More Ill from ILSA...
Is the Scale Tipping?
Exactly a month ago, I wrote about an obscure Federal Statute, called the Interstate Land Sales Full Disclosure Act (affectionately, “ILSA”), that has caused developers to break out the Tums. This forty-year old statute is being relied upon by condo purchasers in an attempt to get out of their contracts and obtain the return of their deposits.
The Twists and Turns
Initially, there was a ruling in favor of a developer, in which the Federal court judge held that the statute did not apply. The purchasers seeking rescission were out of luck, but then they appealed the decision. Several cases thereafter, however, including one this past week involving a purchaser at the Brompton, have consistently held against the developers and in favor of the condo purchasers. It’s become sort of a skins game, in which each succeeding decision has increased the stakes and all eyes look to the Second Circuit (the Federal appeals court in New York) to finally declare a winner. Waiting on a decision of an appeals court will take months and many developers with executory condo contracts and millions of dollars of contract deposits on hold can only wait and hope for a favorable outcome.
What Does This Mean for New York’s Real Estate Economy?
Talk about increasing shadow inventory. With residential apartment sales slowly climbing their way back to some sort of normal, the possibility that hundreds of condo contracts could be voided is a daunting prospect to say the least. If the appeals court gives condo purchasers a get out of jail free card, the market will once again be flooded with unsold condo inventory, with a predictable result: downward price pressure. Further, until the ILSA cases are finally decided, there will be very little incentive for an unhappy condo purchaser to go forward with his or her closing, until the court says yea or nay. As Chester A. Riley would say, “it’s a revoltin’ development”.
For some background on the topic, please see my earlier August 25, 2010 post, “ILSA: Not the Name of a Hurricane”. There are also two good recent articles on the topic: “Condo Rulings May Let Many Cancel Deals”, from the Times on September 22, 2010, and “Buyer’s Remorse Gets Lift”, from the Wall Street Journal, on September 23, 2010.