A successful marketing campaign for real estate, like most products, often involves a multi-state and international target market.  Marketing initiatives for consumer products may include websites, electronic mail, postal mail and other forms of communication.  Similarly, consumers are using these methods to shop for real estate.  A real estate developer has potential purchasers located in multiple states and countries. Having such a large consumer base and utilizing convenient methods of communicating with potential purchasers can be a great asset, provided the developer is in a position to take advantage of it.  For residential real estate marketed and/or sold within the United States this takes planning.

 

            A successful real estate development requires a lot of planning and attention to detail.  Attention is focused on design, construction, marketing and sales.  In the United States, however, there is another very important aspect of real estate development that many developers ignore - often because they are unaware it is exists until it is too late – and that is compliance with federal and state interstate land sales laws.  Unless applicable interstate land sales laws are complied with a developer could find its marketing plans severely curtailed.

 

            The marketing and sale of real estate lots^[1] within the United States, regardless of whether the property is located within the United States, is regulated at the federal level under the Interstate Land Sales Full Disclosure Act (15 U.S.C. §1701, et seq.) (the “Federal Act”), and the regulations promulgated thereto (C.F.R. § 17001.1, et seq. (1991)) (the act and related regulations are collectively referred to herein as the “Federal Laws”).  In addition to the Federal Laws, many states (and the District of Columbia) have promulgated their own interstate land sales laws.  Prior to marketing and selling residential property, the transaction must qualify as exempt from federal and applicable state registration or the subdivision in which the property is located must be registered with the Interstate Land Sales Registration Division, Office of Manufactured Housing and Regulatory Functions, U.S. Department of Housing and Urban Development (“HUD”) and applicable restricted states.  Developers who fail to comply with federal and state land sales laws risk civil and criminal penalties as well as recission of sales contracts by purchasers.  With proper planning, however, an interstate land sales compliance program can be created for a development to help developers avoid such penalties and reduce the recission risks. The primary focus of this article is the Federal Laws; state land sales laws are a full discussion in themselves and are discussed only briefly here.

 

 

 

 

I.          Federal Land Sales Laws

            Except in the case of an exempt transaction, a developer may not sell^[2] lots through the use of any means or instruments of transportation or communication in interstate commerce or the mails (including without limitation postal services, telephone lines and electronic mail) within the United States, unless the subdivision^[3] in which the lots are located is registered with HUD pursuant to the Federal Laws.  This means a developer and its agents cannot mail promotional materials or other information about the subdivision into or within the United States or return telephone calls or email requests for information about the subdivision, even if such request is unsolicited, which calls or emails originate in the United States, until the subdivision is registered with HUD.  Given the impact the Federal Laws have on the ability to market and sell subdivided land within the United States, it is important to consider land sales compliance issues early on in the planning and development stage of a subdivision that may be marketed in the United States.  Discussions with legal counsel knowledgeable in the area of interstate land sales early on in the planning and development of a subdivision will enable a developer to develop a plan for compliance with the Federal Laws that will complement the developer’s marketing schedule and objectives.

 

            A.        Registration

 

            To register a subdivision with HUD a Statement of Record must be filed with, and an effective date issued by, HUD.  The Statement of Record consists of the Property Report and the Additional Information and Documentation (“AID”).  The Property Report must be distributed to each purchaser located within the United States at the time of solicitation and/or sale, prior to the purchaser’s execution of a sales contract.  The Property Report provides full disclosure of specifics relating to the subdivision including descriptions of the infrastructure and recreational facilities, local community services, property owners association(s), real estate taxes, title encumbrances and restrictions on use of the lot, closing costs, and access to and within the subdivision.  The purchaser must acknowledge receiving the Property Report by signing a receipt.  The AID contains documents supporting all of the disclosures made in the Property Report and is not distributed to purchasers.

 

            The Statement of Record is comprehensive and adequate lead time needs to be built into a land sales compliance plan to allow for preparation of the Statement of Records and review by HUD.  To determine a timeline for preparation and filing of a HUD registration count back from the date the developer wants to commence marketing initiatives in the United States by mail or any other means of interstate communications system.  As a general rule, six months should be allotted to prepare and obtain acceptance of a HUD registration.  Registration with HUD can be accomplished more quickly, in some circumstances, but six months is a fair estimate of the average preparation and review time.   And remember, this is only to comply with the federal registration process.  Depending on the target market states identified for a particular subdivision, additional state registrations may be required before marketing activities and/or sales may be conducted and made in specific states (state registration is discussed in more detail below).

