Preliminary Legal Issues - Marketing Real Estate in US Markets


Carmel & Carmel PC is a nationally recognized law firm that provides specialized counsel to resort and recreational real estate, planned community and hospitality developers.  In these practice areas, we deal with federal regulatory authorities and state agencies throughout the U.S. and foreign jurisdictions on matters affecting real estate offerings.  Often developers, adept at working in small local markets, are unaware of the variety of legal issues they will confront when moving into a larger scale project necessitating a national or international sales program.  Also, developers from other countries, including resort markets with proximity to the U.S., are surprised to discover the vast array of federal and state laws that affect their rights and ability to market to U.S. residents.  We have thirty years’ experience in dealing with these issues.  For this reason we are often brought in by in-house or local counsel of developers to assist in working through the federal and multi-state regulatory maze.  The purpose of this memo is to point out some of the preliminary considerations which we find helpful in the early stages of advising real estate development clients.

 

While we have a sophisticated project creation practice for the Mid-Atlantic region, absent some unique need, community regime documents are generally handled by local counsel.  Local counsel is also the pivotal component in the local approval process.  We prefer to provide input into what goes into the community documents as the documents can affect federal and state filings.  We have an extensive library of various programs and unique concepts.   Furthermore, for projects that will be marketed out-of-state, we can save a developer costly additional fees by ensuring certain programs are properly initiated.  We are experienced in the development of traditional home communities, mixed use communities, condominium projects, timesharing projects, hotel developments and condominium securities.  We also have been involved in the creation of golf course club membership and equity programs that are integral parts of some of our clients’ communities.  Our experience includes developer representation, lender representation from initial product development through sellout, problem solving and more recently, the working out of distressed assets.  Our unique approach to real estate development, marketing and sales is directed toward achieving the successful sell-out of a property.  We also have extensive contacts in asset management, marketing and sales organizations and can lend our contacts to our clients and colleagues. 

 

 

SITUS STATE ISSUES 

 

Generally, local counsel is very adept at jumping through the necessary hoops to take a project through local agencies impacting development.  More seasoned local counsels also consider the in-state regulatory requirements for taking a project to market because many states require real estate registration prior to allowing a developer to offer properties for sale even to in-state residents.  In addition, vacation-type properties including community association developments, golf course communities, condominiums, condo-hotels, timesharing properties and camp clubs are given even greater scrutiny by most states.  In working with a new client, we typically address whether or not they have considered in-state regulatory requirements.   We can work with existing local counsel or recommend people in areas where we have worked on projects in the past.  We have worked with a significant number of knowledgeable land use lawyers throughout the country, and local lawyers often engage our firm on behalf of their developer clients.  While we cannot efficiently do situs state work or closings for local real estate matters, local counsel often cannot efficiently deal with federal or multi-state compliance issues in the efficient manner that we can. 

 

HUD CONSIDERATIONS 

 

The second issue we deal with upfront is compliance with HUD's Interstate Land Sales Full Disclosure Act ("ILSFDA").  We are routinely retained by new land development projects where the developers and local counsel have never considered the ILSFDA.   Additionally, we are often called in to prepare registrations for out-of-state marketing efforts only to find that sales at the project are currently in violation of the ILSFDA.   

 

The ILSFDA regulates the sale or lease of subdivided property through the use of interstate commerce.  This applies to any property developed and marketed within the U.S. and foreign properties if marketed in the U.S. to U.S. residents.  The ILSFDA regulates any marketing or offering of property ("subdivided land") if the property is offered in "interstate commerce."  Regulated property under the ILSFDA includes lots in a subdivision, homes in a community, condominium units in a condominium building and any other divisions of land sold pursuant to a common promotional plan.   

 

While many novice developers think the ILSFDA applies only if you market to residents of other states, this is incorrect.  In fact, if you mail a letter, use the telephone or advertise over the Internet, you use interstate commerce, and the ILSFDA requires the prior registration of lots in a subdivision with HUD's Office of Interstate Land Sales Registration ("OILSR") unless the project meets a complete or partial exemption under the ILSFDA.  Unless the sale of property meets a complete or partial exemption under the ILSFDA, the property must be registered with the OILSR prior to any sales (or the taking of non-refundable deposits.)  Additionally, prior to any such sales, the Seller must deliver to the prospective purchaser a HUD-approved Property Report that is prepared in connection with a HUD Registration.  Thus, a preliminary consideration for any new community is whether or not the sales of lots in the community can meet the requirements of an ILSFDA exemption. 

