THE BLOG
01/20/2016 03:20 pm ET Updated Jan 20, 2017

The Other Side of Luxury: When New Construction Goes Very, Very Wrong

A Cautionary Tale

Anyone interested in purchasing a new construction condo is well advised to read the piece in the Times about the settlement between a developer and the New York State Attorney General's Office. The painful story speaks volumes about what can happen when a developer runs out of funds to complete a project.

Long Story Short

Back in the haze of 2008, Africa Israel Investments Ltd., the developer of several high end condos, ran out of funds to complete the amenities of two buildings in lower Manhattan and one in Brooklyn. The purchasers were left with unfinished buildings and other serious construction problems such as a leaky exterior in one building (costing the unit owners $1,000,000.00 to repair). The separate settlements between the affected condos and the Attorney General's Office, as described in the Times, appear to require the developer to complete the buildings and offer restitution for the damages incurred. Finally, a victory for the unit owners after years of struggle. But let's think about this...

Kafka Comes to Manhattan

Most folks who purchase a new construction apartment are unaware that they are actually purchasing a security offered by the developer, after obtaining the approval of the AG's office. That right to sell apartments is made possible through a disclosure document, the size of a telephone book, known as the "Offering Plan". In many cases, the offering is made to the public before the first shovel of dirt is removed from the site. As a result, the buyer's understanding of what will actually be completed, is in theory, set forth in the Offering Plan. This impossibly dense document, has become a "get out of jail" free card for developers. Chock full of disclosures and qualifications, the primary intention, at least as I see it, is to strip the unit owner of any ability to make a claim against the sponsor after the purchase agreement is signed, and certainly, after the closing takes place. In fact, the unit owner, in most cases, does not have "a private right of action" against the sponsor for material misstatements in the Offering Plan or for the failure to perform as promised. At the end of the day, the party primarily responsible for holding the developer's feet to the fire, is the AG's Office. Unless the AG's Office gets involved, the individual unit owner or the Condo Board, on behalf of all unit owners, will have a difficult, lengthy and expensive time trying to get a defaulting sponsor to fulfil its obligations. So, let's fast forward to the settlement mentioned above.

Size Matters

The AG's office, with a limited staff, has to make Hobson's choices every day as to which cases to pursue when a sponsor goes off the reservation. The Africa Israel settlement is a perfect example. In this very extreme situation, a sponsor literally did not complete the construction of several high rise buildings, leaving the unit owners scratching their heads as to how things would get resolved. But for the involvement of the AG's Office, it's quite possible that this dispute would be continuing and would not have settled even after many years of litigation. Now imagine that you've just purchased a new construction apartment and the sponsor has failed or refused to complete the "punch list". The punch list being those unfinished construction details or minor mistakes that the sponsor is permitted by the Offering Plan to finish and correct after the closing is completed, without either any escrow of funds to insure completion or a definitive timetable for completion other than "within a reasonable period time". As a result, only the most egregious failures of a developer will be pursued by the AG's Office, leaving an individual unit owner out in the wilderness, trying to get his or her defective dishwasher replaced.

Residential Reality: Careful Out There...

Even developers with the best of intentions can run into serious construction problems. It is a gargantuan task to build a high rise, with the potential for complications possible at any point during the process. A lot can be said for purchasing an apartment in a completed building with a clean three to five year operating history. But the sizzle of amenities, location, bling and brilliant marketing campaigns, make the allure of the building yet to come, irresistible.