Report on condominium development and sales practices, together with additional views

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Title:
Report on condominium development and sales practices, together with additional views report
Physical Description:
iii, 25 p. : ; 24 cm.
Language:
English
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United States -- Congress. -- House. -- Committee on Banking, Currency and Housing. -- Subcommittee on General Oversight and Renegotiation
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U.S. Govt. Print. Off.
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Washington
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Subjects / Keywords:
Condominiums -- United States   ( lcsh )
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federal government publication   ( marcgt )
non-fiction   ( marcgt )

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Additional Physical Form:
Also available in electronic format.
Statement of Responsibility:
by the Subcommittee on General Oversight and Renegotiation of the Committee on Banking, Currency, and Housing, House of Representatives, 94th Congress, second session, July 1976.
General Note:
At head of title: Committee print.

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University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 025954176
oclc - 02509013
lccn - 76602426
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lcc - HD7287.67.U5 U53 1976
ddc - 333.3/232/0973
System ID:
AA00025947:00001

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COMMITTEE ON BANKING, URRENCY




94th Congress, Second Session







Printed for the use of the Committee on Banking, Currency and Housing

U.S. GOVERNMENT PRINTING OFFICE















COMMITTEE ON BANKING, CURRENCY AND HOUSING
HENRY REUSS, Wisconsin, Chairman
LEONORK. (MR. JOHN B.) SULLIVAN, ALBERT W. JOHNSON, Pennsylvania
Missouri WILLAM STANTN, Ohio
THOMAS ASHLEY, Ohio GARRY BR Micgan
WILLIAM S MOORHEAD, Pennsylvania CHALMERS P. WYLIE, Ohio
ROBERT G. TEPHENS, JR., Georgia JOHN ROU Cifornia
FERNAND J. ST GERMAIN, Rhode Island STEWART B. McKI Conec
HENRY B. GONZALEZ, Texas JOHN B. CONLAN, Arizona
JOSEPH G. MINISH, New Jersey GORGE HANSEN, Idaho
FRANK ANNUNZIO, Illinois RICHARD T. SCHUL E, Pennsylvania
THOMAS M. REES, California WILLIS D. GRADISON, JR., Ohio
JAMES M. HANLEY, New York ENRY J. HYDE, Illinois
PARREN J. MITCHELL, Maryland RICHARD KELLY, Florida
WALTER E. FAUNTROY, CHARL E. GRASSLEY, Iowa
District of .Colunbia MILLICENT FENWICK, New Jersey
LINDY (MRS. HAL BOGGS iana RON PAUL, Texas
STEPHEN L. NEAL, North na
JERRY M. PATTER SO fornia
JAMES J. BLANCHARD, Michigan
CARROLL HUBBARD, JR., Kentucky
JOHN J. LAFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LES AuCOIN, Oregon
PAUL E. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
PHILIP H. HAYES, Indiana
MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
CLIFFORD ALLEN, Tennessee
NORMAN E. D'AMOURS, New Hampshire
STANLEY N. LUNDINE, New York
PAUL NELSON, Clerk and Staff Director
WILLIAM P. DIxoN, General Counsel
MICHAEL P. FLAHERTY, COUh8el
GRASTY CREWS II, Counsel
ORMAN S. FINK, Minority Staff Director
GRAHAM T. NORTHUP, Deputy Minority Staff Director



SUBCOMMITTEE ON GENERAL OVERSIGHT AND RENEGOTIATION
JOSEPH G. MINIS, New Jersey, Chairman
PARREN J. MITCHELL, Maryland GEORGE HANSEN, Idaho
BUTLER DERRICK, South Carolina JOHN H. ROUSSELOT, California
PHILIP H. HAYES, Indiana STEWART B. McKINNEY, Connecticut
HENRY B. GONZALEZ, Texas
FERNAND J. ST GERMAIN, Rhode Island
DAVID W. EVANS, Indiana
STANLEY N. LUNDINE, New York
JACK ZACKIN, Counsel

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LETTER OF TRANSMITTAL

JuoL 20, 1976.
To Members of the Committee on Banking of Currency
Transmitted herewith for use by the full Banking, Currency and
Housing Committee and the Congress is a report by the Subcommittee
on General Overight and Renegotiation on Condominium Develop-
ment and Sales Practices.
The report has been adopted by all of the majority members of the
Subcommittee and by Congressman McKinney. Congressman Rous-
selot and Congressman Hansen have chosen to submit additional
comments.
JOSEPH G. MINISH, Chairman.
(III)

























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PRACTICES TOGETHER WITH ADDITIONAL VIEWS

I. INTRODUCTION
Section 821 of the Housing and Community Development Act of
1974 (P.L. 93-383) reflects Congressional concern with the significant
implications of the rapidly expanding condominiui housing market.
ring th first session of the 94th Congress, the Subcommittee on
Housg and Coimunity Development requested that the Subcom-
mittee on General Oversight and Renegotiation of the Committee on
Banking, Currency and Housing undeake a inquiry int condo-
minium dvelt d saes praices. Pursnt to this request, the
It ~~l~ p ofermml whea Aerl
Oversight Subcommittee conducted four days of hearings and an
legislatioisnecessary or advisabe t protect condomium purchasers
and t insure that cdminium development keeps pace with the
nation's. housing needs.
A condomium is defind as an individually owned housing unit
in a multi-unit project. Condominium purchasers acquire full title
to their units plus an undivided interest in the pro s common areas
such as the parking lot, recreation facilities an the land under the
building. A related type of cluster hou g s he planned unit develop-
ment (PUD). In a pland unit development, the purchaser acquires
fee simple ownership of what is typically a single-family home as well
as the real property beneath it. All other areas of the development are
In the past 5 years, condominium development has increse dramat-
icallyfrom 8000 units in 1970 t approximately ,340,000 units
today. It is estimated that almost 4 million Americans currently reside
in condominiums. In 1973 and 1974, HUD estimated that 25 percent
of all for-sale housing starts were condominiums. The National Asso-
ciation of Home Builders estimates that condominium starts in 1975
amounted to 8.1 percent of total private housing production, or 94,082
units. Projections for 1976 put the condominium share of total starts
at 9 percent, representing approximately 139,000 condominium units.
oominim develp nt, howver, has been a highly reonal
phenomenon. In some areas of the country, therefore, condominium
production. HUD estimates that nearly 5O percent of all condominium
units are located in Florida, Califoria and New York. More than
70 percent are concentrated in 10 States: Florida, California, New
York Illinois. ichigan, Pennsylvania Texas, New Jersey, Arizona,
and Marland. As might be expected, Uthe majority of condominium
housing is located in or on the fringes of urban areas, or in resort
.the






2

purchasers' point of view, condominiums combine some of the best
attributes of apartment living, such as ease of maintenance and prox-
imity to urban centers, with the tax advantages and opportunities for
equity appreciation characteristic of single-family housing. In addi-
tion, condminiums are less expensiv than detached homes, making
the benefits of property ownership available t alager share of the
population.
Condominiums also offer certain advantages to developers which
make them attractive alternatives to more traditional investments.
Rapidly rising costs of land, labor, and materials militate in favor of
high density, multi-unit housing. These same factors, however, plus
high real estate taxes and the imposition of ren contrls, have sinifi-
cantly diminished potential profits to be reaped from rental housing.
There are, therefore. great incentives for a developer to turn to con-
dominium construction where he can realize a quick return on his in-
vestment, and turn responsibility for running the project over to the
resident owners. Owners of existing rental projects have similar in-
ducements to convert their projects into condominiums.
Certain benefits inherent in condominiums have also become ap-
parent to local governmerits. The development of condominiums pre-
sents one of the only meaningful possibilities of attracting middle-
income families back into inner city areas. In addition, the conversion
of rental units into condominiums provides the possibility -of neigh-
borhood rehabilitation and the increased stability and maintenance
which traditionally attends home ownership.

