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March 31, 2020

Stroock Special Bulletin

By: Leslie R. Byrd, Joy Baskin, Ross F. Moskowitz

The COVID-19 emergency has altered virtually all aspects of the New York real estate landscape, including the procedures sponsors must follow in connection with the offering and marketing of condominium and cooperative projects.

On March 25, 2020, the Real Estate Finance Bureau (“REF”) of the NYS Department of Law (“DOL”) issued a guidance document outlining temporary policies and procedures with respect to the submission of condominium and cooperative offering plans and amendments thereto, no action letter applications and other submissions governed by Article 23-A of the General Business Law (the “Martin Act”) and applicable REF regulations and guidelines.[1]  The temporary policies acknowledge and seek to mitigate the challenges faced by submitters and REF in meeting certain deadlines and providing hard copies of documents in the current remote-working environment.  The policies will remain in effect for at least the duration of Governor Cuomo’s declaration of a disaster emergency in New York State (the “Relief Period”).  The temporary policies do not apply to violations of the Martin Act and other applicable provisions of law which occurred or began prior to the Relief Period.

Key aspects of the temporary policies include:

I. Requirement to File Financial Update Amendments Suspended; Sales under Expired Plan Permitted if No Material and Adverse Change:  An initial condominium or cooperative offering plan expires 12 months after REF acceptance of the plan for filing, unless extended by a duly filed amendment.  Existing law and regulations prohibit sponsors from marketing, entering into contracts or closing on unit sales under an expired plan.  A sponsor who engages in any such marketing and sales activity after expiration of the plan risks triggering a right of rescission for purchasers and REF enforcement action against the sponsor and its principals under the Martin Act.

An amendment which serves principally to extend the term of the offering is known as a “financial update amendment.”  During the Relief Period, REF will not (i) require sponsors to submit financial update amendments or (ii) consider marketing and sales activity under an expired plan as grounds for rescission by purchasers or enforcement action by REF.

However, if a material and adverse change occurs during the Relief Period, the sponsor must disclose same in a submitted amendment and refrain from all marketing and sales activity until the amendment is accepted for filing by REF.  Failure to so disclose such changes and cease from such activity will give rise to purchaser rescission and REF enforcement action against the sponsor and its principals.  The guidance document sets forth the following non?exhaustive list of changes REF would deem material and adverse, and thus required to be disclosed in an amendment to the condominium or cooperative offering plan during the Relief Period:

1. 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.

2. Litigation is filed which may adversely affect the sponsor’s capacity to perform all of its obligations.

3. The sponsor learns, or should know, that the project is not meeting its current obligations.

4. The sponsor is not meeting its current obligations.

5. 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.

6. 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 or cooperative, including, but not limited to, assessments or liabilities, outstanding uncured violations of record, dangerous and hazardous building conditions, or pending litigation.

7. There is an increase of 25% or more in the budget or projected budget of the project.

8. There is an increase of 25% or more in the project’s projected or assessed real estate taxes.

9. The sponsor changes the size or number of units and/or their respective percentages of common interest.

10. The sponsor materially decreases the size or quality of common elements.

11. There is an architectural change to any common element or any unit offered, other than a substitution of “equal or better quality” as defined in the offering plan.

12. There is a material decrease in the square footage of any unit being offered.[2]

13. There is a change to the identity(ies) of the sponsor or principal(s) of sponsor.

II. Requirement to File Price Change Amendments Suspended

Under existing REF regulations, a sponsor may not increase or decrease (or advertise any increase or decrease in) offering prices for one or more lines of units, or increase the price of a unit for a specific purchaser, without the prior filing of a price change amendment to the offering plan.  The temporary policies suspend this requirement.  A sponsor may thus offer and sell units for any price during the Relief Period without filing a price change amendment.  After the Relief Period, REF will provide guidance to sponsors regarding amending their plans to disclose any price changes that occurred during the Relief Period (and that were not disclosed in a substantive amendment during the Relief Period).

