No. 28753 (New Rule): R162-11. Undivided Fractionalized Long-Term Estates

DAR File No.: 28753
Filed: 05/24/2006, 03:03
Received by: NL

 

RULE ANALYSIS

Purpose of the rule or reason for the change:

S.B. 64 (2005 General Session) requires the Utah Real Estate Commission to make rules concerning: 1) the timing, form and substance of disclosures to be made by real estate licensees who are marketing undivided fractionalized long-term estates; 2) management agreements related to these estates; and 3) requirements for the management and structure of master leases on these estates. (DAR NOTE: S.B. 64 (2005) is found at Chapter 257, Laws of Utah 2005, and was effective 05/02/2005.)

 

Summary of the rule or change:

This rule sets forth the disclosures that must be made by real estate licensees when they market undivided fractionalized long-term estates. The rule also sets forth requirements for the structure of the master lease of an undivided fractionalized long-term estate, and prohibits the property manager from being affiliated with the sponsor of the undivided fractionalized long-term estate.

 

State statutory or constitutional authorization for this rule:

Subsection 61-2-5.5(1)(a)(vi) and Section 61-2-26

 

Anticipated cost or savings to:

the state budget:

None--The rule implementing S.B. 64 (2005) will have no budgetary impact in addition to that imposed by S.B. 64 itself.

 

local governments:

None--Local governments do not act as affiliates, entities, sponsors, or marketing agents of undivided fractionalized long-term estates and thus are not affected by it.

 

other persons:

None--The only persons who are affected by these rules are the sponsors of, and the persons marketing, undivided fractionalized long-term estates. Any cost or savings to these persons would be attributable to S.B. 64 (2005) and not the rules implementing that statute.

 

Compliance costs for affected persons:

None--Any compliance costs are attributable to S.B. 64 (2005) itself, and not the rules that the Commission is required by S.B. 64 to make.

 

Comments by the department head on the fiscal impact the rule may have on businesses:

Pursuant to statute, this rule filing establishes disclosure standards for the sale of undivided fractionalized long-term estates, as well a requirements for the structure and management of master leases on such estates. No additional fiscal impact to businesses is anticipated beyond those already foreseen in passage of the authorizing statute. Francine A. Giani, Executive Director

 

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Commerce
Real Estate
HEBER M WELLS BLDG
160 E 300 S
SALT LAKE CITY UT 84111-2316

 

Direct questions regarding this rule to:

Shelley Wismer at the above address, by phone at 801-530-6761, by FAX at 801-530-6749, or by Internet E-mail at [e-mail]

 

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

07/17/2006

 

Interested persons may attend a public hearing regarding this rule:

6/21/2006 at 1:30 PM, Heber Wells Bldg, 160 E 300 S, Room 210, Salt Lake City, UT

 

This rule may become effective on:

07/25/2006

 

Authorized by:

Derek Miller, Director

 

 

RULE TEXT

R162. Commerce, Real Estate.

R162-11. Undivided Fractionalized Long-Term Estates.

R162-11-1. Authority and Definitions.

11.1.1 The following administrative rules are promulgated under the authority granted by Sections 61-2-5.5 and 61-2-26.

11.1.2 Terms used in these rules are defined as follows:

(a) "Affiliate" means an individual or entity that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, a specified individual or entity.

(b) "Entity" means any corporation, limited liability company, general or limited partnership, company association, joint venture, business trust, trust, or other organization.

(c) "Sponsor" means the party that is the seller of an undivided fractionalized long-term estate.

(d) "Undivided fractionalized long-term estate" is defined as in Section 61-2-2.

 

R162-11-2. Marketing Disclosures.

11.2.1 All real estate licensees who market an undivided fractionalized long-term estate shall obtain from the sponsor, and shall provide to investors or prospective investors in the form of written disclosures provided in a reasonable amount of time in advance of closing to allow adequate review by the purchaser, the following information:

11.2.1.1 Information concerning the sponsor and the sponsor's affiliates:

(a) The financial strength of the sponsor and all affiliates, as evidenced by current certified financial statements and current credit reports, and information concerning any bankruptcies or civil suits;

(b) Whether any affiliate of the sponsor is a third party service provider in the transaction, including mortgage brokers, mortgage lenders, loan originators, title service providers, attorneys, appraisers, document preparation services, providers of credit reports, property condition inspectors, settlement agents, real estate brokers or other marketing agents, insurance providers, and providers of any other services for which the investor will be required to pay.

(c) Any use that will be made of investor proceeds.

11.2.1.2 Information concerning the real property in which the undivided fractionalized long-term estate is offered:

(a) Material information concerning any leases or subleases affecting the real property;

(b) Material information concerning any environmental issues affecting the real property;

(c) A preliminary title report on the real property;

(d) If available, financial statements on any tenants for the life of the entity or the last five years, whichever is shorter;

(e) If applicable, rent rolls and operating history;

(f) If applicable, loan documents;

(g) The Tenants in Common agreement, or any agreement that forms the substance of the undivided fractionalized long-term estate, including definition of the undivided fractionalized interest and the rights of presentment;

(h) All third party reports acquired by the sponsor;

(i) A narrative appraisal report, with an effective date no more than 6 months prior to the date the offer of sale is made, that includes at minimum pictures, type of construction, age of building, and site information such as improvements, parking, cross easements, site and location maps;

(j) All material information concerning the market conditions for the property class; and

(k) All material information concerning the demographics of the general market area.

11.2.1.3 Information concerning the asset managers and the property managers of the real property in which the undivided fractionalized long-term estate is offered:

(a) Contact information for any existing or recommended asset managers and property managers;

(b) Any relationship between the asset managers and the sponsor;

(c) Any relationship between the property managers and the sponsor; and

(d) Copies of any existing asset management agreements and any property management agreements.

11.2.2 All real estate licensees who market an undivided fractionalized long-term estate that is subject to a master lease shall obtain from the sponsor and provide to investors or prospective investors financial statements of the master lessee, audited according to generally accepted accounting principles.

11.2.3 All real estate licensees who market an undivided fractionalized long-term estate:

(a) shall disclose in writing to investors or prospective investors:

(i) that there may be tax consequences for a failure to close on the purchase;

(ii) that there may be risks involved in the purchase; and

(b) shall advise investors or prospective investors that they should consult with tax advisors and other professionals for advice concerning these matters.

 

R162-11-3. Structure of Master Lease.

11.3 The master lease may not be structured so that the master lease tenant is an affiliate of the sponsor or so that the sponsor is an affiliate of the master lease tenant.

 

R162-11-4. Management Agreement.

11.4 The property manager may not be an affiliate of the sponsor and the sponsor may not be an affiliate of the property manager.

 

R162-11-5. Regulation D Offerings.

11.5 The Division and the Commission shall consider any offering of a fractionalized undivided long-term estate in real property that is compliant with Securities and Exchange Commission Regulation D, Rule 506, 17 C.F.R. Sec. 230.506 to be in compliance with these rules.

 

KEY: tenants-in-common interests

Date of Enactment or Last Substantive Amendment: 2006

Authorizing, and Implemented or Interpreted Law: 61-2-26