II. FINDINGS AND CONCLUSIONS

A. CONSUMER PROBLEMS

Despite' the potential benefits of condominium development, the con-
dominium boom has been accompanied by a number of consumer prob-
lems and developer abuses. On February 18 and 19, the Subcommittee
on General Oversight and Renegotiation heard testimony from con-
dominium consumer advocates and spokesmen for deveopers. On May
19, 1976, Housing and Urban Development Secretary, Carla Hills
reported on the findings of the HUTD Condominium/Cooperative
Study. The Subcommittee also held hearings on May 22 in Hallandale,
Florida and obtained thev iews of nurerous condominium owners and
several major developers. The Subcommittee found the following prob-
lems to be those generally considered most significant:
1. A recreation lease is a device by which the developer of a condominium
project retains title to a project's recreation facilities, such.as the swimming pool
or a card room, and leases these facilities to the unit owners. Such leases are
usually for 99-year periods and contain escalation clauses which provide for auto-
matic adjustments in rent, based on increases in the cost of living. In almost all
cases wherehetey exist, execution of the recreation lease is a prerequisite to the
purchase of an individual apartment. A purchaser cannot, therefore, purchase an
apartment but decline signing the recreation lease and forego use of the recrea-
tion facilities. The subcommittee found that long-term recreation leases are the
greatest complaint of dissatisfied condominium owners in Florida.
2. Understandably, condominium purchasers expect their housing to be of better
quality than a rental apartment, since the purchase of a condominium involves
a major investment. Condominium owners, however, report that poor construc-
tion quality is a major grievance. Faulty construction poses particular problems
to condominium purchasers since it is virtually impossible to conduct an ade-






3

qute inspectioof projet's structurl system. In addition, onstructio de-
fects i condominiums are difult to remedy because of the requirement that a
majoity of owners must agree to make repairs. The problem of faulty construc-
tion is further exacerbated by the fact that many developers do not provide any
warranties on a building's major structural systems.
3. Because the legal relationships flowing from condominium ownership are
complex, the legal documentation required for the creation of a condominium
frequently exceeds several hundred pages. The language of the documents is so
dflcult to understand that it is generally beyond the comprehension of the
averae aym Purhaser, therefore, oftendo not fully understand their rights
and responsibilities until probles arise and hidden obligatios become clear.
4. A series of difficulties sometimes beset condominium owners after the devel-
per tr control of te project over to them. Such problems include improper
inrn verge, nadeqate budgeting, unworkable bylaws, and lack of ade-
quate reserves for major repairs and replacements. In general, these blems
result from lack of proper management.
S e coum probles arise fro the close-quarter living inherent in
condominium ownership. Concerns such as the problem of pets and neighbors
ih diveret lifestyles, for example, are often cited by condominium owners as
sources of dissatisfaction.
6. For a variety of reasons, including underfinancing and the general recession,
S elopers have gone bankrupt in the past several years. In
some cases these bankrupt developers had been commingling purchaser deposits
th g rl constructin f ollowg the developer's bankruptcy, pur-
asers have been unable to recover their deposits.
A widely reported problem is ev per misrepresentation of the apartment
owners' future maintenance costs Whether intehtional or inadvrtet, hen this
actce occurs pchasers nd themselves saddled with expenses far in excess
of those they anticipated.
8. Problems are created for unit owners if the developer fails to pay his pro
rata share of association assessment for completed but unsold units. This gen-
ally requires the apartment owners to pay larger asessments or face curtailed
9.ertain evelopers are including in their sales contracts a provision which
obligatethe purchser to utilize uit financing arranged for by the developer in
res substantial) "finders fee". Obviously, this practice in-
reases the price of the unit and prevents te purcaser from attempting to obtain
The refutourn control of a proect over t the resident
S th a been a recurring problem. Aside
from depriving the unit owners of their right to fully control ther own property,
this practice has been cited a leading to several specific abuses Developers have,
for example, entered into long-term "sweetheart contracts" with management
comat y tir own subsidiaries. These contracts subject unit
owners to higher cost and lower quality management than might have been
tle to s t n id dent management company.
11. Many condominium owners have reported that their apartments were not
ready for occupation on the date promised by the developer. This is a p ular
problem for purchasers who have sold their homesor whose leases have ter-
minated and have no available a lternave housing.
e Sbee beevestt a maj rity of th problems re-
ported by condominiu owners stem directly from therelative new-
ness ofcondo housin. Most purchasrs of condominiums
simply do not possess the requisite knowledge and information to
enable them to fully understand the impon of condominium
ownership. Unlike buers of single f amily homes or renters f apart-
ments., who are generall familiar with the product for which they are

what to look for and expect when purchasing an apartment. While
ee eeeee of wil deloper misreprestation
eal it is te geeral lak f er Info rma which
enerates the severest roblems for condominium owners.






4

In her statemen to the Subcommittee, Amanda Hyatt, exective
director of the Georgia Association of Condominium Owners, ad-
dressed this point:
The most widespread sourcef problems encountered by our members is lack of
education and understanding. Most condominium purchasers . are buying a
condominium for the first time and with very little idea of whait is they are
joint ownerhip of the c prperties nor o they comprehend that they
owners, must operate the [owners'] association. They often do not understand
exactly what they own individually and what is commonly wned or restric-
tions that common ownership imposes. (earings p. 358).
Secretary Hills, in response to a question from Chairman Minish,
indicated that providing the individual with adequate information
could solve 95 percent of consumer problems.
The problem of inadequate information is compouded by the com-
plexity of the document tion, which deters even those condominiu
purchasers anxious to understand exactly what their purchase entails.
As Congressman Ben Rosenthal told the Su mmitte
In addition to their bulk, condominium documents are Mhghly technical in
nature and extremely difficult to undersand. In some cases all docents cover-
ing the purchase are not even delivered to the buyer until after the purahase has
been concluded and the contracts for sale signed. Even if the purchaser is given
adequate time to inspect the documents, their sheer voluie and complexity
makes it difficult for the average layperson or lawyer to understand. Thus, it is
unlikely that many purchasers-if any-have even a vague notion of the commit-
ment they are making when they finally sign a contract to purichae a condo-
minium. (Hearings p. 94).
It is the Subcommittee's conclusion that disclosure to prospective
purchasers, in readily understandable language, of all pertinent in-
formation concerning a particular condomiium project woud allevi-
ate many of the problems reported by condominim owners. Such
information would include conspicuous disclosure of important items
in the sales contract, such as the existece and terms of recreation leases
and management contracts, and the extent and duration of the devel-
oper's control over the unit owners' association.
Even complete and conspicuous disclosure, however, would not al-
leviate all the consumer problems. Disclosure must be supplemented
by educational programs to acquaint consumers with the basic facts
concerning condominium ownership ad to point out the key features
to look for when purchasing.
Education, moreover, should not be limited to the consumer. The
subcommittee agrees with Secretary Hills, who stated:
A better informed public more knowledgeable developers and better trined
property managers can eliminate many of the problems and abuses we have iden-
tified. (Hearings p. 202).
Through its Office of Consumer Affairs and Regulatory Functions,
HUD is currently engaged in an attempt to educate all parties con-
cerned with condominium living, and has published a series of booklets
for this purpose. The Subcommittee believes that a comprehensive pro-
gram of education is one of the most important measures HUD can
take to assure consumer satifaction and a healthy condominium
market.
As the figures cited above indicate, condominium development has
slowed from its extremely rapid pace in the earl 1970s. In part, this
slowdown is due to the general recession. Well publicized consumer






5

Snoed rtin th co rucon slow


development are favorable.
In addition, as Secretary Hills reported, "Some experts believe that
a significant amount of construction a conversin activiy will take
place in areas that currently have few condominiums." (Hearings

The subcommittee believes that Congressman Rosenthal was correct
.when e testified:a

