For many brokers and buyers, condo offering plans comprise the latest chapter in New York real estate’s required reading, as many people get cozy with the phone book-sized documents that exhaustively describe new properties down to the last detail.
The sale of all types of cooperatively owned real estate, whether its co-op shares or condo units, is subject to the Martin Act, a state law that mandates that a complete description of the property must be fully outlined in an offering plan. No advertising or sales for the property can take place unless the offering plan has been accepted by the New York Attorney General’s office.
The documents contain a plethora of information including floor plans, the size of rooms, architect’s reports, estimated common expenses, details about how the apartment will look, building materials, types of appliances that will be installed, how many units the sponsor can or intends to hold back to rent, information about any commercial space that will be included in the development, and much more. The plans also include certifications from the architects, sponsors, and managing agents that they did their best preparing an adequate budget and that they didn’t omit any material facts.
The process is heavily regulated. The Attorney General’s office reviews the plans and there are criminal penalties for non-compliance, according to attorney Richard Singer, a partner with Hirschen Singer and Epstein LLP in Manhattan, who has written offering plans for sponsors for 20 years.
The size of the document alone offering plans are typically around 300 pages and can be up to 500 pages or more is enough to make many people want to just put down their money, sign on the dotted line and hope for the best, but that’s the worst thing a buyer could do, attorneys and brokers say.
“It’s helpful to hire a lawyer at least, because once you sign there’s not much you can do about it,” Singer said.
And sometimes there are problems that can come back to haunt buyers, brokers and even the sponsors.
Mortgages and down payments
Buyers and brokers should be aware of how many units, if any, a sponsor plans to hold onto and rent, said Michael Goldstein of the law offices of Michael W. Goldstein and owner of mortgage brokerage First Metropolitan Financial Group LLC, both in Manhattan.
“A lot of banks don’t want to lend in a building that’s less than 50 percent owner-occupied. It may vary from one bank to another. The reason is that [banks believe] an individual is going to make an effort to pay bills on a place that he lives in,” Goldstein said. Banks fear that investor owners might not make an effort to keep up with mortgage payments if they have difficulty finding a renter or if tenants don’t pay the rent, he said. Since most condo offerings don’t include a mortgage contingency, any deposit or down payment could be lost to the sponsor if the buyer can’t obtain a mortgage.
Mortgage and down payment headaches only scratch the surface. Brokers and buyers need to make sure that there isn’t anything vague or misleading in the text. “There can be all kinds of surprises in there,” Goldstein said.
Goldstein said he had two clients who were about to buy condos, but when he reviewed the offer-leased land.
That’s not always a bad situation, but the financial terms regarding renewing the lease expiration needs to be spelled out clearly, he said. After reviewing the terms of the land-lease renewal, he advised both clients to pass on the deals because he didn’t think the terms were favorable, he said.
“I don’t like to tell my clients, ‘you must not buy that,’ but I want to arm them with information,” Goldstein said.
It’s all in the details
Real estate attorney John Bradbury says he knew of a situation where an offering wasn’t specific about what kind of floors were going to be used in the apartment. The offering stated the sponsor would use either “wood flooring or manufactured flooring.” Since the sponsor wasn’t specific, once the buyer signed, he would have had to accept anything from hardwood floors to laminate products such as Pergo. “Those are a few words that would be easily overlooked,” Bradbury said.
Offering plans will often specify brands or models of appliances and other fixtures. Sometimes they will promise a particular model or will provide a sampling of models that the sponsor may choose from. So, if a buyer wants a high-end Viking range, it should be clear that’s what they are going to get before signing the contract.
How big is it, really?
While there is some leeway for construction variances say if it’s a condo conversion and during construction something is found such as a steel beam that forces the developer to make small alterations in the floor plan the size of the rooms should be clear and as close to what’s stated in the plan as possible.
“When building a building it’s impossible to get everything exactly as in the (offering plan),” said Michele Conte, senior vice president and managing director for condominium marketing and sales at Brown Harris Stevens, who also teaches a class on selling sponsor residential units for the Real Estate Board of New York.
For example, it’s typically OK for a room that is supposed to be 14 feet by 20 feet to end up being a little smaller say, 14 feet by 19.5 feet. Or, if the baseboards don’t touch the floor exactly right in every area of a room, that also may be considered an acceptable construction variance, she said.
However, if there is a material difference and the buyer wants to renegotiate or get out of the contract and the sponsor refuses, the buyer can take the dispute to the Attorney General’s office and it will make a judgment on the matter.
“I lost a deal one time because the room was one foot short of the market plan,” Conte said. “I agreed with the buyer. He got his money back.”
That’s not the only time Conte has seen people try to get out of deals.
Getting out or in
It should be clear how a buyer can get out of a contract with her deposit once a contract is signed. Just because market conditions have changed and the apartment isn’t worth as much as it was a year ago, when the buyer first looked at the offering plan, doesn’t mean the buyer can just walk away.
“The danger for a developer selling today is that he’s not going to deliver the apartment for a year and anything can happen,” Conte said. “A couple could get divorced, the stock market could crash, a buyer could go to jail I had a situation where the husband went to jail and the wife asked to get out.”
The developer said no.
Offering plans are written to protect the developer as much as possible since the developer can’t sell the property to anyone else once it’s under contract. Most buyers are stuck unless they comb “the offering and find a legitimate way to rescind and get their deposit back,” Conte said.
One example would be a client who got his deposit back because the room was smaller than promised. Another example might be if a buyer can prove that a sponsor was aware that views were going to be obstructed by new development and didn’t disclose the information in the offering plan.
Brokers and attorneys also need to make sure their client understands that offering plans typically provide leeway for a developer to deliver the units later than expected in case of construction or other delays and that they might have to wait longer than expected to move in.
Absorbing unexpected costs
Common charges are important to review, but brokers and buyers should understand that in new construction there are no guarantees because the building has no financial history. If heating bills or salaries for the building’s staff are higher than expected, the buyers will have to absorb those costs.
“These are not numbers pulled out of the sky,” Bradbury said. “They come from an accountant who is an expert. There are building managers and the like who make representations to what utilities should be. There are designated experts in the field that have to be [consulted to provide their best estimates] because the building doesn’t exist yet.”
Bradbury said he’s rarely come across a situation where the estimated charges were way off from what was in the plan.
“In my experience they have not been so woefully inadequate that there can be cause for concern,” Bradbury said.
To simplify matters, brokers should advise buyers to take the offering plan to their attorney for a review. Once the attorney reviews it, the buyer should find out if the attorney has identified any red flags and then give the attorney a list of questions of things they want to be sure about.
Also, buyers should never sign anything or put down any money until the plan has been reviewed by an attorney and the buyer might even want to secure financing first as well, Goldstein said.
For more information about offering plans see the documents “Cooperative and Condo Conversion Handbook” and “Before You Buy a Co-op or Condo” listed in the index on the New York Attorney General’s Web site at http://www.oag.state.ny.us.