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Real estate brokers who handle sales of cooperatives, condominiums, and time-sharing interests may need more authorization than a real estate broker’s license because the sales may be subject to securities regulations. If the sales are classified as a sale of securities, the real estate broker may need to file additional forms with the state to comply with state regulations.
Most of the time, a person selling or leasing any type of residential, commercial or industrial property on behalf of a client needs only a real estate brokerage license as authorization to handle the transaction. However, a real estate broker may need additional authority when the subject property consists of any of the following:
- Cooperative housing
- Time-sharing interests
All states have adopted condominium and/or cooperative laws, and some have issued extensive regulations governing public offerings of this type of real estate. Although a real estate broker’s license is all that’s needed to act as broker for the seller or purchaser of isolated condominium units that are being resold by an individual unit owner, some states require additional forms to be completed and filed if the broker is acting as the selling agent (sometimes referred to as a ”broker-dealer”) because of the securities implications involved in the offering of the unit for sale.
Some states also subject cooperatives and homeowner association projects to the same requirements that apply to condominiums, including the special licensing of brokers who are acting on behalf of the sponsor or developer. Shares in a cooperative housing corporation representing units to be occupied by purchasers under proprietary leases are considered to be the acquisition of a residence and not securities subject to federal regulation. So, brokers involved in isolated sales of stock in cooperative housing corporations, as with condominium units, are not required to register under federal law.
Classification as Sale of Securities
The sale of condominiums or cooperatives may be classified as a sale of securities and may be subject to state regulation. An investment contract is a device employed to promise profits from the use of another person’s money. The Securities and Exchange Commission classifies an investment contract as a sale of securities if it is offered with any one of the following three specified rental arrangements:
- The purchaser will acquire economic benefits from the managerial efforts of the promoter of the project to rent the units
- The condominium offering includes participation in a rental pool arrangement
- The offering of a rental requires that the purchaser hold his unit available for rental for any part of the year, use an exclusive rental agent, or otherwise agree to material restrictions on the occupancy or rental of his unit
Sales of condominium or cooperative units may be classified as sales of securities and therefore be subject to state regulation if the sales are defined as ”investment contracts.” There are three tests used in the condominium, cooperative and time-share context to determine whether a particular transaction constitutes an investment contract:
- The federal test, which looks for an expectation of profits through a third party’s efforts
- The risk capital test, which requires the investment to be subject to the risk of an enterprise
- The evidence of indebtedness which is subject to regulation
Based on the tests above, the sale of time-sharing interests or ”interval ownership” interests constitutes a security sale subject to state regulation. In such transactions, the investor purchases the right to use a condominium for a period of time with reliance on the seller to maintain the property. The time-share buyer or investor will receive benefits from the purchase. He assumes the risk that the venture will succeed. Also, the sale of a time-sharing interest is an evidence of indebtedness because the investor, by contractual obligation, is promised future benefits and rights in exchange for presently paid money.
If the real estate interest is classified as a security, the promoter’s broker has to be qualified as a broker-dealer. Some states have other special licensure requirements for specific types of securities.
Rights of First Refusal
Another unique consideration for brokers representing sellers and buyers of condominium or cooperative units involves the rights of first refusal. By definition, a right of first refusal requires a unit owner, when he receives an offer to purchase (or lease) that unit, to give the other co-owners (generally, through the management group) the right to purchase (or lease) the unit or to furnish a purchaser (or lessee) on the same terms offered by the prospective purchaser or lessee. If the other co-owners don’t, for whatever reason, want to have the prospective purchaser or lessee as a neighbor, they may exclude him by purchasing (or leasing) the unit on the same terms.
The broker representing either the purchaser or the seller of a condominium or cooperative unit upon resale is usually the one who must bear the burden of complying with the requirements of the project governing transfer of a unit owner’s interest. In the case of a condominium, the broker must:
- Secure a written waiver of the board of manager’s “right of first refusal” and
- Secure a written statement from the board certifying either that the outgoing seller has paid all common charges for which he was responsible or, in the alternative, detailing the amount the seller will owe the condominium as of the closing date
Processing the resale of a cooperative apartment requires many of the same steps as the resale of a condominium unit. The broker processing the application must take the action necessary to induce the cooperative housing board of directors not to veto the proposed sale (or sublease).
Questions for Your Attorney
- I’m interested in buying a time-sharing interest. What documentation and disclosures should I expect to receive from the seller and its real estate broker?
- How long does the cooperative or condo board/association have to exercise the right of first refusal if I have a prospective buyer for my cooperative shares or condo unit?
- What are the different or additional forms and paperwork required when I’m selling/buying a time-sharing interest, condominium unit or cooperative share as compared with the paperwork involved in the sale/purchase of a single-family home? Are your fees different for such a transaction?