AG BULLETIN

The Real Estate Finance Bureau is pleased to announce that it has started posting offering plans and amendments to the offering plan database search web page. The database search results will now include a “Documents” tab when the offering plan and/or amendments associated with a particular filing have been posted to the database. This new tab will appear to the right of the “Stat Card” tab. Users may download individual or multiple documents using the appropriate buttons and checkboxes on the “Documents” tab.

Documents will be posted to the database once they have been screened in accordance with New York State law, regulations, and policy. Accordingly, some of the documents posted to the database may have private information redacted (i.e., blacked out). Such information includes, but is not limited to, bank account numbers, residential addresses, and purchaser or tenant names.

Please note that, because only screened documents will be posted to the database, the “Documents” tab may not include all documents reflected on the “Plan Details” tab of the database search results. For example, even if the “Plan Details” tab shows the offering plan and 6 amendments have been accepted for filing by the Department of Law, only the offering plan and amendment 3 may be posted to the “Documents” tab. Moreover, the “Documents” tab will only appear if documents have been posted for that particular filing. If documents have not been posted to the database for a particular filing, there will be no “Documents” tab. Additional documents will be posted to the database on an ongoing basis as they are screened.

The Real Estate Finance Bureau offering plan database is available at https://ag.ny.gov/real-estate-finance-bureau/database. To see an example of a filing with posted documents, look up 130 William Street Condominium (plan ID CD180040) in the database and click on the “Documents” tab.

Make sure your brokerage and co-brokerage agreements are always in writing. It may sound simple, but the litigation team at Starr Associates LLP was compelled to defend this issue for a client in New York Supreme Court when a purported “co-broker/finder” claimed he was entitled to 1/2 our client’s brokerage commission based on an alleged oral agreement.

Although the evidence provided by plaintiff during discovery was paltry, the court permitted the case to proceed to a jury trial, based on the claim by plaintiff that a gratuity offered by our client as a “thank you” once the deal was consummated, as is common in the industry, was really an effort to pay the co-broker less than the ½ commission orally agreed-upon. Our client wholly denied that any oral agreement was ever discussed and alleged that the “thank you” payment was a simple gift. Plaintiff provided no proof of such oral agreement, other than his own testimony.

After jury selection and a three day trial, where our firm questioned the validity and existence of the alleged oral commission agreement on cross examination of the plaintiff, a unanimous verdict was returned in favor of our client. The jury found there was not enough evidence to support plaintiff’s claim of an oral co-brokerage agreement.

It is important to note that, during the trial there was much debate as to whether the “procuring cause” standard should be applied to co-brokers as it is applied to brokers in general. While the judge ultimately decided not to instruct the jury that plaintiff was required to prove its case based on the procuring cause standard, it is open for future litigation as to whether a co-broker must also show he or she is the procuring cause of the transaction or if any alleged interaction, no matter how peripheral, is enough to state a claim for an oral co-brokerage agreement. Thus, brokers open themselves up to a factual dispute and potential litigation if their commission agreements, no matter how big or small, are not memorialized in writing. Protect yourself.

Please call us at Starr Associates LLP if you need any assistance in preparing, reviewing or memorializing your commission agreement or if you are involved in a brokerage dispute.

As many of you may have heard, the budget bill for New York’s 2020 fiscal year, which begins July 1, 2019, was signed into law and includes an increase to the New York State (NYS) transfer tax and so-called “mansion tax” on transfers of real property where the real property is located in any city within the state having a population of one million or more (i.e. all 5 boroughs). By way
of background, the current rate for the NYS transfer tax is $2 for every S500 (or fraction thereof) of consideration, subject to limited exceptions and exemptions and the current rate for the mansion tax” is 1% on transfers of residential real property where the consideration is in excess of $1 million.

Attached are the new applicable tax rates. It should be noted that, while the new tax will take effect on July 1, 2019, there is a safe harbor provision for transfers made pursuant to a binding agreement entered into on or before April 1, 2019 and that close after July 1, 2019.

In preparation for the new tax rates, our office will be preparing an amendment to all existing offering plans and will address the new tax rates in all pending contracts until such amendment is accepted for filing by the AG. Please give us a call with any questions and to discuss what may need to be done for your project.

NEW NYS TRANSFER AND MANSION RATES

On December 20, 2018, the New York State Department of Law (“DOL”) published a memorandum (“Memo”) setting forth guidelines to sponsors who wish to submit a condominium offering plan (“Plan”) and withhold certain units from the initial offer. The following summarizes the pertinent items from the DOL Memo, all of which will need to be clearly disclosed throughout the Plan, prior to withholding any units:

★ Applies to newly constructed, vacant or non-residential condominiums only. Other submissions (e.g. occupied conversions) will require prior written approval from DOL.

★ DOL will not permit sponsors to reserve the right in the Plan to withhold units from the offer in the future (thereby effectively removing previously offered units from the market).