 

What is often misunderstood is that HUD has jurisdiction over virtually any residential subdivision in excess of 25 lots, regardless of whether or not the property meets one of its statutory exemptions.  Developers are cautioned by our office to heed the anti-fraud provisions of the ILSFDA in connection with their advertising.  This is true even for sales of lots which are exempt pursuant to the Single-Family Residence Exemption or the Less than 100 Lot Exemption. 

 

Due to the recent downturn in the real estate market, ILSFDA compliance has become a critical element in developer compliance plans to ensure sales withstand legal scrutiny.  Even mundane errors may constitute misrepresentation that could lead to consumer rescission rights.  Costly ILSFDA-based consumer actions have become prevalent as consumers seek to get out of prior real estate transactions.  Failure to comply with the ILSFDA’s registration requirements, or adequately comply with an ILSFDA exemption, in the sale of residential real estate will at a minimum afford the consumer a two year right to cancel the purchase transaction; a right which survives closing and delivery of a deed.  Additionally, recent case law suggests that the ILSFDA-based rescission right may extend into a third year as well. 

 

Unfortunately, condominium developers have been slow to realize that the ILSFDA applies to their sales.  For any condominium property that consists of 100 or more units, or multiple condominiums within a community totaling 100 or more units sold pursuant to a common plan, the ILSFDA must be considered.  If the project exceeds the 99 unit threshold, then unless the unit is complete at the time of sale, the condominium project must either be registered or the sale must be made pursuant to an unconditional obligation for the developer to complete the unit within two years from the date a purchaser signs a purchase agreement.  In addition, the purchase agreement may not limit the purchaser’s remedies in the event of a default of the obligation by the developer.  For example, all remedies available at law or equity (including the right to specific performance) must be afforded the consumer.  Absent the unconditional obligation to complete the unit and the availability of all remedies to the purchaser, unless the unit is complete at the time of sale, the project must be registered under the ILSFDA.  Of course, there are additional concepts that come into play and other exemptions may be available; however, for the most part, this is the basic analysis a condominium developer must undertake to understand the impact of HUD and the ILSFDA.

  

HUD also requires adherence to its own advertising guidelines, all of which should be consulted prior to embarking on a national advertising campaign.  Further, HUD has a number of additional regulations that affect real estate developers, including the Real Estate Settlement Procedures Act (RESPA), which must be complied with.  Even if you are not providing financing, RESPA issues arise from the manner in which you account for closing charges and any steering you may facilitate to preferred settlement companies. 

 

OTHER FEDERAL ISSUES 

 

Additionally, HUD, the Federal Trade Commission, other federal agencies and virtually all of the states have various forms of anti-fraud acts which are designed to preclude false and deceptive advertising.  Consequently, even for projects that do not need to register with HUD, it is incumbent upon a developer to at least ensure the inclusion of certain provisions in their purchase contracts to avoid exposure.   

 

Federal anti-fraud acts have the effect of precluding aggressive forms of marketing, including sweepstakes and "free-gift" types of advertisements.  Additional regulations may have an impact in the event the advertising for the property provides anything less than an accurate description of the property.  Other issues affecting advertising such as the use of the "Offering Void Where Prohibited By Law" disclaimers should also be considered by developers prior to using their advertisements in the national marketplace.    

 

Recent legislation such as the Telecommunications Fraud and Consumer Abuse Act, new telemarketing laws, the Do-Not-Call laws, the Anti-Spam laws and the Gramm Leach Bliley Privacy Act must all be considered.  Privacy has become an important issue, and we are actively involved in representation of this kind and can assist in developing appropriate safeguards in the establishment of your various advertising programs. 

 

Furthermore, in the event you are offering any financing, federal truth-in-lending laws and state lending laws must be complied with as well.  There are a variety of additional federal laws that may impact the offer and sale of real estate depending upon the activities engaged in by the Developer and its marketing and sales organization and new ones seem to come up all the time.  This is not meant to be an exhaustive compilation of the law; it is intended merely as a mechanism to set forth some of the types of issues we handle on behalf of our clients.  Depending upon the level of our engagement, we can guide developers, their lenders and their sales and marketing companies through these issues and more. 

 

SECURITIES ISSUES 

 

Another set of issues that must be addressed for large community developments are the federal and state securities laws.  Many large communities have rental programs that increasingly resemble securities offerings, and the development of condominium hotels is becoming popular once again.  In addition, many early-stage buyer programs are offered for their investment potential.  These types of offerings must be considered in connection with federal and state securities laws, as the offer of anything that is expected to increase in value due to the efforts of another may constitute a security.  In the mid-80's, we were actively involved in the registration with the SEC of condominium hotels offering hotel apartments coupled with a rental pool.  We now work with local counsel in structuring these offerings in an attempt to avoid securities registration issues.  We caution developers planning any form of rental programs or early stage investor programs to carefully consider these laws.  There has been a significant increase in litigation in these types of projects emphasizing the need for a thorough review of what is being offered. 