 

 

 

            B.         Exemptions under the Federal Act

           

            The Federal Act provides three types of exemptions:  (1) full statutory exemption; (2) partial statutory exemption; and (3) regulatory exemption.  The first two types of exemptions are based on a subdivision as a whole while the third type, regulatory exemptions, allow for exemption of individual lots.

 

                        1.         Full Statutory Exemptions.  There are a number of transactions that qualify for a full statutory exemption for the Federal Act.  A transaction that is fully exempt from the Federal Act is exempt from all provisions of the Federal Act, including registration and the anti-fraud provisions (discussed below).  The following summary highlights several of these transactions:

 

a.           Less than Twenty-Five Lots.  The sale or lease of lots in a subdivision containing less than twenty-five lots is exempt from the Federal Act.  If a subdivision contains more than twenty-five lots, but fewer than twenty-five are offered pursuant to a common promotional plan (because, for example, several lots have been permanently dedicated for public park use), the sale of the residential lots are exempt.  As defined under the Federal Act, “common promotional plan” means a plan, undertaken by a single developer or a group of developers acting in concert to offer land for sale or lease and such land is contiguous or is known, designated or advertised as a common unit or by a common name.  (15 U.S.C. § 1701(4)).  In contrast to the foregoing example, if a developer acquires fewer than twenty-five lots in a larger subdivision, and continues to act in concert with the developer of the balance of the subdivision, the offering may be subject to the Federal Act.

b.           Improved Lots.  The sale of (a) land on which there is a residential building ready for occupancy; or (b) unimproved land for which the sales contract specifically obligates seller (referred to herein as developer) to construct a residential building thereon to be completed within two years from the date the purchaser executes the sales contract is exempt from the Federal Act.  A building is deemed complete when it is physically habitable and usable for the purpose for which it was purchased or leased.  For example, a residential building is complete when ready for occupancy, with all utilities connected.

 

            A contract between a developer and purchaser for the purchase of a lot qualifying under this exemption must obligate the developer to complete construction of the residential building within two years of the date the purchaser signs the sales contract and must not allow nonperformance by the developer at his or her discretion.  In addition, the sales contract must not negate the purchaser’s right to specific performance, although that right need not be specifically stated.  For example, a contract which restricted the purchaser’s remedies for the seller’s failure to build a dwelling unit within two years of the earnest money deposit was held not to satisfy the requirements of the Act in Markowitz v. Northeast Land Company, 906 F.2d 100 (9th Cir. 1990); and a contract which listed the purchaser’s remedies as return of the deposit or specific performance, but excluded damages, did not meet the conditions for the exemption in the view of the Florida Supreme Court in Samara Development Corp. v. Marlow, 556 So.2d 1097 (Fla. 1990).

            The sales contract may allow for nonperformance or delays beyond the two-year building period for reasons not within the developer’s control if such provisions are legally recognized as defenses to contract actions in the jurisdiction where the building is to be constructed.  Accordingly, provisions allowing for time extensions for acts of God, casualty losses or material shortages are generally permissible.  In a multi‑phased subdivision, the obligation to build within two years does not require completion of the entire subdivision within that period, but only completion of the phase in which the lot sold is to be located.

 

c.           Sales to Builders.  The sale of land to any person who acquires the land for the purpose of engaging in the business of constructing a residential building or for resale to persons engaged in such activity is exempt from the Federal Act.  A sale or lease of land to a person for construction of his own home is not exempt from the Act under this clause. 

 

d.           Zoned or Restricted Real Estate.  The sale of real estate which is zoned for industrial or commercial development or which is restricted to such use by enforceable covenants is exempt from the Federal Act, provided certain conditions are met.  One such condition is the approval by local authorities of access to a public road running at least to the legal boundary of the subdivision, if not to each lot.  In addition, unless waived by the purchaser, a title policy or opinion must be issued in connection with the lot sale showing title vested in the developer, subject only to exceptions approved in writing by the purchaser or lessee prior to recording of the deed or execution of the lease.  The purchaser must be a duly-organized business entity engaged in commercial or industrial business and represented by a representative of its own selection (a sole proprietor is not excluded from representing himself). The purchaser must provide specific affirmations in writing, including for example, that the purchaser is engaged in commercial or industrial business and is purchasing the real estate substantially for its own use, or has a binding commitment to sell, lease, or sublease the property to an entity which is a duly-organized business entity engaged in commercial or industrial business.  The affirmations should be retained by the developer for the longer of three years or for the period of the applicable statute of limitations in the jurisdiction.

