Investors May Obtain Rights to Acquire Condominium Units Prior to the Filing of an Offering Plan

June 2013

The use of an appropriate corporate structure may provide investors the option to acquire the property interests in a condominium unit prior to the filing of an offering plan by the sponsor.

The New York Attorney General's office recently issued a memorandum that permits early investors in condominium development projects to reserve the right to purchase a specified condominium unit in certain circumstances. Investors may first purchase an interest in a syndication or offering of interests in the company developing the project at any time, including when the project is under development and later have certain rights to convert or use the equity in the investment to a purchase of a condominium unit.

The significant effect of the New York Attorney General's memorandum is that there is now express authority to acquire and use funds in the project well before an offering plan is filed or a purchase is closed. Developers may utilize real estate investment structures, such as Series Limited Liability Companies, to acquire project investment. Lenders, including construction lenders, might better judge the possible success of a project in its infancy by reviewing the syndication offering and evaluating its progress.

There are several corporate securities law and tax issues involved in any such offerings. Careful consideration should be given to the structure of the investment and the scope of the disclosures that are provided to the investors. Investors will not have the protections of an offering plan and should carefully consider the additional due diligence procedures and the terms and conditions of the offered equity interests.

The express authority provided by the Attorney General's memorandum creates many opportunities for developers and investors to increase the probability of a successful condominium development.

To view the memorandum issued by the New York Attorney General's office, please click here.