 

STATE LAWS 

 

Depending upon the type of offering, about half of the fifty states have some form of regulation affecting the offering of out-of-state properties to their residents.  Most have additional consumer protection statutes that may impact the sale of real estate across their borders.  While some states only require a notice filing, others require significant efforts to comply with their laws.  Significant efforts to ensure compliance with state land sales laws may include any of the following: 

 

-Changes to the method of offering the property;

-Preparation of an offering statement or property report;

-Delivery of project documents for review;

-Detailed backup of all budgeted items in a community association budget; 

-Audited financial statements for a developer or the community association;

-Escrowing of deposits until closing;

-Adherence to state advertising regulations.

 

We can provide, upon request, additional details on any of the states where you intend to market future or existing projects. 

 

In the event a regional or national advertising program is planned for a community, the impact of the other states' laws must also be considered.  You should not confuse federal registration with state registrations.  These are different laws from different agencies and either or both may apply to your offering.  It is important for us to emphasize that just because a project has been cleared with HUD does not mean lots or units can be offered in out-of-state markets. To do so, you must comply with HUD and then determine the requirements to market in each separate state where you want to market. 

 

Another common misconception amongst developers is how the state registration laws work.  Many think that they do not apply to them as long as they don’t physically venture out of their local area.  Most state registration laws will apply to the extent a developer has any interaction with residents of the regulated state while located in their state or residence.  For example, if a consumer from one of the states requiring registration calls a developer and asks to be sent more information about the property (and the developer complies), any resulting sale is likely voidable at the option of such consumer for some period of years following the date such consumer signs a purchase agreement.  Further, directly mailing into regulated states in order to reach out to residents of the regulated states, whether done by the developer itself or through a broker or other third party, subjects the developer to the jurisdiction of such states’ laws.  If prior qualification is required, the state may take civil or criminal action against a developer (which is for the time being unlikely), but more importantly, the buyer ends up with a contract voidable at their option and if the contract involves a number of buyers may provide a basis for a class action.  Even sending emails to someone known to reside in a regulated state can subject a developer to these consequences.  

 

Yet another misconception by developers and brokers is that a developer can provide a third-party broker with advertising and other development information and the broker can send it to out of state prospects without penalty.  This is not true.  A broker is not permitted to do what a developer is not entitled to do.  Doing so could subject the developer to the same enforcement actions as if they sent the information themselves, and the broker could be subject to fines and sanctions from the other state and their own state licensing agency.  Furthermore, any resulting sales would also likely be voidable. The recent retreat in the real estate market, especially in dealing with condominiums, has led to a wave of rescission demands.  Unless a developer has been careful in implementing its marketing plans, they are encountering significant exposure in today’s market.  Good times seldom elicit complaints from real estate buyers, but a declining market will have every plaintiff’s lawyer in the country looking for ways for their clients to void contracts with developers.  

 

OTHER ISSUES 

 

Many other types of laws and legal issues are also applicable to real estate development projects and the marketing and sale of individual units.   The use of the Internet exposes a developer and its property to domestic and international markets. There are many laws affecting contact between you and residents of other jurisdictions, and in the event you want to correspond with people who view information from your Website, it is in your best interest to be aware of the existence of these laws and do your best to protect yourself from claims.  We are uniquely qualified to assist in these efforts and have worked extensively with national developers in developing appropriate protections with respect to their Internet activities and their intellectual property. 

 

SUMMARY AND PURPOSE 

 

While this memorandum is not designed to cover all issues that may impact a development, we have drafted it to set forth some preliminary considerations that should be evaluated by the developer and the project team.  In the past rising values of real estate offerings have reduced the number of consumer grievances. When the property is worth more than they paid for it, consumers are typically happy.  Times have changed, and even in the good times there are class action lawyers who will search out actions based upon large groups of consumers who have been sold anything in violation of some particular state or federal law.  Now that consumers may be having buyer’s remorse in a variety of markets, it is incumbent upon the wise developer to make sure their buyers cannot simply walk away from their purchase and sue for damages.  These are “bet the company” issues, and a little insurance goes a long way. 

 

In the event we can be of any assistance to you on these or other matters, Carmel & Carmel attorneys can be reached at info@carmel.us or 202-787-1322.

 

 

 

 

This article does not constitute legal advice or the formation of an attorney-client relationship.  Republication of this article without express permission of Carmel & Carmel P.C is prohibited.