 

e.           REIT Securities.  The sale of Securities issued by a real estate investment trust. 

 

f.            Government Sellers/Lessors.  The sale or lease of real estate by any government or government agency, including city, state, and foreign governments as well as the United States government.  This exemption does extend to apply to sales or leases by federal or state chartered, regulated, or insured institutions.

 

                        2.         Partial Statutory Exemptions.  A partial statutory exemption provides an exemption from the registration and disclosure requirements of the Federal Act but not from the prohibitions against the use of unlawful or misleading sales practices and the inclusion of certain contract provisions in sales contracts more particularly discussed below in the section titled “Anti-Fraud Provisions”.  The following is a summary of some of the real estate transactions that qualify for a partial statutory exemption from the Federal Act. 

 

a.              Single-Family Residence.  To qualify for this exemption lots must be located in a community where the local government specifies minimum standards for subdivision development including lot dimensions, plat approval and recordation, roads and access, drainage, flooding, water supply and sewage disposal and the subdivision complies with all of the local codes and standards.  Each lot must be zoned for, or otherwise limited to (e.g., enforceable covenants), single-family residences.  By the time of closing, each lot must be situated on a paved street that meets the local standards or a bond must be posted by the developer to assure completion of roads to such standards.  By the time of closing, the local government or the homeowners association must have accepted or be obligated for maintenance of the roads upon which the lot is situated.  Also by the time of closing, potable water, sanitary sewer disposal and electricity must be extended to the lot or the local government must be obligated to install such utilities to the lot within 180 days from closing.  At closing, purchaser must receive a current title insurance binder or title opinion indicating that, subject only to exceptions approved by the purchaser in writing, marketable title to the lot is vested in the developer. The sales contract must provide for delivery of a warranty deed conveying title free from monetary liens and encumbrances to purchaser within 180 days from the date the purchaser signs the sales contract.  Prior to signing the sales contract, the purchaser or purchaser’s spouse must make a personal inspection of the lot.  Finally, no offers of gifts, trips, dinners or the use of similar promotional techniques to induce a visit to the subdivision or the sale of the lot may be used.

 

b.              The 100 Lots Exemption.  This exemption applies to the sale of lots in a subdivision containing less than 100 lots, excluding any lots otherwise fully exempt from the Federal Act.  If more than ninety-nine lots are sold, and if the 100^th lot and any subsequent lots are not in compliance with another exemption, future and prior sales will lose their exemption status and purchasers have the option to void their lot purchases.  This underscores the importance of keeping track of the number of lots actually sold.  The resale of a lot will count toward the ninety-nine lot limit.

 

            The 100 lot count for purposes of this exemption would exclude lots exempt under one of the full exemptions outlined in Section 1.  It is important to note that certain exemptions can be combined.  For example, if a subdivision contains 120 lots, ninety-nine lots may be sold under the 100 Lots exemption, ten may be sold under the Sales to Builders exemption and eleven may be sold under the Improved Lots exemption.

 

            It is also important to note that a developer who acquires fewer than 100 lots in a larger subdivision may jeopardize qualifying for the exemption if the acquiring developer acts in concert with the previous developer, so that more than 100 lots are offered pursuant to a common promotional plan.

c.              Twelve Lot Exemption.  Up to twelve lots may be sold in a twelve month period without registering the subdivision with HUD.  The twelve month period is measured from the date of the first lot sale.  A new twelve month period begins on the anniversary of the date of the first sale and with each new twelve month period this exemption renews and the developer may sell twelve lots in each twelve month period without registering.  If more than twelve lots are sold in any twelve month period, the exemption will terminate on the sale of the thirteenth lot.  Once terminated, the exemption cannot be revived by the same developer for the same subdivision even if less than twelve lots are sold in subsequent twelve month periods.  In determining eligibility for this exemption, all lots sold or leased are counted whether or not the transactions are otherwise exempt.  Resales of lots will not be counted toward the twelve lot limit.

