Authored By: Mark S. Radke Attorney View Biography

The Interstate Land Sales Act (the “ILSA”) restricts a developer from selling residential property within a development or subdivision without first registering the development or subdivision under the ILSA, except in the case of so-called “exempt transactions.” The registration process administered by HUD is time-consuming and costly; therefore, an exemption under the ILSA is of significant importance. Furthermore, a purchaser of property in a nonexempt transaction from a developer who has not registered under the ILSA has the option to revoke their sales contract at any time within two years after the date of the contract. Other remedies for violation of the ILSA include disgorgement of related profits, fines, injunctive relief, and criminal prosecution for willful violations.

There are a significant number of exemptions under the ILSA. Some of the less common statutory exemptions include the following: (i) the “single family exemption” which exempts the sale of lots in certain typical subdivisions that are limited to single-family residential use; (ii) the “intrastate exemption” which exempts the sale of lots in certain subdivisions sold exclusively to residents of the state in which the property is located; and (iii) the “Metropolitan Statistical Area exemption” which exempts the sale of lots in certain subdivisions located in a Metropolitan Statistical Area to persons residing in the same such area. Each of these exemptions is quite narrow in scope and typically has limited application to sizable condominium projects.

One of exemptions under the ILSA that has broader application is the so-called “100 lot exemption.” Under this exemption, the sale of property is exempt from the registration requirements of the ILSA if the development or subdivision contains fewer than 100 units, exclusive of units that are otherwise exempt under other statutory exemptions to the ILSA. In determining the number of units within the project, include all units within related projects that are marketed pursuant to a “common promotional plan” and any garage stalls or storage areas created as separate units within the CIC.

It should be noted that the 100 lot exemption is only a “partial” exemption from the ILSA in that a development qualifying for this exemption is still subject to the antifraud provisions of the ILSA. As a result, sales personnel should be advised accordingly and purchase agreements used for the sale of units under the 100 lot exemption should include language which warrants to the buyer that all utilities, common element roadways, and other amenities have been or will be completed.

The other common exemption is the “improved property” exemption or the “two-year rule”, which exempts the sale of completed units and units that are not complete but will be completed within a period of two years from the date of the purchase agreement. The form of purchase agreement used must expressly obligate the seller to complete the unit purchased within the two year period. In addition, the purchase agreement cannot prohibit or limit the purchaser's remedies if the seller does not complete the unit within two years, except in the case of pre-sale contingency clauses conditioning completion of construction within a stated period of time generally not to exceed 180 days.

Certain of the ILSA exemptions can be used contemporaneously. The most common application of this approach is that the 100 lot exemption and the two-year rule can be applied in combination to exempt a project containing 100 or more units in certain instances. However, it is important to note that the determination of whether a project is exempt (under single or multiple exemptions) is made on an all or nothing basis. For example, the sale of more than 99 units in transactions not covered by another available exemption has the effect of nullifying the 100 lot exemption for all prior and future sales within the project. As a result, developers of projects containing in excess of 99 units must assure themselves that all units in excess of 99 will be sold in exempt transactions (for example, the two-year rule) or risk the consequences of noncompliance with the ILSA.

Determination of the applicability of the ILSA requirements are project-specific and should be made only after a thorough analysis of the project is completed. Some considerations in making this determination are the size and nature of the project as well as construction and marketing timetables. If a determination is made that filing under the ILSA is not required and any of the exemptions discussed above are utilized, the developer must maintain conscious and vigilant monitoring of construction timetables and sales and marketing efforts with respect to the project in order to comply with the ILSA exemption requirements.