The pressure of the problem has subsided at the mment because of the reces-
sion but it will surely come back. The trend to conversions and the building of
condominiums of course is enormous. It islike water being heated in a kettle,
inevitably it is going to boil ad that top is going to be blown off. We in Congress
e ticipate that event nd nt let the problem get outof hand. (Hearings
p. 96).
B. CONVERSIONS
Over one hundred thousand rental .units have been converted to con-
dominium ownership ince 1970. Perhaps no aspect of condominium
development has engendered as much controvrsy as the conversion
process. The fear has been widely expressed that conversions are hav-
ii, P : , . ay-'

ing a se im ct u the nation's low-income and elderly citzens,
since these groups usually cannot afford to purchase their apartments
and thus face su ary eviction. The chronic scarcity of rental housing
in the major urban areas, whre most coverions occur, makes it
difit or ip ible fr evied t ts to obtain comparable or
alternative housing. Each cnvrted apartment building, mreover,
exacerbates the rental housing shortage by further decreasing the stock

For t e r, he Oversight Subc mittee considered the con-
dominium conversion process to. be worthy f ompreensive study.
On February 19, the Subcommittee heard from a panel of four experts
on the conversion process: Dr. George Sternlieb of Rutgers University,
Ahur v Assitnt ttorey Gener of the State of New
York, and David H. Marlin and Erica Wood of the National Council
of Senior Citizens. The testimony of these witnesses, coupled with
tht ty Heresnative enjamin Rosnthal, d
Verona, New Jersey Mayor, Jerome Greco, provided the Subcommit-
tee with an extensive factual background from which to analyze the

The sharp rise in the cost of operating an apartment building, the
prime location of converted buildings, and the purchasers' opportuni-
tion ve a cotributed to theonersion
phenomenon. It appears, however, that two goernmeta policies have
provided the major impetus for the conversion o rental units. The
promulgation of municipal rent control ordinances is. perhaps, the
overriding incentive for apartment owners to convert. As Dr. George


i . [Their imposition makesthe hip
of rental facilities a more riskful, less promising investment. The response is; an
attempt to sell out. Since private buyers for the parcel as a whole are faced
74-550-76--2




6

with the same drab picture as the prospective seller, tis io a pr r
promising avenue. . .
What is left therefore is the condominium conversion process. Since the build-
ing now is to be sold among a variety of individuals e of whom becomes
the owner of his own apartment, the tricture on rent level are irelee
(Hearings pp. 69-70).
In addition, prospective purchasers of converted apartments are
encouraged by the favorable federal income tax treatment afforded
to homeowners. Dr. Sterniheb went so far as to lable federal tax policy
"the principal . shaper of the pesent situation." (Hearins p. 46).
Moreover, purchasers' expectatios of sizeable tax deductions fre-
quently furnish the apartment owner an additional incentive to con-
vert, since they enable him to secure from individual buyers a higher
than pre-cbitrol price for the total of apartment units in his building.
Mayor Greco, for example, testified that prices of the individual
units in a converted project in Verona averaged 31/2 times the assessed
valuation.
In a study of conversions in Washington, D.C., Dr. Sternlieb's
Center for Urban Policy Research found that converted apartments
appeal primarily to young, childless couples, and to well-to-do elderly
families whose children no longer reside at home. Because national
demographic trends indicate that these households are increasing at
a far greater rate than the national population as a whole, it appears
that the condominium conversion process will remain a significant
factor in the nation's housing picture for the foreseeable future.
All of the Subcommittee's witnesses agreed that it is the nation's
elderly citizens who are most severely affected by the conversion proc-
ess. Living on fixed incomes, many older people are not financially
able to purchase their apartments. Moreover, it is often difficult for
the elderly to arrange for mortgages, and many simply believe them-
selves too old to take on the responsibilities of home ownership. The
problems of the elderly are compounded by the fact that many of them
reside in well-constructed, well-located buildings which are prime
targets for conversion.
The Center for Urban Policy Research found that, in the District
of Columbia, the principal family compelled to move from a con-
verted building is an elderly household with a head whose median age
is over 60 years. The median income of such households approaches
$8,500, with the largest concentration below $10,000. While this
family's rent typically represented 25.7 percent of income, the con-
dominium changeover would have increased housing costs to amost
53 percent of income. In response to a question from Mr. McKinney,
Dr. Sternlieb indicated that the Center's findings concerning Wash-
ington, D.C. were equally valid for all major urban areas.
Similarly, in its study of conversions in Washington, D.C.. the
National Council of Senior Citizens found that 54 percent of those
who moved from converted buildings were aged 60 or over, while 45
percent had incomes under $10,000. Altogether, 32 percent were found
to be low and moderate income renters.
While our witnesses concurred that conversion forces he elderly
out of their apartments, there was considerable disagreemet over
the ability of evicted senior citizens to locate new rental units com-
parable to their former apartments. Dr. Sternlieb reported:






7t

Their new unit had a median rent of $182 monthly. Interestingly eough1, this
is exactlythe same median tt ,Wprevailed in the unit which, nderwent
condominium conversion. While the move itself represents some degree of hard-
ship .. there s little ev e to suggest that the market was ot able to
absot the moeouts at rents cmparable to those arged bere the condo-
miniium convern o urred. Morover, they shifted to unit compaable in size
and quaty to t e vacate,~ andmost of these were stil in the city ..
(Hearings pp. 56 and 60).
vid Marlin, on the her han d repted that the Natipnal Coun-
cil of Senior Citizens' study found that 72 percent of low and middle
income elderly experiecea 20 percent o greater increase in rent as
they moved to their new locations. The NC.S,C. study also inlicated
that 23 percent of the evicted tenants took four months or longer to
find substitute housing.
Secetay Hills testified that an average of only 20 percent of rental
tenants purchase their apartments when a building is converted., She
also reported that, "Those who do move often find it difficult to find
substitute housing, especially in areas where the available supply of
suitable housing is inadequate or too expensive."
Economic factors aside, all of the witnesses expressed a belief that
te sc nd psycological impact of conversion on the elderly is
severe indeed. Uprooted from neighlborhoods in which they have
typically esided for many years, forc, d to leave old friends and old
e ries, te derly find it extremely difficult to adjust to their new
situation. The very process of apartment hunting may, in fact, prove
extremely taxing. These conclusions are borne out by the N.C.S.C.
study. As explained by Eric:a Wood:
The study also focused on social and psychological costs of moving for these
elderly persons; 9 percent responded that they had a harder time seeing their
families 81 percent responded they had a harder time getting to church; and
71 percent had a harder timne getting t~o the doctor.
Moreover, Mr. Chairman, 45 percent reported ill health effects from the move,:
More particuarly, anxiety and grt depressio. (Hearings p. 40).
On the other hand, the Subcommittee found that the conversion
process offers significant benefits to the jurisdictions in which it is
occurring. The conversion of quality buildings in prime locations
presents a viable method by which cities can reverse the exodus of
midde cs reidents. Anici p alities also benefit from the increased
assessents on converted parcels. As Dr. Sternlieb testified:
From Wahington' point oiew, you take all of the conversions that have
taken place, what you have is about a 100-pecent increase in the tax base on
sites. You have a doubling of your base with no particular increment in the
municipal expenditures required. (Hearings p. 88),
The c e n rental partments into copdminius preseits a
classic instance of c pineting values and interests. As pointed out, the
conversion process can have severe repercussions for elderly citizens
forced to move from long-established residences. Balanced against
soetys interest in protecting the elderl? however, is the potential
benef inherent in the ability of the onverson pocess to improve
the fiscal position of the nation' cities, hrough up-graded assess-
ments and the in-migration of middle and upper-class households.
It is the sense of the Subcommittee that the responsibility for bal-
i prI~ + tt... +t....
g tese com in interests pr rly resides with the risdic-
tons directly affected by the conversion rocss. t would e both