 

d.              Twenty-acre Lots.  Subdivision lot sales will be exempt from registration requirements if each lot has contained at least twenty acres.  Easements for ingress and egress or public utilities are considered part of the total acreage of the lot if the purchaser retains ownership of the property affected by the easement.  In order to be eligible for this exemption, each lot in the subdivision must be twenty acres or larger in size.  If any one lot is smaller than twenty acres, no lot in the subdivision will qualify for the exemption.  A developer cannot take advantage of this exemption by treating as separate a site with lots that are each larger than twenty acres if those lots are offered under a common promotional plan with other sites which do not qualify for the exemption.  Further, lots measuring twenty or more acres may not be divided and offered in smaller parcels and still meet the requirements of this exemption.

 

e.              Intrastate Exemption.  HUD provides an exemption from registration for the sale of lots pursuant to an intrastate marketing plan (sales conducted only within the situs state of the subdivision) where the lots comply with a list of specific conditions which include but are not limited to: (1) the lot must be free and clear of all liens, encumbrances and adverse claims; (2) a personal on-site inspection is conducted by the purchaser or purchaser’s spouse; (3) the purchase contract includes specific disclosures (see 15 U.S.C. § 1702(b)(7)(A)((iii)); and (4) the purchaser acknowledges in writing receipt of a good faith estimate of the cost of providing electric, sewer, water, gas and telephone services to the lot.

 

f.               Metropolitan Statistical Area Exemption (“MSA”).  MSAs are defined by the U.S. Office of Management and Budget based on population.  To be exempt from HUD registration, lots within an MSA must meet specific requirements, including without limitation:  (1) located within a subdivision that contains, and has contained, fewer than 300 lots since April 28, 1969; (2) the principal residence of the purchaser is within the same MSA as the subdivision; (3) a personal on-site inspection is conducted by the purchaser or purchaser’s spouse; (4) the purchase contract includes specific disclosures (see 15 U.S.C. § 1713(a)(5)); (5) the lot is sold free and clear of all liens except those specifically excepted by HUD (see 15 U.S.C. § 1713(a)(6)); (6) prior to the sale, the developer makes certain written disclosures regarding mutually enforceable liens on the subdivision lots and the purchaser’s costs for utility installations, and the developer obtains a receipt for those disclosures; (7) the developer provides the purchaser with a written statement designating the developer’s agent for service within the state and acknowledging legal jurisdiction of the state over the developer; and (8) the developer must execute and submit to the Secretary of HUD on or before January 31 of each year a written affirmation of each sale made under this exemption.

 

3.         Regulatory Exemptions.  The transactions listed below are exempt from registration with HUD unless the Secretary of HUD terminates the exemption, as permitted for public interest reasons upon notice and hearing.  These exemptions are available on a lot-by-lot basis; the entire subdivision does not have to qualify.  The anti-fraud provisions of the Federal Act still apply to lots sold pursuant to a regulatory exemption.  Some of the transactions to which a regulatory exemption may apply are:

a.              Leases for Limited Duration.  The lease of a lot for a term not to exceed five years, if the provisions of the lease do not obligate the lessee to renew.

 

b.              Lots Sold to Developers.  The sale of a lot to a person who is engaged in a bona fide land sales business.  This exemption does not apply to the sale of lots to an individual buying the property for investment and resale at some unforeseeable time.

 

c.              Adjoining Lot.  The sale of a lot to a person who owns a contiguous lot that has a residential, commercial, or industrial building on it.

 

d.              Lots Sales to a Government.  The sale of real estate to a government or government agency.

 

e.              Sales of Leased Lots.  The sale of a lot to a person who has leased and resided primarily on the lot for at least one year immediately preceding the sale.

 

            No notice to or approval from HUD is required to market and dispose of property under the above described exemptions.  The developer is, however, responsible for maintaining complete records in order to demonstrate that requirements of a particular exemption have been met.

 

            C.        Anti-fraud Provisions

 

            As discussed above, use of the 100 Lots or Single-Family Residence exemptions from registration under the Federal Act does not relieve a developer from compliance with the anti-fraud provisions of the Federal Act. The anti-fraud provisions require, by way of example and not limitation, that it is unlawful for a developer or the its agent to employ any device, scheme or artifice to (1) defraud; (2) obtain money or property by means of an untrue statement of material fact; (3) omit to state material facts necessary to make the statements regarding the lot or subdivision not misleading; or (4) engage in any transaction, practice, or course of business which operates as a fraud or deceit upon a purchaser.  The anti-fraud provisions also require that a developer that represents that roads, sewers, water, gas, or electric service or recreational amenities will be provided or completed by the developer, must contractually obligate itself to complete, or cause to be completed, such services or amenities. (C.F.R. § 1710.4).

