If you are looking to buy in a new development condo, you should understand what legal and financial risks are present before and after an Offering Plan has been ‘Declared Effective’.
Here’s how and when an Offering Plan is Declared Effective:
- A sponsor’s attorney submits an offering plan to the New York State Attorney General’s office. The AG’s Real Estate Finance Bureau is charged with “governing regulations that regulate the offer and sale of real estate securities,” including condos.
- The plan is reviewed by an attorney at the AG
- If NY’s legal requirements are met, the plan is accepted, otherwise, it will be rejected
- If accepted, the sponsor can begin marketing the condos
- When a minimum of 15% of the units have gone into contract, the sponsor’s attorney can submit the Plan’s updated status to the AG
- The AG declares the Offering Effective
Now that you understand how and when an offering plan is Declared Effective, we can look at why the milestone is important.
Prior to the plan being Declared Effective, the sponsor can, says Romer Debbas attorney Matthew Melnick, at its option, “abandon the project and, upon the return of deposits collected, cancel the purchase agreements.” Ouch.
This would most likely happen if sales were not meeting minimum expectations or if the condo’s sponsor was experiencing some other financial or legal difficulty jeopardizing the viability of the project.
In short, a condo reaching this milestone means some of your risks of buying the property have been removed.
Once the Offering Plan is Declared Effective, the sponsor’s ability to turn back must follow a very different, and much more difficult, route, including:
- The discovery of title defects that can not be cured making it impossible for the sponsor to sell you the property
- Significant damage to or the destruction of the building (for example, by fire)
- The property is condemned or taken by eminent domain
These contingencies are also detailed in the Offering Plan. Be sure to read yours — and get a real estate attorney experienced in the purchase of condos in new developments.