8

ufair and unwise for hefederal government to inhibit the conversion
process in financial ly-stra pped communities that believe that the over-
all economic benefits justify the social costs of conver sion.
It is also pparet that communitie striking the balane in favor
of tenant protection have acted or are acting to reduce the threat of
eviction. ew Yor State and San Francisco, Califora, for example,
have enacted a requirement that 35 percent o the tenants n a ilding
must agree to purchase apartments before conversion can take place.
Palo Alto and Marin County, California have enacted ordinances
linking the right to convert to their community's rental vacancy rate.
In his testimony before the Subcommittee, Arthur Levine indi-
cated an additional objection to federal action:
I might also point out this, namely, that conditions in New York City or the
urban areas like New York City may be different than conditions elsewhere. And
you just cannot tailor a national law that will fit every situatio throughout the
land. And you just cannot tailor a law that will fit each and every econoic
class. (Hearings p. 90),

C. THE CURRENT FEDERAL ROLE
HUD's Office of Interstate Land Sales Registration (OILSR), the
Federal Trade Commission, and the Securities and Exhange Com-
mission are the three federal agencies currently involved in the ad-
ministration of condominium development and sales. In order to learn
the details of these agencies' condominium related activities, and to
assess the potential interaction between these activities and a cmpre-
hensive scheme of federal regulation, the Subcommittee on General
Oversight and Renegotiation requested the views of Secretary Hills
on the activities of OILSR, and solicited testimony from James De-
Long, Assistant Director of Special Projects, Bureau of Consumer
Protection, Federal Trade Commission, and two witnesses from the
Securities and Exchange Commission, Richard H. Rowe, Director of
the Division of Corporation Finance and Paul Gonson, Associate
General Counsel.
1. Office of Interstate Land Sales Registration
The Office of Interstate Land Sales Registration administers the
Interstate Land Sales Full Disclosure Act. The Act applies to the sale
or lease of 50 or more lots of real property through the mails or other
instruments of interstate commerce. Regulations have subjected con-
dominiums to the Act since 1969. A condominium project is considered
as a subdivision, with each unit being a lot. The Act, however, ex-
empts sales of completed units or units sold under a contract requiring
completion within two years. As Secretary Hills explained, these ex-
emptions exclude most condominium projects from the requirements
of the statute:
With respect to condominiums intended as primary residences in metropolitan
areas, registration is generally unnecessary since most professional builders are
able to deliver a completed unit to a purchaser within two years after the
contract of sale has been signed. (Hearings pp. 223-224).
2. Federal Trade Commission
The staff of the Federal Trade Commission is currently conducting
an investigation of condominium sales practices. The investigation








is focusing on possible violations of Section of the Federal Trade
Co mmission Act which prohibits unfair or deceptive trade practices.
James DeLong explained to the Subcommittee:
During the investigation the general philosophy of the staff has been that
the best use of FT resources would be in connection with problems of long term
ee ntrac ad recreation leas, especially when cosumers are
tloked into suc agreements as the result of contracts entered in the past. ....
To obtain consumer redress we must be able to show a Federal District Court
that the practices ~for which redress is sought were fraudulent or dishonest.
While the Coon i f can ssue cease and desi orders ainst practices
which ar simpl unfair and ideeptive the igher standard must be met if redress
is to be obtained. (Hearings p. 258).
Mr. DeLong rep that the staff planned to make recomienda-
tions to the Commission in the near future.
Sadditio to its authority to comence litigation, the 'FTC is
to issue regutions to prevent future unfair and deceptive
practice In response to a question from Mr. Evans, Mr. DeLong

When the invstigation started, both of these possibilities were certainly
open. After C introduced bills last year, we felt we should coMnentrate
Sthis other araf the problei f the past because we felt that Congress
might wellbe enacng legslation ii this area and that it would be foolish for
us to get into rule-maing when legislation was in process. . We are not pro-
ceeding in dition, bu it is an open possibility. (Hearings p. 261).
Several consumer spokesmen have also suggested that long-term
ecreatio ses onstite "tie-in" sales and are therefore in violation
of the ati-tst ws. r. DeLong indicated that FT action based
on this theory hs ot ee precuded. It seems clear, however, that
the Federal Trade ission sff,at least for the time being, is
concentrating on seeking to redress abuses of management contracts
and recreation leases through Section 5 of the Federal Trade Com-
mission Act.
3. Secuities ad Exchange Commisio
If a co ominium is offered and sold as a "security", as that term
is defined li the federal securities laws, it is subject to regulation by
the Secritiexc ge Com ission. Although the line is some-
what unclear, th Commision will generally consider a condominium
to be a security when, as Richard Rowe explained, "The facts suggest
that puraser is investing in a business enterprise, the return
rom whi ill be sust ialy depende on the success of the
managerial efforts of other specified persons."
In 1973, the Commission issued Securities Act Release No. 5347,
iii tat condill be considered "securities" in
any of the following circumstances:
1. The condominiums, with an rental arrangement or other similar service,
are offered and with e is economi benefits to the purchaser
t be derved f e eria effo .s of te pmoter, or a third party
designated or arranged for by the promoter, from rental of the uinits;
2. Participation is offered in a reintal pool arrangement;
3. A rental or similar arrangement is ered whereby the purchaser must
hold his unit available for rental for any part of the year, must use an exclusive
his unit. shl
Wt J1 resi oro rental of

If SEC determines that a condominium constitutes a security, the
developer is required to comply with the Securities Act of 1933 and






10

the Securities and Exchange Act of 1934. The 1933 Act- is basically



' 'te i .
a disosure statute, requiring theofferor to register and have declared
effective a registration statement containing full- and. fair disclosure


reliating of the project Until SEC declares the statemeat effective,
the developer cannot accept any funds nor consummate any sales.
Theo Securities and Exchange Act of 1934 regulates individuals in
the. biusiness of selling, securities, and may require a. dev~loper to


rerister his salsmen as securiities broker/dlers, or find, registered
broker/dealers to sell units in his projects. Probably the most serious


consequefne of having to register salesmen as broker/dealers is the
application of the nargin requirements of the Federal Reserve Boar's
Regulation T. These requirements prohibit assigning a value to a
security for purposes of using it as collateral unless the security is
listed on an exchange or a special margin list. Under the regulations,
therefore, broker/dealers selling condominium units cannot partic-
ipate in an offering where the developer has himself extended or ar-
ranged for financing. This interpretation of Regulation T makes it
very difficult to arrange mortgages for investment condominiums. The
Commission and the Federal Reserve Board, apparently in response
to this problem, promulgated regulations last year exempting certain
condominiums from the operation of Regulation T.
Registration with the SEC is a costly and time consuming process.
Richard Rowe estimated that the process may take from a month to
a year, and cost between $50,000 and $100,000. Only 88 projects have
been registered since 1967, a number considered by SEC to be only
a small portion of those required to register under the regulations.
In response to a question from Mr. McKinney, Mr. Rowe indicated
that the failure of developers to file is probably due to their ignorance
of the application of the securities laws to investment condominiums.
In his testimony, Mr. Rowe frankly admitted that constraints on
time and manpower have prevented the Commission from devoting
the resources necessary to make developers aware of their obligations
under the securities laws, and to insure that these obligations are met.
He also admitted that SEC's disclosure and broker/dealer registra-
tion programs might be considered by some to be unduly costly and
time consuming when applied to less-conventional investment vehicles
such as condominiums.
Based on these considerations, SEC indicated that they would not
necessarily object to the enactment of a comprehensive federal con-
dominium disclosure and regulatory statute which would be adminis-
tered by another agency. They did stress, however, that their support
of such legislation would depend on their assessment of whether it
provided sufficient protection for investors. As Mr. Rowe put it:
We believe, however, that in formulating such legislation, the Subcommittee
should bear in mind that there may be significant differences between the kind of
regulation or disclosure that should be required for residential, urban con-
dominiums, on the one hand, and the disclosure that would be appropriate for
"investment" condominiums such as certain resort or commercial projects. Unless
new legislation were specifically directed to the problem of investment as opposed
to residential condominiums, it would, in our view, be important to retain exist-
ing Commission jurisdiction over condominiums which come within the definition
of a security in order to assure that such securities, like other investment vehicles,
are subject to disclosure and other requirements of the federal securities laws.
(Hearings p. 272).






