Question: I am a condominium sponsor in New York City, and I am getting conflicting guidance on whether I need to set money aside if I begin to sell condo units with only a temporary certificate of occupancy. Can you explain to me what the law is and what a sponsor needs to do?

Answer: The offer and sale of real estate securities such as cooperatives and condominiums is governed by General Business Law (GBL) §352-e, et seq. (the Martin Act). The Martin Act is a disclosure statute that empowers the Department of Law to promulgate suitable rules and regulations governing disclosure that must be provided to prospective purchasers. While the test of the Martin Act is not overly specific on disclosure, it does in fact explicitly regulate the treatment of purchaser down payments. GBL §352-e(2-b) requires that “[a]ll deposits, down[] payments or advances made by purchasers of residential units shall be held in a special escrow account pending delivery of the completed apartment or unit and a deed or lease[,] whichever is applicable, unless insurance of such funds in a form satisfactory to the attorney general has been obtained prior thereto.” In furtherance of GBL §352-e(2-b), the Department of Law issued guidance on Oct. 13, 2015, which defines a completed apartment or unit as one that has a permanent certificate of occupancy (a PCO). See Real Estate Finance Memorandum, “Certificates of Occupancy and Part 20 Offering Plans.” Because GBL §352-e(2-b) governs the conversion of both new construction as well as occupied rental properties to cooperative or condominium status, the escrow requirements apply to any type of offering where a sponsor is selling apartments or units without a PCO.

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