 

            D.        Reservation Agreements

 

            A common practice among real estate developers is to take reservations in advance of taking binding contracts for the purchase of lots in a subdivision.  Part III(a) of the HUD Guidelines for Exemptions available under the Interstate Land Sales Full Disclosure Act (the “Guidelines”) establishes rules for use of a reservation agreement prior to registration with HUD.  The Guidelines require that a reservation agreement: (a) be non-binding; (b) require deposits be placed in escrow with an independent institution having trust powers and be refundable in full at any time at the option of the potential purchaser; and (c) not become a binding obligation to purchase a lot without a subsequent affirmative action by the purchaser (such as signing a sales contract).  An option agreement where a potential purchaser could forfeit money in return for the chance to buy a lot is not permitted.  In addition, evidence of purported compliance with the Federal Act cannot be delivered to an interested party in advance of entering a reservation agreement for a lot that is neither registered nor exempt from the Federal Act.

 

            E.         Liability for Violations of the Federal Laws

     Liability for violations of the Federal Laws can be far reaching.  The developer, its officers, directors, partners, employees, agents and successors all may be held liable for violations of the Federal Laws.  Violators risk both civil and criminal liability, and under certain circumstances violations may render sales contracts voidable at the option of the purchaser.

 

            1.         Civil Liability. Civil liability for violations of the Federal Laws may include any one or combination of the following:  (a) monetary damages, specific performance or any other relief that the court deems equitable to an injured party; (b) payment of damages equal to the difference between the purchase price paid and the fair market value at the time relief is determined, plus interest, court costs, attorneys' fees, appraisers' fees and travel expenses to and from the property; (c) a court order enjoining the developer from further violation; and (d) monetary penalties of $1,100.00 per violation up to a maximum of $1,100,000.00 per person, per year.

 

                             2.         Criminal Liability.  Criminal liability for violations of the Federal Laws may include fines of up to $10,000.00 and/or imprisonment for up to five years.

 

 

 

                                    3.         Contract Recission.  In a non-exempt transaction, if the developer fails to deliver a Property Report to the purchaser prior to purchaser’s execution of a contract, the purchaser is granted a two-year right of revocation.

 

            II.        State and Jurisdictional Land Sales Regulations

 

            Many states regulate the marketing and sale of out-of-state land to their residents. In such states the real estate market is closed to a developer of a subdivision located outside of the state until the developer has complied with the state’s land sales laws (each such state a “Closed State”).  States have enacted laws that may require one or more of the following: (a) registration of the subdivision with a state agency; (b) distribution of a public offering statement prior to execution of a binding sales contract or a reservation agreement; and (c) solicitation, offering, and selling through a broker or agent licensed in the Closed State. 

 

            Most states have taken the position that advertising, sending an email or placing a telephone call into a state, even as a response to an unsolicited request for information, or mailing any marketing materials or information into the state will subject the person or entity conducting such activities to the applicable laws of such state.  The land sales laws are not uniform among all Closed States and the compliance process varies between states, ranging from a simple two page form to a comprehensive registration application with a state property report similar to the federal registration requirements.  A number of states also have sales contract and advertising disclosure requirements, specific escrow instructions for deposits made under sales contracts and require financial assurances that promised improvements will be completed.

 

            It is important to understand that exemption from the Federal Act, or registration there under, does not mean that the same subdivision will be exempt from registration under state laws.  There are a few states that provide an exemption equivalent to the federal 100 Lot Exemption.  In most states with an interstate land sales registration requirement, exemptions based on the size of a subdivision is limited to projects much less than ninety-nine lots (e.g., 25 lots).  There are also some states that provide an exemption from some or all of the state land sales laws for subdivisions that qualify for the Improved Lot Exemption from the Federal Act.  While registration under the Federal Act will not exempt a subdivision from registration in any state requiring land sales registration, a HUD registration may help to simplify the state registration process because some state provide a shorter registration process for subdivisions registered with HUD.  Regardless of whether a subdivision is exempt from or registered or registered under the Federal Act, the interstate land sales of each target market state for a subdivision should be considered.

 

            The penalties that may be imposed by a Closed State for violations of the state’s land sales laws range from voiding sales contracts and imposing cease and desist orders to fines and criminal charges, including misdemeanor and felony charges, against the developer, its directors, officers, agents, employees, and sales agents.  A broker’s or sales agent’s license may also be suspended.