.11

D. GOVERNMENT SPONSQ1REl FINANCING MECHANISMS
1. HUD/FHA Condominium Mortgage Insuance
-Section 234 of the National Housing Act authorizes HUDJ/FI-IA to
insure condominium mortgages. Under Section 234(d)I FHA insures

condoinium housing development. When construction has ben com-
plete and indiidual unitsare sold the units are rleased from the
project mortgage and financed separately.
A purchaser may finance his unit with FHA Single-Family Unit
MortgageInsurance under Section 234(c), if the mortgage does not
eceed $4500. Ahough HUD regulations require that no unit mort-
gage can be insured until units representing 80 percent of the value of
the total units in a project have been sold, this requirement can be
waived if the circumstances warrant.
iHUD/FHA hp established stringent quality control standards for
the projects insure under Section 234. FA involves itself in such
projts from their iception, making feasibility analyses of initial
proposals, reviewing preliminary specifications, and examining corn-
plete architectural drawings and specifications before making a firm

In addition to supervising the quality of construction, HUD/FHA
regulates the mnnner in which a developer may offer units for public
sale. Before any solicitation can be made, the developer must obtain
FHA approval of all organizational documents, including manage-
ment contracts. No language will be permitted in the enabling declara-
tion that would permit the grantor to retain ownership of the common
facilities.
Adequate disclosure to prospective purchasers is assured through
the requirement that a "subscription and purchase agreement", incor-
porating essential information about the project, be used in the devel-
oper's solicitation. A schedule of estimated monthly assessments must
be attache to the agreeent. The sums received on account of the pur-
chase of all units must be deposited in a special escrow account, under
an escrow agreement which has been approved by HUD/FHA.
Since the inception of the Section 234 (c) program, FHA has insured
a total of only 24,174 condominium unit mortgages. Condominium
units utilizing FHA assistance thus account for less than 2 percent
of all existing units. The spokesmen for condominium developers
who testified befoe the Sucommittee indicated that the 80 percent
pre-sales requirement and the provisions of the Davis-Bacon Act
account, in part, for the limited utilization of Section 234. They also
stated, however, that the major factor limiting wider utilization of
FHA assistance is the requirement in Section 234(c) (2) that no
mortgage on an individual condominium unit, located in a project
contai g 12 or more units, shal be for 234 insurance unless
the entire project is covered by an FH insured project mortgage.
This provision, of course, prevents FHA assistance in any large
project which was original fly constructed with conventional financing.
The developers also pointed out that the provision results in delays
and reased costs sice FHA must process both the project mortgage






12

application and the individual unit mortgage application before insur-
ing any unit mortgages in a given project.
In response to a question from Mr. McKnney, Secretary Hills
enumerated the reasons for this two-step processing procedure. The
Secretary stated:
First of all, we are required by statute to determine th te condominium
is part of a project which may be c4vered by a project mortgage under the Na-
tional Housing Act. You hae to get the t with e
pigeonholes, and second, we hae to deemin at the owr is
creditworthy.
These are separate and distinct questions. But it is not duplicative processing,
it is two-step. One, does the project comply with the sta ? And then two,
are the ndividual purchasers creditworthy and are they the kind of ndividuals
for whom we should provide insurance of thir loan?
Simply by determining that the projects meet minimum property standards
and that sort of thing does not uniformly mean that the taxpayers should insure
the loan of every person. (Hearings p. 230).
In her statement, Mrs. Hills indicated that the lack of wider utili-
zation of section 234 can be traced to the stringent consumer protec-
tion provisions outlined above, and the easy availability of commercal
credit for condominium development in the early 1970's.
The Subcommittee believes that the provisions of section 234(c) (2)
have been an impediment to wider utilization of FHA condominium
mortgage insurance. We are not, however, prepared to recommend
at this time that Congress amend this provision. We do recommend
that HUD carefully evaluate section 234 (c) () to assess its utility
in light of the goals of the National Housing Act.
2. Veteran Administration Fimancing
The Veterans' Administration also guarantees mortgages on indi-
vidual condominium units. Through March 1976, the Veterans' Admin-
istration had guaranteed the mortgages on approximately 5,400
condominium units. Unlike section 234, however, the Veteran's Hous-
ing Act of 1974 authorizes the guarantee of loans to acquire individual
condominium units without the prerequisite that the entire project
has been insured by HUD/FHA. The unit, however, must be in a new
condominium development or in a structure originally built as a con-
dominium project.
3. Secondary Market Agencies
The Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC) provide a
secondary market for condominium mortgage loans. FNMA's condo-
minium program is centered around its prior approval service. A
mortgage seller who has been approved by FNMA may seek prior
approval of a condominium or PUD project by submitting an appli-
cation to secure FNMA's certification. If prior approval is granted,
a seller may submit mortgages on the individual units in the project
for sale under FNMA programs.
Approval is granted only when FNMA's review of the project and
individual unit documentation shows that the Association's interest
as a mortgagee and the interest of the home owner are adequately
protected. Therefore, like the Federal Housing Administration,
FNMA requires that stringent construction and consumer protection
standards be utilized before granting prior approval. To date, FNMA






13

has received applications for prior approval on 127 condominium proj-

-WJ
ects representing 20,200 units, and 167 PUD projects representing
32,108 units. Of these. FNMA has granted -inal approval for unit

units, and 56 PUD projects representing 6, units.
FNMA aiso administers programs to purchase FHA insured multi-
family project mortgages. FNMA will purchase either project mort-
gages sured pursuant to section 24 of the National Housng Act or
individual unit mortgages in such prjects. Unit mortgages must be
insured under section 234 or 235 (i) of the National Housing Act or
guaranteed by th VA under section 1810, chapter 37 of title 38,
United States Code. The unit mortgages may be delivered pursuant
to either blanket project commitments or single-family commitments.
Such mortgages are also currently eligible for purchase by the Gov-
ernment National Mortgage Association (GNMA) under its program
23. GNMA project mortgag are administered by FNMA. To date,
FNMA has ot purchased ny Section 234 project mortgages. They
have, however, as of Deceber 31 1975, purchased 6,254 Section 234
unit mortgages, totaling $100791,292. FHLMC is also active in the
purchase of condomium unit mortgages and had purchased about
22.000 loans by the end of 1975.
Projects insured under Sectio 234 of the National Housing Act
a.re also eligible for construction loan advances under a program
administered jointly by NMA and FHA. Basically, this program
authorizes FNMA to make loan advances not to exceed 95 percent of
the amount of each FHA insured advance. To date, FNMA has not
ruction financing of ay Section 234 projects.
4. Inter-Agency Task Force
Secretary Hills informe the Subcommittee that HUD has orga-
nized an inter-aency task force, the Committee for Standardization
of Condominium Requirements, comprising all the federal and quasi-
federal organizations associated with the financing of condominiums
(FHA, FmHA, VA, FNMA, and FHLMC). The goal of this task
force is to eliminate duplicitous or conflicting requirements and to
make it easier for evelopers to utilize federally related financing
programs. The task fore is attempti to standardize the program
requirements of the various organizations to allow for more rapid
reviews and approvals. Mrs. Hills promised that HUD would proceed
as quickly as possible to complete inter-ageny negotiations and to
implement the resulting task force recommendations.

