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The Interstate Land Sales Full Disclosure Act (ILSA) was enacted by Congress in 1968 to protect consumers from fraud in real estate transactions. ILSA applies to “subdivisions” of residential lots and condominium units. Unless an exemption applies, the development must be registered with the Consumer Financial Protection Bureau, and the developer must provide prospective purchasers with a disclosure document or “Property Report” prior to entering into a contract. These requirements are costly, administratively burdensome, and time-intensive. Penalties for non-compliance may include, without limitation, jail time, rescission of the contract or sale, compensation for the value of subsequent improvements, additional penalties, attorneys’ fees, and other fines and fees.

Qualifying for a Full Exemption

The three most common projects qualifying for a “full exemption” from all ILSA requirements are: (i) the sale of lots or units in a subdivision containing less than 25 lots; (ii) the sale of land with a completed building thereon, or the sale of land under a contract that requires the seller to construct a building thereon within 2 years; or (iii)  the sale of lots or units to a builder who acquires such lots or units for the purpose of building residential improvements thereon for resale to third-parties.

Projects that do not qualify for a full exemption may still be eligible for a “partial exemption.” If a partial exemption applies, the lots or units are exempt from registration under ILSA, but the anti-fraud requirements of ILSA still apply, which can impact the sales contract used between the developer or seller and the initial purchaser for the project.

A Closer Look at Partial Exemptions

The two most common projects qualifying for a “partial exemption” from ILSA requirements are: (i) the sale of lots or units in a subdivision containing less than 100 lots or units, which do not otherwise qualify for a full exemption; or (ii) the sale of an “improved” condominium unit, generally understood to be a dwelling that may be used for residential purposes.

A third popular partial exemption is the “single-family residence” exemption, or the sale of lots within a municipality or county where local government specifies minimum development standards, when: (i) the subdivision meets all local standards; (ii) each lot is zoned for single-family or is restricted to single family residences; (iii) lots are situated on a paved street, or there is a bond or surety to complete the roads, and the municipality or homeowners; association will accept maintenance of the roads; (iv) water, wastewater and electricity is extended to the lot as of closing; (v) the contract requires delivery of a warranty deed to purchaser within 180 days of the contract date; (vi) a title policy reflecting marketable title is vested in the seller; (vii) the purchaser makes an on the lot inspection prior to signing the contract; and (viii) there are no offers, by direct mail or telephone solicitation, of gifts, trips, dinners, or other such promotional techniques to induce prospective purchasers or lessees to visit the subdivision or to purchase or lease a lot or unit.

The single-family residence exemption is not available in Texas. Notably, it requires that the title binder issued or presented to the purchaser must show that marketable title is vested in the developer. However, Texas law prohibits title insurance companies from insuring against loss or damage by reason of unmarketability of title. Because of this prohibition, title insurance policies in Texas insure good and indefeasible titles rather than marketable titles.

Exemption Orders

An Exemption Order request for the single-family residence partial exemption may be submitted to the CFPB pursuant to 12 C.F.R. §1010.16. Exemption Orders are granted at the CFPB’s sole discretion, and the grant of the exemption is not guaranteed. However, in prior exemption orders, HUD has taken the position that indefeasible title is the substantial equivalent of marketable title for purposes of this exemption. See The Greenways at Hillside, OILSR No. 6 00153 49 (Exemption Order dated September 15, 1995), The Hills of Lakeway, OILSR No. 6 00152 49 (Exemption Order dated September 15, 1995) and Spillman Ranch, Phase One, Section Two, OILSR No. 30694 (Exemption Order dated May 16, 2002).

CONTACT:

Will Smith I  512.370.2893  I  wsmith@winstead.com

Will Smith is a member of Winstead’s Real Estate Development & Investments Practice Group. Will’s practice is focused on real estate acquisition and development. Will also represents developers in their creation and administration of the property owner association.