The ILSA Condo Exemption – Not Out of the Woods Yet

Real Estate   |   October 17, 2016

Construction SiteThe Interstate Land Sales Full Disclosure Act (ILSA) is a federal statute that aims to prevent land sales fraud and uninformed purchases of unimproved real property by requiring registration of subdivisions with the Consumer Financial Protection Bureau and pre-contract consumer disclosure of a property report. ILSA includes among its remedies an automatic right of rescission, even for closed transactions and without any proof of harm, and it therefore has been a popular statute for bringing buyer’s remorse claims when the real estate market suffers a downturn. Since there are several drawbacks to registering under ILSA – including cost, time, administration, and substantive purchase contract requirements – developers generally seek to obtain the advantage of an exemption.

Condominium units are considered “lots” subject to ILSA. The increased size and complexity of construction of condominium projects often made unavailable the more common exemptions, namely for a promise to complete construction within two years and for subdivisions under 100 lots. The U.S. Congress passed HR 2600 in 2015 to exempt condominium units from registration and disclosure (but not the fraud rules) under ILSA (the “Condo Unit Exemption”).

Contrary to popular belief, the Condo Unit Exemption does not solve all ILSA issues for condominium developers. First, for technical reasons although qualifying condominium units are exempt from registration, they count as units in a subdivision if it is necessary to determine whether a subdivision has fewer than 100 units. For example, in a mixed housing-type subdivision with 90 condo units and 20 single family lots, the subdivision has 110 lots so the 20 single family lots cannot take advantage of the 100-lot exemption even though the 90 condo units have the advantage of the Condo Unit Exemption. One solution is to try to qualify the condo units under the Improved Lot Exemption, since then the units are not counted as part of the subdivision.

Second, the Condo Unit Exemption requires the unit to be an “improved lot” by closing. In other ILSA contexts, this has meant the issuance of a final certificate of occupancy (CO). Therefore, we advise clients to be conservative and require in their contract the existence of a final CO by closing rather than a temporary CO or architect’s certificate of completion. In addition, we warn clients that a “decorator-ready” or “designer ready” unit that does not have a final CO by closing might not qualify for the Condo Unit Exemption. It is preferable to provide the minimum fixtures in those units necessary to obtain a final CO to avoid becoming a plaintiff lawyer’s test case.

For further information about the Condominium Exemption or other questions about the Interstate Land Sales Full Disclosure Act, please contact Rob Freedman, Rich Linquanti, or Bill Sklar.

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