TIT. RECO313.FENDATION S
Condominiums have been described as the best housing alternative
avalable to Americas given the economic and environmental realities
of the present time. Our study revealed, however, that when condo-
minium development is left unregulated, serious consumer problems
arise which deprive the condominium ownersof their exectations of
good and decent housing and curtail the construction of new condo-
minium units. It is the Subcommittee's recommendation, therefore,
that Conress enact leislation rovidin minimum standards for dis-






14



4closur and consumer protectioy in cndominim sales and cnvr-







*'ium uinits'and common alteasi' d u two~ea: va nty
sions. Specific the Subcomiittee recommends:
SThe promulgatiol of feder minimum disclosure p'ovisions-to





o2. Enactient of a "coowing-off" period allowing the conedominiu
purchasers to cancel their contracts within 15 days after the execution




of ta sales units in lagreement ni ee
6. A requirement that tenanl pu aser deposits be placed in a special
escrow accounts prinot to be utilizied b a developer until owner
occupancy.-
4. A one-year warranty against structural defects in new condomin-



order to fai and common areas,d a torsiy and aranty for conver to pr-
units.


e5. The Subcommittee' xeroposals for minimum dis osure, a cooling-
7. Enfo, ament of the above provisits swould alsobe left applicable



owners through individual or claSs actions in federal court. Attorney's
to the sal be oof units in planned unit developments.
8. St ate rementy chem tha t tenants be ie disosure and sbst n-
than 120 days prior to being required to vacate their apartments in


order to facilitate a condominium conversion affed an option to pur-
chase their apartments exercal legisation, ithin 90 days of such notice.
state sale f condnof the above provisions would be left to apartment
ownerely throepesent an additional remedy class act for aevederal court. Attorney's
thes statld be recoverable by successful plaintiffs.
9. StateCurreulatory schemes that provide the disclosure and substan-
tie protection outlined above would not be affected by the Subcom-



*DlSCUSSlO .
A. C0XSUTTIER PROTECTION
ittee's proposed federal legislation, either inin the interstate or intra-
thae sale of condominiums. The right to sue resutin federal courhaset would





familiarity with condominium housing. A large part of this problem
can be overcome by requiring developers to disclose to prospective
purchasers in a bref easy to understand format, the inf0ration
necessary to enable consumers to make a sound purchase decision. The
majority of witnesses who testified before the Subcommittee agreed
that a federal disclosure requirement would be an important step for
merely represent an additional remedy for aggrieved consumerf the
these states.
9. Current federal condominium-related activities should remain
in effect.

A. CONSUMER PROTECTION





As poin hav ted out in th e Subcommittee'ns "Findings and Conclusions"e
ithe majorit y of consumere probabl y are thely result of purchaser un-253)
familarity with condominium housin. A large part of this problem
cane eparcome by requiring d Urban elopers to disclose to prospec ntive
miniurchasers in a b form daclostre in the ale of o rinformation
necessary to enable consumers to make a soundoin purchase decision. The
majority of witnesses who testified before the Subcommittee agreed




that a informedurcase disio, t Federasclosure requirement wo uld be an important step for
the protection of condominium consumers. As James DeLong of the
FTC stated:
I think we have all focused on this. There is a general consensus that disclosure


is the appropriate reedy here and probably the only reedy. (Hearings p. 253).
Similarly, Secretary.Hills noted:
The Department [of Housing and Urban Development] has endorsed national
minimum standards for disclosure in the sale of cIondominium properties. Every
effort must be made to enable potential condominium purchasers to reach an
informed purchase decision, but Federal disclosure requirements should be held
to a minimum. (Hearings p. 215).
While disclosure is important, the Subcommittee believes that it
is equally important that the information required to be disclosed by







4 15

ral l atio e limited to essetial items, and be st out in clear,
concise terms.' Lengthy, complicated disclosure statemenits rve little
purpose since they do not -enhance consumer tuderstandtug and may,
in fact, be ignored by purchasers. In addition, developers would incur
suial. expenses n preparing exe is ure urp s and
would undoubtedly pass these coss.o to cosuers. Te Sbcommit-
tee agrees with Secretary Hills:
Highly technial and voluminous disclosure statements are complicated,
ostly, and aswe found during our stdy, often not read by the, buyer. Accord-
ingly, disclosure requiremens shquld bLe limited to the provision of informatipn
essential to a prudent purchase decision. (Hearings p. 216).
The Sbomitte on General versight and Renegoti ion, there-
fore, recommends that the developer berequired to furnish the follow-
ing information to all prospective purchasers:
1. The name and address of the condominium project, and the name, address
and telephone number of the developer and of the project manager or his agent;
2. A general narrative description of the project stating the total' umber of
units, a description of the types of units and price of each -type of unit, the
total number of units that may be included in the project, and a precise state-
ment t nature of the interest which is being offered;
3. A genral disclosure of the status of construction, zoning, site plan, or other
approvals, and compliance or notice of failure to comply with any other Federal.
Stat, or local statutes or regulations affecting the project, and the actual or
sc led dates of completion of buildings, recreation facilities, and other com-
mon elements;
4. The significant terms of any financing offered by or through the developer
to purchasers of the condominium units in the project, including the name of
any bank or other institution involved in the financing, the minimum downpay-
ment, and the interest rate;
5. A brief deription of any warranties for structural elements and mechan-
ical and other systems, stated separately for the individual units and the common
elements;
6. A two-year projection (revised and updated at least every six months) of
annual expenditures necessary to operate and maintain the common elements
of the condominium project, and a complete statement of estimated monthly cost
per t r such two-year period including-
(A) the formula for determining each unit's share of common element costs;
(B) the amount of principal, interest, taxes, and insurance each listed
separately;
..... '' ^ : i. .Y ,
(C) the dollar amount of operating and maintenance expenses;
(D) the monthly cost of u tilities and
(E) any other costs, fees, and assessments;
7. A statement of significant provisions for management of the condominium
project including-
(A) conditions for the formation of an owners' association;
(B) the apportionment of voting rights among the members of the

(C) any provisions concerning meetings and required notice thereof;
(D) provisions for the activities of officers of the association and their elec-
tion, duties, and functions;
(E) the ontraca rights and responsibilities of the owners' association; and
(F) the bining nature of any provisions of documents establishing or con-
trollin the condominium project and the method of amendment, of any portions
relating to rs' aociation;
8. A statement of purchaser's right to review the condominium instruments,
to void the contract, any conditions for the return of deposit, a statement about
any present litigation concerning the condominium project, and the rights of
agai the eveloper for failure to comply
with federal requirements;
9. A statement of the extent of commercial or other nonresidential develop-
ment in or near the condominium project and the potential effects of such devel-
opment on the interests, rights, or obligations of the condominium unit owners:
10. The existence (or requirement for the establishment) of a reserve fund
to finance the cost of repair or replacement of common element components;






16

11. The existence and terms of any lease of the project's common areas, with
a clear, concise definition of an "escalation clause" if such a clause is included
in the lease; a iando c au
12. A clear, concise definition of all essential terms used in the disclosure
statement.
The Subco tte believes that requiring the d l rs to pr de
the above infor tion will not prove unduly burd me, nor incur
unnecessary costs to the consumer. The cots of suc discosure would
be minimal since all the equired information is realy avalae to
the developer. In addition, the Subcommittee coneurs in the views of
New York State Assistant Attorney General, Arthur Levine:
The evidence is quite clear that the nation's ability to construct and market
housing is not deterred by full disclosure and is often enhanced. .. Disclosure
helps and protects the real estate industry by establishing a climate of hoesty
so that competition does not descend to the level of liars and cheats. By adher-
ing closely to the promises contained in the disclosure document, unnecessary
litigation involving allegations of fraud and misrepresentation can be substan-
tially reduced or eliminated. (Hearings p. 84).
The Oversight Subcommittee believes that minimum federal dis-
closure, when coupled with the educational programs administered
by HUD's Office of Consumer Affairs and Regulatory Functions, will
prove highly effective in protecting condominium buyers. We also
believe that certain substantive measures are necessary to insure ade-
quate consumer protection. To prevent the loss of purchaser down-
payments and deposits in the event of developer bankruptcy, it is rec-
ommended that federal legislation require all such payments to be
held by the developer in a special escrow account. This provision would
effectuate the general expectation of the parties to the sale, without
incurring substantial additional costs to the developer.
The Subcommittee also recommends that federal legislation pro-
vide the purchaser with the right to cancel his sales contract within
15 days after its execution. As Secretary Hills explained:
A "cooling-off" period allows the consumer to review disclosure materials and
to consider carefully his purchase decision. . The "cooling-off" period avoids
the developer having to provide extensive disclosure materials to every individ-
ual inquiring about a unit. It is far more efficient to require that materials
be given only to serious purchasers but to allow them time for careful review
of those materials during a cooling-off period. (Hearings p. 208).
As discussed in the "Findings and Conclusions section of this
report, poor quality condominium construction is particularly hard to
discover and remedy, especially in high rise structures. For this reason
the Subcommittee recommends that the federal government require
developers to provide a one-year warranty against structural defects
in each of the units and in all common elements. For converted struc-
tures, a two-year warranty should be required.
The provision of a warranty will possibly result in a marginal
increase in the price of a condominium unit. It is believed however,
that on balance the benefits to purchasers of having protection against
unexpected costs stemming from a major structural defect justifies a
limited warranty requirement.
The Subcommittee believes that planned unit developments present
the same potential for purchaser confusion and dissatisfaction as do
condominiums. We therefore recommend that our proposals for min-
imum disclosure, a cooling-off period, and the escrowing of deposits
and downpayments be made applicable to PUDs. Since most housing