★ Sponsors shall not withhold units to deceive the public about the number of sales. Therefore:

(1) For marketing/advertising, % of units sold must utilize total number of anticipated units in the condominium.

(2) Sponsors must not offer any withheld units (e.g. by engaging in sales/marketing activity, executing purchase agreements, or transferring title to units) prior to amending the Plan. VIOLATION MAY TRIGGER DOL INVESTIGATION FOR VIOLATION OF THE MARTIN ACT.

★ Declaring the Plan effective must be based upon the total number of anticipated units in the condominium.

★ Prior to declaring the Plan effective, sponsor must at all times offer at least 15% of the total anticipated units in the condominium.

★ Sponsor must not rent any units (including withheld units) before the consummation of the Plan.

★ Offering of previously withheld units may be done via a price change amendment provided the only information not previously not disclosed in the Plan is the offering price. If more information needs to be disclosed, a substantive amendment must be filed.

A complete copy of the Memo is attached for your convenience. If you should have any questions at all, please reach out to us.

Download AG Memo Here

Clients and Colleagues:

According to a recent New York City local law, the owners of all Class A multiple dwellings, which includes all cooperative corporations and condominiums, are required to adopt a “smoking policy” by no later than August 28, 2018. The law provides that the smoking policy must be a written declaration that states in clear and conspicuous fashion where smoking is permitted and prohibited on the premises. This smoking policy applies to existing buildings as well as offering plans that are currently in draft form. There are various ways to address the smoking policy requirement and the compliance obligations under the local law. Please feel free to call us to discuss.

Click here to view the statute.

The General Data Protection Regulation (“GDPR”) was approved by the European Union (“EU”) and went into effect on May 25, 2018.  The GDPR is the result of the EU Parliament’s goal to equip the EU citizens with stronger protections against privacy and data breaches.  One of the most significant and controversial changes to the GDPR is the expanded scope of its jurisdiction, such that the rules and penalties imposed by the GDPR now apply to all companies processing personal data of EU residents – regardless of the company’s location. This means that any of our clients who process the personal data of EU citizens – including by using websites that collect IP addresses and cookie data – may be subject to these new regulations.

The nature of these reforms would require any companies subject to GDPR to ensure that all systems and procedures are consistent with GDPR’s heightened conditions for prior consent, internal record keeping requirements, erasures of data upon request (including by third-parties associated with your company), data protection monitoring, and breach notifications, among other new or stricter requirements.

Starr Associates LLP highly recommends that any of our clients who may be subject to GDPR seek more information by consulting with privacy law counsel. To access the page of the official EU Commission website relating to the GDPR, please click here. Another resource for education about the GDPR is a website that was created to provide information about its main elements, available here.

The Kadampa Meditation Center occupies the entire ground floor of a seven-story commercial co-op building in Manhattan’s Chelsea district. The nonprofit that bought the 7,500 square foot space in 2012 has been trying for the past two years to convince the co-op board to convert the building to a condominium association. Such a conversion would enable the nonprofit to take advantage of a tax exemption that is not available to nonprofit shareholders in a co-op.

“Many not-for-profits are so hungry for ownership that they give up the tax benefits so they can own in a co-op,” says Michael Rudder of Rudder Property Group, which represented the nonprofit in its Chelsea co-op purchase. The long-term benefits of ownership include not being displaced at end of their lease, and being able to finance or lease the space and earn a profit.

The Chelsea nonprofit’s push to convert the commercial co-op into a condominium is a desire shared by shareholders and boards in numerous residential co-ops. To be sure, New York City condo units have been fetching 10- to 20-percent higher prices on average than co-op units for several years – numbers that are skewed by the escalation of luxury condominium construction. But the hurdles that cooperative housing corporations have to jump to do a conversion make very few co-ops willing to take it on.

The process referred to as a conversion is actually a collapsing of a cooperative corporation, says attorney Shaun Pappas, a senior associate at Starr Associates, which is known for its work on co-op conversions. “That is not done that often because there are substantial tax consequences, because you’re basically dissolving a corporation.”

To be able to convert from a co-op to a condominium association, a co-op board first needs approval from a supermajority – generally 80 percent – of its shareholders. If a supermajority approves, all shareholders must pay off any existing share-backed loans for their units, or convert to a regular mortgage loan. The co-op itself also must pay off any outstanding loans, or convert.

The co-op then goes to the state Attorney General’s office with a letter stating the shareholders’ desire to convert to a condominium, and that there is no public offering involved. Once the Attorney General approves the letter, the co-op hires an architect to draft tax lot drawings and floor plans of the condo units and common elements, and then uses those drawings to purchase individual tax lots from the city’s Department of Finance (DOF). The co-op’s attorney drafts a condominium declaration, which becomes the governing document for the condo association, and that is also submitted to the DOF for review and approval. If approved, the co-op is free to create the condo association based on its tax map drawings and condo declaration. This is recorded in the City Register’s Office.

