Thursday, October 21, 2010, 9:51 AM

DESPERATION IS THE MOTHER OF CREATIVITY

Posted by: Chris Jones

BEWARE ILSA. What is ILSA? Never heard of it, you say? Well, you are about to hear of it, and if a recent federal court decision from New York becomes a trend, it will be one of many wrinkles that tend to prolong the real estate crisis. ISLA is the Interstate Land Sales Full Disclosure Act, and it was enacted in the late 1960s in response to land booms in places like Florida where unscrupulous interstate developers were selling land sight unseen to out-of-state buyers. It contains numerous technical requirements. Requirements that, as with many technicalities that really have little to do with the propriety or fairness of the involved deal, were often ignored prior to the real estate bust.

Now, as recently reported by New York Times reporter, Christine Haughney, prospective buyers that put down large sums to hold condominiums or apartments are finding refuge in the technicalities of the statute, and developer oversights are resulting in cases going forward that seek return of deposits merely because the property has devalued, the investment is not as attractive and the buyers want out.

Last month, a federal judge in New York ruled that prospective purchasers of a $3.4 million Upper East Side (this equals expensive real estate for the three of you who are unfamiliar with New York City)may recover their $510,000 deposit, because the developer's contract violated an ILSA provision requiring that contracts in large developments be in a form that can be filed with the city register. In other words, the complaint was not that the developer was unscrupulous, that there was deception or fraud, that the development was not being completed, or that some financing trap tricked the wealthy shipping executive buyer. Instead, the argument was that the developer would not permit the contract to be filed because it would trigger a lien against the property (and, ironically, likely throw a wrench in the developer's financing and ability to complete the project). The natural, fair and just thing to do in such a case? Apply a law that was intended to protect the unsophisticated from buying up swampland in Florida, and leave developers, and their financiers, swinging in the wind.

So, here is how this will work: Rich and sophisticated Greek executive bruises his knees jumping on the real estate band wagon and puts a half-million dollar downpayment on a swank Upper East Side apartment; then the real estate market does precisely what everyone predicted . . . it bursts; the value of apartments like the one he is buying drop precipitously, and his investment doesn't look nearly as smart; Greek executive now wants out and wants to walk with his $500,000 (and really, who can blame him?); developer has financed the project in part on the strength of pre-construction sales and cannot return buyers' downpayments or else the entire development will collapse; enter, ILSA and creative lawyering; the court (perhaps correctly) rules that the deal violated ILSA provisions and the prospective buyer(s) are entitled to have their investment returned; developer's financing crashes and the development goes into...wait for it...FORECLOSURE, which we all know will be a pitfall free, smooth sail for the banks; the development sits empty (or at least emptier) for goodness knows how long. And, what does this do for revitalization of the real estate market, the economy or development of sound jurisprudence? To get that answer, you'll have to stay tuned...just like me.

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