in PUDs is of the single family detached variety, detecting and rem-
edying structural defects does not present the problems it does in
multi-unit condominiums. The subcommittee does not, therefore, be-
lieve that warranties should be federally mandated in the sale of units
in PUDs.
B. ENFORCEMENT

primarily a matter of local concern and responsibility. It is not, there-
f ore the Subcom ees intent to oust state jurisdiction over this area,
nior to disrupt already existing state regulatory machinery. It is be-
lieved, however, that federal protection is necessary in those States
ich have not yet enacted condoinium legislati. Moreover, while
some type of disclosure is an integral aspect of all existing state con-
dominimm consumer protetion stutes, not all of these statutes
require warranties, ooling-off period, or the escrowing of deposits.
In states which do not provide these safeguards, the subcommittee's
recommendatios would provide substantial additional consumer
protection.
Our belief that the States have primary responsibility in this area
is one rean we are recommending that enforcement of federal stand-
ards be left to individual condominium owners through the creation of
a f dal cause of action. This enforcement mechanism would permit
the states that currently regulate condominiums to continue their
own programs unhampered by a conflicting or duplicitous federal
enforcement scheme. In states which provide protection similar to or
greater than the Federal act, litigation in Federal courts would simply
provide an additional remedy.
The federal disclosure provisions would also apply to the solicita-
tion of condominium sales across state lines. Here again, the Sub-
committee believes that states wishing to provide greater protection
for their citizens from interstate solicitations be Dermitted to do so.
The federal provisions recommended by the Subcommittee would,
therefore, supplement and not supplant state regulation of both intra-
state and interstate condominium sales.
The Subcommittee believes, moreover, that private federal litiga-
tion would provide more than sufficient protection for consumers in
States having no condominium consumer legislation, or whose Drotec-
tion schemes are more limited than our recommendations for federal
action. As James DeLong told the Subcommittee:
e FTC staff view if one could develop decent disclosure statements that
rere the developers to t out the bas situation into which the purchaser
is getting and that points out the obvious traps that exist, and that creates rights
to bring some type of class action for rescission, or other appropriate redress. it
would go a long way toward solving this problem. and solving it without getting
into all the complications of elaborate Federal regulations. (Hearings p. 253).
The Oversight Subcommittee believes that the measures outlined
ao ar suii to protect cons rs and are, in fact, the only
appropriate federal response at the resent tie. Proposals for a more
ext e Fedel re such s rg registration of all con-
dominium projects or relati the spcifies of condominium manage-
ment and control might provide marginally reater protection to the
Se ee rt in an eensive
regulatry scheme, and the increased costs to government, developers,






is

and consumers, tweigh these advantages andrgue against a more
comprehensive scheme of condomi~nium regulation.
In the course of the Subcom tt's earingsin o a, e viw
was expressed by numerous witnesses that te federal government
should prohibit long-term recreation leases, and declare existing es
void ab inito. The Subcommittee has given careful consideration to
these proposals, but believes that such measures are not warranted at
this time. Although the recreation las c ept undoubtedly been
abused in Florida, it is potentially an xtremely beneficial device for
individual condominium owners. By means of recreation leases, devel-
opers of large condominium projects are able to provide a wide range
of recreation facilities at a lower cost than would otherwise be possible.
Insuring that the purchaser is aware of and understands the plica-
tions of long-term recreation leases would provide adequate safeguards
against recreation lease abuses, while retaining an individual's flexi
bility to purchase in a project offering recreation leases if he or she
deems it best.
The Subcommittee similarly declines to recommend legislation that
would attempt to void existing recreation leases. Such legislation would
almost certainly be held by the courts to be a violation of the Con-
stitution's Due Process Clause. In any event, litigation of this issue
could be expected to take many years, during which time efforts of
condominium owners to reach other solutions would be curtailed or
hindered. Florida, the state where recreation leases are mainly found,
has recently declared rereation leases to be against public policy.
Federal legislation dealing with this same issue would not add signifi-
cantly to the relief available to Florida condominium owners under
this state provision. FTC litigation appears to be the only appropriate
federal response to the serious problem of existing long-term recrea-
tion leases.
c. COXNERSIONS
The decision whether to regulate the conversion of rental apartments
into condominiums is one that properly belongs to the jurisdictions
directly affected. Based upon a locality's individual situation and cir-
cumstances, state and local governments must decide whether to foster
or inhibit the conversion process. The Subcommittee does not believe
that it is appropriate for the federal government to involve itself in
this decision making process. The federal government can, however,
provide substantial protection to tenants by mandating that landlords
provide written notice of their intention to convert 120 days before
requiring tenants to vacate the premises. Tenants should also be given
a 90-day right of first refusal to purchase their own apartments. These
measures would not significantly interfere with what is basically a
local decision.
D. CURRENT FEDERAL INVOLLVIEENT
The Subcommittee agrees with SEC spokesmen that unless a scheme
of federal regulation were enacted which specifically addressed the
problems of investment as well as residential condominiums, the juris-
diction of the SEC should remain unimpaired. Since our recommenda-
tions contain no special provisions dealing with condominiums as in-
vestments, the Subcommittee does not recommend that the SEC's role
in this area be changed. Similarly, the limited nature of the consumer






19

protection measures recommended by the Subcommittee argues in favor
of allowing the Office of Interstate Land Sales Registration to continue
its condominium registration program.
As previously pointed out, an interagency task force, comprised of
all federal and quasi-federal agencies involved with the financing of
condominiums, is currently attempting to formulate new financing pro-
cedures to eliminate conflicting and duplicitous requirements and to
make it easier for develors to utilize Federal programs. Pending the
results of the task force's efforts, the subcommittee recommends that no
changes be made in Federal financing programs.