Under the law, the conversion of co-op units to condo units is treated as a sale, subject to capital gains tax. But residential owners who use their unit as their primary residence are not required to pay a capital gains tax on their condo unit. Owners who either use their units as a secondary residence or rent them out do have to pay taxes on any value gain, as does the condo association itself, says attorney Warren Gleicher, a partner at Olshan Frome Wolosky, who advises clients on the tax impact of conversions.

On the other hand, says Gleicher, the IRS has ruled that commercial owners who convert from co-op to condo are treated as a “like kind exchange” – that is, when the size and the use of the space remain the same.

Attorney Pappas says Starr Associates receives about five to 10 inquiries each year about the co-op-to-condo conversion process, from either individual shareholders or board presidents of small residential co-ops. Although very few go forward, Pappas says conversions could become more common if condo prices continue to rise and the value gap between condos and co-ops continues to widen.

Source: https://www.habitatmag.com/Publication-Content/Bricks-Bucks/Condo-Conversions

New York State’s highest court shot down a Williamsburg condominium board’s effort to directly sue the principals of Savanna Real Estate, in a move that further enforces the protections created by limited liability companies.

In 2012, residents at 125 North 10th Street sued entities linked to Savanna and also sued the company’s principals, Christopher Schlank and Nicholas Bienstock, claiming their new condos were shoddily constructed, resulting in leaks, flooding, odors and dangerous conditions. An appellate court ruled in May, however, that Schlank and Bienstock were protected from personal liability through their LLC, and thus their names would need to be removed from the suit.

The condominium board pressed forward, pushing the personal liability issue all the way up to the Court of Appeals, where it was finally shot down this month. In an October 17 decision, Judge Janet DiFiore wrote that “the motion is dismissed on the ground that the order sought to be appealed from does not finally determine the action within the meaning of the constitution.”

In other words, because the condo board has not yet been given a decision on its full apartment damage claims (those are still pending in Brooklyn), it’s not a problem the appeals court can really handle just yet.

It is quite rare for this kind of real estate litigation to even reach the Court of Appeals in the first place. Savanna’s counsel, Andrea Roschelle of Starr Associates, said that it was the only condo board-related case she could recall landing at that court since 2009. Roschelle was not surprised with the outcome. “Statutorily, they really had no grounds,” she said. “It would have been easier for them if they had just gone back to the Second Department [appellate division] and said ‘you made a mistake.’”

Jennifer Bock, attorney for the 125 North 10th Street condo board, did not immediately return a request for comment.

Source: https://therealdeal.com/2017/10/27/condo-boards-crusade-against-savanna-principals-struck-down-by-states-top-court/

Over the years, a number of Brooklyn condo buyers filed lawsuits in New York Supreme Court against the actual developers behind the projects they lived in, alleging construction defects. One such case, against real estate investment firm Savanna and their 86-unit condo at 125 North 10th Street in Williamsburg, made its way to appellate court.

The judges in that case have now ruled that claims can only be brought against the development entity, in this case, an LLC. The takeaway: Developers aren’t personally liable for the buildings they put up.

Previously, cases naming individual developers as defendants were justified by developer signatures on the “certification of sponsor,” a document in which stakeholders affirm that all the contents of a new condo offering plan are true and representative. Brooklyn developers singled out in breach of contract lawsuits in recent years include Amir Yerushalmi and Alan Messner. The appellate court department covering Manhattan, however, has established precedent for dismissing cases brought on this argument. With the Savanna ruling, Brooklyn, covered by the appellate division’s second department, has gone the same way.

“For the last few years in the lower courts in the second department, judges have been denying motions to dismiss made by sponsors in construction defect cases,” said Andrea Roschelle, an attorney at Starr Associates who represented Savanna in the 125 North 10th Street case. “This cannot be the only industry in the United States that principals are not entitled to protect their assets by using the corporate form, here an LLC.”

In 2012, buyers at the condo Street sued Savanna and its principals, including co-founders Christopher Schlank and Nicholas Bienstock, as well as architects, management and construction firms involved in the project. Residents complained of hot water flowing through fixtures, deficient heating and cooling systems, flooding in the garage, foul odors and balcony railings unsafe for children. Although many of the firms and individuals were dismissed from the case in a Kings County court, Savanna and partner Investcorp couldn’t get their names removed from the breach of contract suit.

In the ruling, the appellate judges held that the individuals “cannot be held individually liable for the breach of contract alleged by the plaintiff, based solely on violations of the offering plan, merely by their certification of that offering plan in their representative capacities on behalf of the sponsor…”

Jennifer Bock, attorney for the condo board, did not return a request for comment.

This is not the only recent case with big implications for condo developer liability. In April, a Brooklyn judge ruled that Fortis Property Group was not responsible for defects at condos it sold after acquiring them from their original developer, Isaac Hager.

Source: https://therealdeal.com/2017/06/01/attention-brooklyn-condo-buyers-good-luck-trying-to-hold-your-developer-personally-accountable/