LEGAL ALERT! COVID-19 Effect on Amendments to Offering Plans

To help our clients navigate the coronavirus (COVID-19) crisis, Keane & Beane, P.C. is providing numerous Legal Alerts on a variety of issues.

The New York State Department of Law Real Estate Finance Bureau (“REFB”) put forth a Memorandum, dated March 25, 2020, enacting a number of temporary policies and submission procedures to remain in full force and effect as long as New York Executive Order 202 Declaring a Disaster Emergency in the State of New York remains in effect (the “Relief Period”).  The REFB reserves the right, in its sole discretion, to extend or end the Relief Period, or modify the policies and procedures therein, at any time.

The March 25, 2020 memorandum has a substantial effect on a sponsor’s obligation to file certain amendments to an offering plan, discussed in detail below.

AMENDMENTS TO EXTEND THE OFFERING PLAN

The Martin Act requires that before a sponsor of a real estate syndicate interest may offer or sell units, apartments or houses, the sponsor must submit an offering plan to the REFB, which is valid for twelve (12) months from the date of acceptance.  (See GBL § 352-e(2)).  The offering plan may be extended by filing an amendment thereto.  (See 13 NYCRR § 20.3(a)(5)).  Continuing to market and/or sell units, apartments or houses after the expiration of the offering plan and any subsequent amendments is a violation of the Martin Act, exposing the sponsor and its principals to enforcement actions by the REFB.

During the Relief Period:

1. The REFB does not intend to pursue enforcement actions against sponsors or principals based solely upon marketing or selling units, apartments or houses under an expired offering plan.
2. The REFB does not intend to commence new investigations of sponsors or principals for sales under an expired offering plan that occurred after the start of the commencement of the Relief Period.
3. The REFB will not consider marketing or sale of units, apartments or houses under an expired offering plan to be an act triggering a right of rescission for purchasers.
4. During the Relief Period sponsors do not need to submit amendments to the REFB that principally serve to extend the term of the offering plan.
5. The REFB does intend to continue to investigate, and pursue enforcement actions against sponsors and principals as warranted, the marketing and selling of units, apartments or houses under an expired offering plan that occurred prior to the start of the Relief Period and will do the same for such actions after the conclusion of the Relief Period.

MATERIAL AND ADVERSE CHANGES MUST BE DISCLOSED

Material and adverse changes must be disclosed in an amendment to the offering plan during the Relief Period.  Failure to do so exposes sponsors and principals to enforcement actions from the REFB and triggers the right of rescission for a purchaser.

The following non-exhaustive list of material and adverse changes was contained in the REFB’s March 25, 2020 memorandum:

1. 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 which 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 senior 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 which 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 which 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 senior 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)).

PRICE CHANGE AMENDMENTS

REFB regulations require an amendment to the offering plan be filed when there is a change in offering price resulting in an across-the-board increase or decrease affecting one or more lines of units, apartments or houses, or a price increase for an individual purchaser.  (See 13 NYCRR Part 20.5(d)(1)).

During the Relief Period:

1. The REFB does not intend to pursue enforcement actions against sponsors or principals based solely upon the failure to file price change only amendments prior to offering or selling units, apartments or houses at prices different than most recently disclosed.
2. The REFB will not consider a sponsor’s failure to file a price change only amendment prior to offering or selling units, apartments or houses at prices different than most recently disclosed to be an act triggering a right of rescission for purchasers.
3. The REFB is advising sponsors not to submit price change only amendments until further notice.

After the conclusion of the Relief Period:

1. REFB intends to again pursue enforcement actions against sponsors and principals, as warranted, in connection with the failure to file price change only amendments prior to offering or selling units, apartments or houses at prices different than most recently disclosed, where the failure to file the price change amendment occurred after the conclusion of the Relief Period.
2. The REFB will require sponsors to (i) disclose any price changes that occurred during the relief period (and that were not disclosed in a substantive amendment during the Relief Period) in a subsequent amendment to the offering plan, and (ii) pay the appropriate filing fees for any price changes that occurred during the Relief Period.
3. The REFB will provide sponsors with guidance on how to do so at the conclusion of the Relief Period.

NEW YORK STATE FORM M-10

A broker or sales agent of the sponsor cannot offer for sale to the public any securities (units, apartments or houses) prior to filing with the REFB a registration statement accompanied with the appropriate filing fees (NYS Form M-10).  (GBL § 359-e(3)(c)).  The NYS Form M-10 is valid for a period of four (4) years plus an additional ninety (90) days following the end of the four (4) year period.

During the Relief Period:

1. The REFB does not intend to pursue enforcement actions against brokers or sales agents based solely upon the failure to timely file a NYS Form M-10.
2. The RFB is advising brokers and sales agents not to submit the NYS Form M-10 until further notice.
3. The REFB will require proof of a valid NYS Form M-10 with the submission of a new offering plan or no-action letter application, as appropriate.
4. The REFB will require a new or supplemental NYS Form M-10 with the submission of a substantive amendment if there is a change to the sponsor or any of its principals.

After the conclusion of the Relief Period:

1. The REFB intends to again pursue enforcement action against brokers or sales agents, as warranted, in connection with the failure to timely file a NYS Form M-10 when such failure occurred after the conclusion of the Relief Period.
2. Any NYS Form M-10 that was not filed with REFB during the Relief Period should be filed at the conclusion of same.
3. The REFB will provide a ninety (90) day grace period after the conclusion of the Relief Period for such brokers or sales agents to come into compliance with GBL § 359-e.

For Sponsors submitting a new Cooperative or Condominium Offering Plan:  By Executive Order 202.11, the obligation prescribed in  § 352-e(2) of the New York General Business Law for the Attorney General to respond to such new submissions within thirty (30) days is relieved to the extent that same can adjourn this deadline by an additional thirty (30) days.

If you have any questions regarding this Legal Alert, please contact Eric T. Kolle at Keane & Beane, P.C. or any of our attorneys in the Real Estate Practice department.