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ADDITIONAL VIEWS OF CONGRESSMEN GEORGE
HANEN AND JOHN H. ROUSSELOT

The und Minority Members of the Subcommittee find the
SRepor on Condom Develop t and Sales Practices to be gen-
erally useful and accurate, but we believe it is appropriate to make the
following observations:
1. The ort notes that condominiums are a "highly regional
phenomenon," with 50 percent of development occurring in Florida,
California, and New Yolr and 7 percent occurring in the ten most
active states, according to estimates provided by HUD. All of these
states healady enacted legislation to regulate condominium devel-
opm ad somealready have "second generation" statutes. The
highly regional nature of condominium development and the fact that
the states most directly affected have enacted condominium statutes
indicate that there is little justification for federal intervention, except
for the area of interstate sales, where extension of disclosure provisions
governing interstate land sales to cover condominiums would seem to
be in order.
2. We were impressed by the indication that policies of local gov-
ernments and of the federal government create artificial incentives for
owners of rental apartments to convert their properties to condo-
miniums, with the result that some residents experience considerable
hardship due to the expense and inconvenience of forced relocation.
Policies contributing to owner abandonment by means of condominium
conversions include rent controls, high real estate taxes, and the avail-
ability of income tax deductions for mortgage interest payments
associated with condominium ownership.
3. The provision of a 15-day "cooling-off" period for condominium
sales seems to constitute an attempt by the Subcommittee to write con-
tracts for condominium purchasers which may limit choices available
to condominium purchasers in an arbitrary manner reminiscent of the
oriinal Real Estate Settlement Procedures Act (RESPA).
With respect to the proposed warranties of one year for new condo-
miniums and two years for converted units, we see no justification for
demanding a longer warranty on an existing, converted structure than
on a totally new one.
4. Finally, we find ourselves in complete agreement with the state-
ment that, "Condominium development, like most real estate devel-
opment, is primarily a matter of local concern and responsibility."
We therefore agree, as well, with the desire of the Majority to avoid
establishment of an additional layer of bureaucratic machinery to reg-
ulate condominiums. However, it is not at all clear that the provision
of a federal cause of action as a means of enforcing federal standards
is consistent with the stated concern.
The Report states that, "This enforcement mechanism (a federal
cause of action) would permit the states that currently regulate condo-
(21)






22

miniums to continue their own programs unhampered by a conflicting
or duplicitous federal enforcement scheme. In states which provide
protection similar to or greater than the federal act, litigation in fed-
eral courts would simply provide an additional remedy."
It is easy to lose sight of the very real possibility that a separate
federal remedy administered by an existing agency (the federl court
system) can be as "conflicting" or "dupcitous" i its effect as if an
entirely separate agency were created. Moreover, the apparently simple
expediency of creating a right to sue in federal court will add to the
burgeoning growth of the case load in the federal courts. The interests
of the Subcommittee in recognizing the primary responsibility of the
states to regulate condominium development and in minimizing dupli-
cation of state and federal enforcement efforts can best be served, in
our judgment, by confining federal enforcement efforts to such areas
as interstate condominium sales where there is clearly a substantial
federal regulatory interest.
EORGEHANSEN,
JoHN H. ROUSSELOT.














APPENDIXE

As pointed out in the report, 10 States account for more than 70 percent of
all condominium development in the United States. The following table indicates
whethr these Save enacted onsumer protection provons similar to
those reb the Subcommittee on General Oversight and Renegotia-
ion. In the re ing States, cosumers generally enjoy far less protection
than in the juris t ions listed on the chart. A more detailed chart providing a
comprehensiv review of con nium-related statutes in all 50 States, the
District of Co bia, and Puerto Rico is contained in Volume I of the Depart-
ment of Housing and Urban Development's "Condominium/Cooperative Study."
(23)


































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Minimum Documents required to be provided to
units purchasers-Timing, procedures, Warranty Specific provisions regarding con-
Jurisdiction required penalties Escrow requirements requirements versions Cooling-off period

Florida.---------. (I) Prospectus containing detailed project If no performance bond is given, Implied warranty of Notice of intention to convert must Sales (or lease) contract
information must be provided to any purchase funds equaling 5 percent fitness and mer- be given to all tenants; early voidable by purchaser (or
prospective purchaser or lessee of a of purchase price must be held in chantability by termination of leases (except in lessee) within 15 days of
residential condominium (in a pro- an escrow account until settlement. developer and certain circumstances) deemed to execution or of rece pt of
ject containing 20 or more units) other contractors be unenforceable and against required documents,
prior to the offering of such unit for and subcontractors public policy, whichever is later; pro-
sale or lease. applicable to units vided that any right to void
and common be exercised prior to set-
elements. tiement.
California.--------..-. 1 Notice of intent to sell or lease must Require escrow account of sales None--------- None--------- ..--- _--- None.
be filed with real estate commis- proceeds or escrow account of
sioner; Commissioner may require construction funds.
completion of questionnaire contain-
ing additional information; after
examination, Commissioner may is-
sue public report authorizing sale or
lease. Public report must be given to
purchaser prior to closing.
New York...----- (1) At time of initial offering, purchaser Developer required to furnish a ....do---. The Attorney General must refuse to Do.
must be given copy of the offering statement advising the purchaser issue a letter stating that an offer-
statement or prospectus; only state- that he may lose all or part of his ing statement or prospectus has
ments and sales literature approved investment if no bond, escrow, or been filed in cases of proposed
by the Attorney General may be other security arrangement is conversions of existing rental
used. available to assure return of pur- housing into condominiums unless
chase funds, in the event of the certain conditions are met. Those
failure, discontinuance or aban- conditions include the following:
donment of the project. that the conversion plan provides
that at least 35 percent of those
tenants in occupancy in the project
shall have consented to purchase
before it may be eclared effec-
tive; that, if the conversion plan
has not become effective within
1 year of the issuance of the letter
of the Attorney General, it will be
deemed abandoned and of no
effect and that, in such event, no
new conversion shall be submitted
to the Attorney General for at
least 18 mo. following such
abandonment.
Texas --- 4 None.....-__._.-- None ..-.------------------do None -..-..---- ...-..-- Do-








New y......---- (1) Purchaser must, at least 48 hr prior to .-- do.---... .---------- -- do ----- Tenants must be given 60-day notice 7 days.
execution of sales contracts, be given of intention to convert. Tenants
copy of approved public offering may request landlord, and land-
statement. lord shall offer, compafable hous-
ing within the municipality.
rizona.............. (1) At the real estate agency's discretion, -.....do ----------.. ...-----------do--- ....... .None ...-------------------.. None.
a opy of a "Public Report" may be
required to be given to purchasers
prior to closing.
Maryland ------ ---- Not later than 15 days prior to closing, Escrow of purchase funds and per- .-do .-- -.. Statute requires 180-day notice to All purchasers must be
purchaser must be given copies of formance bond required. tenants of intention to convert. advised of any changes
the declaration bylaws, articles of Tenants may thereafter vacate in project which ma-
incorporation (if any), contract of upon giving of 30-day notice to terially affect their owner-
sale, any ongoing management con- landlord. Developer must certify ship rights; purchasers
tracts or lease, budget for the coun- compliance with notice require- may, within 5 days of
cil of owners, an floor plans; a ments under penalty of perjury. receiving such notice,
description of all recreational facili rescind sales contract;
ties; a statement as to whether purchasers may also re-
streets are to be dedicated; and, if scind sales contract with-
the purchase involves a converted in 15 days of receiving
unit over 5 yr old, a statement as to the documents,
the building s condition.
Illinotis- ----....... (1) Prior to execution of sales contract, None- .... --------------do ..--- None------ ---- ----- None.
purchaser must be given declara-
tion, bylaws, projected operating
budget for unit, and floor plan for
unit; no alterations may then be
made without consent of 75 per-
cent of owners; failure to provide
the documents renders sale void-
able for 5 days after last item is
provided or until closing, which-
ever is earlier.
Michi .......... () Although statute does not require that All funds received under reservation _-- do--- -------. Conversion of buildings more than 1 Do.
specific documents be provided to and subscription agreements must yr old requires special approval of
purchasers, it does establish an elab- be held in escrow unless adequate the Corporation and Securities
orate regulatory scheme requiring bonds are offered therefor; upon Commission.
filings with and approvals by the issuance of a conditional permit to
State Corporation and Securities sell, developer may be required to
Commission prior to any offerings of maintain such escrow pending is-
sales of units; this scheme has been suance of final permit.
implemented in the regulations
which, inter alia, make provisions for
a "statement of facts" and other
documents to be given to prospective
purchasers.
Pennsylvania-...----.. () None--..- ---------------. None .----------. -------do..-----.- None --.------------------ Do.

I No minimum,
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