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New regs issued for co-op escrow.

Regulations governing downpayment deposits for units in homeowners associations, co-ops and condos have been modified by the New York State Attorney General to require the money to be held in interest-bearing escrow accounts.

Offering plans must be amended to reflect the new rule and the Real Estate Financing Bureau has sent out model amendments and escrow agreements to sponsors and attorneys.

The change was prompted because, in some cases, sponsors were not depositing the monies in the appropriate accounts, explained Richard Barr, a spokesman for the Attorney General's office.

"When the contracts fell through, the money could not be located," he said. "If you were entitled to rescission of the contracts, people were finding it difficult to locate their deposit funds."

The new regulations will go into effect April 27, Barr said, and all deposits must be placed by then in an attorney's special escrow account which is insured to the maximum extent possible. The escrow agent also must be an attorney independent of the sponsor, licensed to practice in New York State.

Purchasers must also be given notice within 10 business days of the account number and the bank where the monies are deposited. If the purchaser does not receive notice within 15 business days, Barr said, the purchaser has a right to cancel the purchase unless the sponsor shows it has complied with the regulation. These regulations make it easier for a prospective purchaser to obtain a return of a deposit, he added.

In certain cases, if the sponsor has a real, demonstrated need to use the deposit money in order to create the coop or condo, then, Barr said, they can post a bond or a letter of credit. This might also be used by the sponsor if they are doing substantial construction or a gut rehab or to create the building. In a normal conversion, Barr said, the sponsor would not be able to use the funds to repair something like the boiler.

Under the new regulations, purchasers are entitled to interest from the date of deposit to the time it is refunded. If the purchase goes forward, the purchaser is entitled to interest until closing.

Purchasers can apply to the attorney general in the case of a dispute for arbitration. Stuart M. Saft, the head of the real estate department at Wolf Haldenstein Adler Freeman & Herz, said the Attorney General's office is so overwhelmed with large problems that he does not see how they can get involved with individual deposit disputes. "Other than that the regulation sets standards for the deposit and makes them all held uniformity, but I am concerned about this arbitration provision," he said.

Co-op attorney, Alvin I. Apfelberg, said the new regulations are basically a consumer protection device. Previously, her said, during conversion the attorneys who represented sponsors kept funds in escrow accounts. But post conversion, the attorneys would informally keep the escrow funds for a couple of years and then give the money back to the sponsor.

Now, Apfelberg said, the attorney is directly responsible for retaining the escrow finds for seven years. "He must retain files and must get permission of both the sponsor and the purchaser to release the escrow, usually at closing, and if there is a dispute it is resolved by the Attorney General." But he added, "the regulations will turn the attorney into an accountant."

Arthur Winstein, who represents both sponsors and purchasers in conversions said the proposed model amendment is inadequate. "It's written as if the attorney was going to set up an interest bearing account," he said. "But it sticks the lawyer with no method of obtaining the social security numbers." He said the amendment also does not disclose the interest is taxable.

Weinstein believes the regulation should have contained an exception for smaller amounts of money. "The paperwork for an interest bearing account costs more than the interest," Weinstein explained.

Most insider deposits - and even some outsider deposits - are only $1,000 attorneys say, since the purchaser is usually a tenant and the sponsor wants to encourage the purchase. "If the money was kept for six months you'd be talking about something like $25 in interest," Weinstein noted. "The paperwork would cost $125."

Weinstein believes there should have been an exception made in the regulations for a bulk building conversion where the money would be kept for short periods of time and be held in small amounts. Normally, he said, separate accounts are established for each building undergoing conversion. That is consistent with IOLA, he said, but now improper under the Attorney General's new regulations.

IOLA's are attorney's special escrow accounts set up without a charge to the account by the banks. While some of the interest goes to the banks for a fee, most of the interest in these accounts goes to a special fund which is to support the provision of legal services to the needy.

A prospective purchaser is not about to say to the attorney that they'll waive the interest to put it into a lawyers fund, Apfelberg noted. "This regulation is designed for the benefit of the public but to put it in an interest bearing account without any charge to the purchaser may pose an onerous bookkeeping task with the bank," he said. While the bank may set up an account as an accommodation to an attorney on a small amount, he said, "why would they want to do this free of charge for a large transaction?"

Charles R. Rappaport, president of the Federation of New York Cooperatives said, "I can't picture what justification there is to have the interest accumulating in the lawyer's account."

Rappaport believes the rule is basically a good one and added, "All they are saying is to put the sale of shares in the same category as anyone who is buying any where they make a deposit and make sure it is segregated and escrowed so that if anything changes they can obtain a refund."

Barr said comments were solicited prior to the regulations being promulgated. Although he said they are now getting inquiries about the specifics, they have not received much in the way of complaints from the sponsor's attorneys.
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Title Annotation:regulations modified regarding downpayment deposits for units in homeowners associations, cooperative apartment houses and condominiums
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Mar 11, 1992
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