House passes bill loosening ILSA requirements

REBNY-backed legislation seen as cutting red tape for condo developers

From left: Carolyn Maloney, Steven Spinola and Adam Leitman Bailey
From left: Carolyn Maloney, Steven Spinola and Adam Leitman Bailey

The U.S. House of Representatives handed condominium developers a significant victory Thursday, unanimously passing a bill that exempts condos from filing and registration requirements mandated by the Interstate Land Sales Full Disclosure Act, commonly referred to as ILSA.

Under the bill, known as H.R. 2600 (click here for a PDF of full text), developers of new condos or time-shares with at least 99 units will no longer have to register their buildings with the U.S. Department of Housing and Urban Development.

Though the law was seldom used in New York City since it was first passed in 1968 — in part because of similar, if not stronger, state protections — it became a sort of messiah for condo buyers looking to get out of their deposits after the 2008 market crash, spawning a cottage industry of federal litigation, as The Real Deal reported. Buyers could overturn contracts even when developers made seemingly trivial ILSA filing errors.

“During the economic downturn some buyers used ILSA to rescind otherwise valid condominium contracts for economic reasons — an entirely unintended consequence of the law and its intent,” Rep. Carolyn B. Maloney, D-N.Y., who sponsored the bill along with Michael Grimm, R-N.Y., Patrick T. McHenry, R.-N.C., and Jerrold Nadler, D.-N.Y., said in a statement.

“By providing this clarity, condominium developers and their lenders will have more certainty going forward about the status of their sales as the economy continues to recover — while maintaining important protections that consumers have under ILSA,” Maloney added.

The bipartisan bill will now make its way to the U.S. Senate, where, if approved, it will go to the White House to be signed into law.

Steven Spinola, president of the powerful Real Estate Board of New York, which has been lobbying for the legislation, hailed Congress for “closing this very damaging loophole.” The bill, Spinola said in a statement to REBNY members obtained by The Real Deal, would provide “tremendous bureaucratic relief from substantial filings that are duplicative, and sometimes contradictory, to state disclosure requirements.”

The bill also retained ILSA’s anti-fraud provisions, which allow a buyer to pull out of a contract in case of fraud, Spinola noted.

Real estate attorney Adam Leitman Bailey, who is credited with being the first lawyer in New York City to use the ILSA provision to get buyers out of contracts in the wake of the financial crisis, said that H.R. 2600 was a testament to “the incredible influence that the most powerful real estate developers have over the federal government. Despite the major problems afflicting our nation and the failure to have laws passed to address them, somehow, this small issue only affecting condominium [developments] over 100 units got the attention of and passed the House of Representatives.”

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In March 2011, a federal appeals court overturned a controversial lower court ruling involving two New York City condo projects — Harlem’s Fifth on the Park and One Hunters Point in Long Island City — forcing the release of millions of dollars in escrow funds, as TRD reported.

The U.S. District Court had previously ruled that the two projects were exempt from ILSA because, even though the condos were larger than the federally mandated 99-unit limit, the developers sold fewer than that number when they got the temporary certificate of occupancy from the city Department of Buildings.

The appeals court, however, ruled that the district court judge misinterpreted the statute and that buyers must be notified of an exemption at the time of the contract. The decision was seen as a major blow for developers. The current bill provides an exemption for condominiums from ILSA’s registration requirements, but developers are still required to comply with state laws that require specific disclosures.

In December 2012, the tide turned in developers’ favor as the same federal appeals court ruled in favor of the Related Companies in an ILSA case that focused on developers’ responsibility to submit a description of the lot in a form “acceptable for recording” with the city, as TRD reported.

Attorney Mark Walfish of Katsky Korins, which represented Related in the case at the Brompton on the Upper East Side, said that “although the Brompton prevailed in its cases against the purchasers, and in fact, covered attorneys’ fees in one instance, we believe that the proposed legislation will prevent abuses in the future, while continuing to protect purchasers from actual instances of fraud.”

Leitman Bailey, who represented the plaintiffs in that case, a couple who signed a contract for a condo at the Brompton, acknowledged today that ILSA was “anachronistic,” but said that it had provided “the machinery to keep the sale of apartments going during the great crisis.

“Invoking ILSA allowed buyers to pressure sponsors into giving sales discounts at least equal to the amount the lenders withdrew from buyers who could no longer close without their money,” Leitman Bailey said.

Since 2008, ILSA had evolved into a loophole that allowed an informed buyer to head for the hills based on a “trivial technicality” when the markets deteriorated, said residential market maven and Miller Samuel CEO Jonathan Miller.

The new bill would likely reduce litigation exposure for developers, yet reemphasize the consumer protections that were the law’s original intent, Miller added. “Sanity and fairness restored.”