III. Requirement to Renew Broker-Dealer and Salesperson Registration Statements (Form M?10) Suspended

Section 359-e(3) of the General Business Law requires a dealer, broker or salesperson to file a registration statement (Form M?10) with the DOL prior to selling or purchasing, or offering to sell or purchase, securities to the public within or from New York State.  This registration statement is effective for four (4) years (with an additional 90 days after the end of the 4-year period).  During the Relief Period sponsors will not be required to renew existing M?10 registrations in order to continue the offering and sale of condominium or cooperative units.  However, a registration statement will still be required with the submission to REF of a new offering plan or no?action letter application, and a new or supplemental registration statement will still be required with a submission to REF of an offering plan or no?action letter application amendment if there is a change to the sponsor or its principal(s).

IV. “Wet Ink” Signatures Waived; Notarization Requirements Modified

During the Relief Period, REF will accept photocopied or scanned signatures on all documents for which it typically requires original “wet ink” signatures.  In addition, REF, at its option, will either (i) accept documents with a specified “self-certification” entered above the signature line[3] or (ii) require that documents be notarized using the audio?video technology procedures set forth in New York Executive Order 202.7.[4]

V. Email Submission and Acceptance of Final Plans, Plan Amendments and No Action Letter Applications

REF has suspended, until further notice, its requirement for a paper copy of final offering plans, plan amendments and no action letter (“NAL”) applications.  The REF reviewing attorney will instruct the submitting attorney regarding the procedure for digital submission of final documents to REF. Upon review and approval of the digital final documents, the REF reviewing attorney will email the submitting attorney as to whether they have accepted the plan or amendment for filing or issued the NAL.  For offering plans, effectiveness amendments and NAL applications, the reviewing attorney’s email will not constitute REF’s “official” acceptance of the amendment or issuance of the NAL.  The REF records room still must issue the “official” acceptance letter or NAL, which the guidance document states “may be significantly delayed due to the emergency response to COVID-19.”  (Moreover, the “official” letter accepting a plan will not be issued until all post-acceptance items listed in the guidance document are received, including the balance of the filing fee.)  Notwithstanding the foregoing, the date of acceptance for filing of the plan or amendment or issuance of the NAL will be the date indicated on the reviewing attorney’s email.  For non-effectiveness amendments, the reviewing attorney’s email will be the REF “official” acceptance letter during the Relief Period.

The NYC Department of Finance (“DOF”) often requires an “official” amendment acceptance letter or NAL in order to approve an initial condominium declaration or amendment thereto for recording.  The guidance document states that DOF has advised REF that it will accept REF’s email acceptances in lieu of “official” letters during the Relief Period.

VI.  Digital Distribution of Offering Plans and Amendments

Typically, a sponsor must provide purchasers with paper copies of the offering documents, unless the sponsor has applied for, and received, the right to provide digital copies pursuant to REF Cooperative Policy Statement #10.  During the Relief Period, REF will, with limited exceptions, permit sponsors to distribute digital copies of the plan and all amendments to purchasers.  Sponsors must (i) include with the digital copy a cover letter with the advisory statements required by REF regarding the provision of digital copies during the COVID-19 emergency; (ii) provide a paper copy of the offering plan and all amendments to any purchaser who requests same; and (iii) provide all purchasers with paper copies of all previously distributed digital documents within 30 business days after the end of the Relief Period.  Digital distribution of plan documents is not permitted for condominium or cooperative conversion plans (i.e., Part 18 or Part 23 plans) if the post-closing amendment for the offering plan has not yet been accepted for filing.

__________________________________________

For more information:

Leslie R. Byrd

Joy Baskin

Ross F. Moskowitz

[1] The entire guidance document is available at https://ag.ny.gov/sites/default/files/temporary_submission_and_review_policies_and_procedures_due_to_covid-19_state_of_emergency_3-25-2020.pdf.

[2]  Per the footnote #7 of the guidance document, “there is a rebuttable presumption that a decrease in square footage of 5% or less is not material.”

[3]   The guidance document prescribes the following self?certification:  “I declare [or certify, verify, or state] under penalty of perjury under the laws of the State of New York and United States of America that the foregoing is true and correct.  Executed on [date].  [Signature]”.

[4]   New York Executive Order 202.7 is available at https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO%20202.7.pdf.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.