e.g., keep listings on websites, hold open houses) after the offering plan expired. In such cases, REF also seeks monetary relief for such violations. During the relief period, REF will not take enforcement action against sponsors for such violations that take place during the relief period only. The Bureau will continue to pursue enforcement action against sponsors that marketed, entered into contracts, and/or sold units/apartments/homes after an offering plan had expired prior to the relief period.
Suspends the need for price-change only amendments
During the relief period, REF will not take enforcement action against sponsors that advertise, enter into contracts, or close on an apartment/unit/home without having filed a price change amendment when prices changed in any manner from those set forth in the offering plan. The Bureau had been taking enforcement action against this practice prior to the COVID-19 pandemic, and notes that it will continue to pursue violations that took place prior to the relief period. Sponsors should also note that REF states in this guidance document that the failure to file a price change amendment warrants an offer of rescission.
Suspends the need for financial update amendments where there is no material change
During the relief period, REF will not take enforcement action against sponsors that do not file financial update amendments yet continue to market and sell apartments/units/homes.
However, if a sponsor plans to continue to market and sell apartments/units/homes under an offering plan where there has been a material change, then an amendment must be filed. The COVID-19 guidance provides a non-exhaustive list of material changes:
- The sponsor learns that the building’s actual cash operating expenses (excluding depreciation and extraordinary or non-recurring items, but including capital repairs, replacements, and improvements) for a fiscal year exceed its income by more than 15% percent.
- Litigation is filed that may adversely affect the sponsor’s capacity to perform all of its obligations.
- The sponsor learns, or should know, that the condominium, cooperative, homeowners’ association, timeshare, or seniors residential community is not meeting its current obligations.
- The sponsor is not meeting its current obligations.
- The sponsor is subjected to a judgment in any civil or criminal action or proceeding that adversely affects the offering plan or the sponsor’s fitness as an offeror of real estate securities.
- The sponsor learns, or should know, of facts or circumstances that may in reasonable likelihood result in material increases in maintenance charges or common charges because of extraordinary expenses to the condominium, cooperative, homeowners’ association, timeshare, or seniors residential community, including, but not limited to, assessments or liabilities, outstanding uncured violations of record, dangerous and hazardous building conditions, or pending litigation.
- There is an increase of 25% or more in the budget or projected budget of the property.
- There is an increase of 25% or more in the property’s projected or assessed property taxes.
- The sponsor makes a change in the size or number of units and/or their respective percentages of common interest.
- The sponsor materially decreases the size or quality of common elements.
- There is an architectural change to any common element or any unit/apartment/home being offered, other than a substitution of “equal or better quality” as defined in the offering plan.
- There is a material decrease in the square footage of any unit/apartment/home being offered.
- There is a change to the identities of the sponsors or principals of the offering plan. See, e.g., 13 NYCRR Part 20.3(ab).
Postpones the need to update broker-dealer statements and cancels issuance of REF receipts
Broker-Dealer Statements must be updated when there is a material change and otherwise every four years under General Business Law § 359-e.
Additional items suspended/postponed
- Suspends the Need for the Submission of Paper Copies of offering plans, amendments, and other submissions at the time of filing a plan or amendment.
- Suspends the Need to Submit “wet signatures” to REF and allows notarized documents to take advantage of loosened requirements under Executive Order 202.8 or through the use of a separate declaration.
- Suspends the use of Policy Statements that provide for exemptions for certain investments in real estate known as syndications and suspends the use of all Cooperative Policy Statements.
- Postpones the need to file Form 99 for certain real estate transactions also registered with the United States Securities and Exchange Commission.
The relief period provides necessary relief for the health of REF personnel and also loosens filing requirements and enforcement priorities of REF while New York is in a declared state of emergency. Sponsors and other filers should note that the Relief Period commenced on March 25, 2020, and will end on a date solely within the discretion of the attorney general. Moreover, sponsors and filers should note that many of the requirements that are loosened during the relief period must be retroactively complied with by sponsors and filers, in most cases, within 90 days from the expiration of the relief period.
Nixon Peabody will continue to monitor any additional guidance documents issued by REF and is available to discuss the relief period and its implications with clients. While the relief period is welcome news, it does not give sponsors broad flexibility and therefore remaining in compliance with the Martin Act and governing regulations will continue to be a top priority for our clients.
Here is the full text to the Bureau’s memorandum “Temporary Submission and Review Policies and Procedures Due to COVID-19 State of Emergency.”
- State of New York Department of Law, Real Estate Finance Bureau Memorandum: Temporary Submission and Review Policies and Procedures Due to COVID-19 State of Emergency (March 25, 2020.
[Back to reference]
- Sponsors should note that Nixon Peabody has seen variations on this amount.
[Back to reference]