Our sponsors refuse to sell their units. Our offering plan was filed on June 14, 1982, and on the front page there is a sentence stating that the plan may not be used after June 13, 1983. One of our sponsors lived in the building through September 1982, and their daughter lived in another apartment through the summer of 1983. We want to know if these apartments have lost their “unsold” status because they were occupied after the first date of the offering? Our sponsors say they occupied the apartments during the one-year window of the offering plan. Who is right?
There’s a lot we don’t know here. For instance, was this an eviction or a non-eviction plan? Also, some of the conversion rules changed in the ’80s, so that adds another wrinkle. But if we assume this was a non-eviction plan, the unsold shares issue can be sorted out.
First, the date on the cover of the offering plan is irrelevant to sorting out the unsold share status. In the ’80s, a sponsor who was pursuing a non-eviction plan first issued a proposed offering plan. This was generally referred to as a “red herring,” and was not dated. It basically set out the intended parameters of the plan. Once the building’s residents received the red herring, they usually organized and hired a lawyer to negotiate with the sponsor.
The next step was a review and comment period with the Attorney General, which typically led to the offering plan being “accepted for filing.” The accepted plan did have a date on its cover, and my guess is that the plan referenced in the above question was the offering plan. Once the plan was accepted for filing by the Attorney General, the sponsor could begin selling apartments. Typically, negotiations with tenants ensued shortly after the acceptance for filing.
In order for the plan to become effective and a closing scheduled, the sponsor had to sell a certain percentage of units. The rules changed in the ’80s, so it’s hard to know exactly how many units were required in the co-op mentioned above. But if we assume at least 15 percent of them had to be sold, we can also reasonably assume (based on my experience) that it took between six to twelve months to make these sales. Once the requisite number of sales was made, the sponsor could declare the plan effective, amend the plan to reflect that, and schedule a closing. Under the most common practice, until the closing occurred, no shares were issued.
So if we take this timeline and hold it up to the question above, it appears that the sponsor and daughter lived in apartments during the sales period (which commenced on or about the period on the cover of the offering plan) but moved out before the closing when the shares were issued. If that’s the case – and they did vacate before the corporation acquired title and issued shares, and the sponsor still holds those shares though no sponsor has occupied the units since – they are still unsold. It’s likely that they were rented out; it would be unusual for an apartment to remain vacant for so long. If the sponsor and sponsor affiliates actually vacated in the ’80s before the closing, and the sponsor has been renting since the ’80s, they are still unsold. “Unsold” means not sold to a third party for occupancy. The rule generally is that those shares retain their unsold status until they’re sold to a buyer or the apartment becomes occupied by someone affiliated with the sponsor. As presented here, after the offering plan was filed, there were two apartments occupied by people affiliated with the sponsor for roughly one year before closing. We can assume that both units were vacated before the issuance of the shares. If that’s the case, and they did vacate before the corporation acquired the title and issued shares – and no sponsor has occupied the units since – they are still unsold.
Eliot H. Zuckerman
Partner, Smith, Gambrell & Russell