When do I need a Public Report to sell lots or condominium units?

By law, A.R.S. 32-2101 (55), you are a “Subdivider” if you own or have owned 6 or more lots in a single platted subdivision and offer any number of them for sale, regardless if you are an individual or a “builder” entity. All Subdividers are required to obtain a Public Report(s) prior to offering lots for sale in accordance with A.R.S 32-2181 et seq. and Commissioner’s Rule R4-28-B1207 (This link opens the full document of the Arizona Administrative Code. Scroll to the reference). If you hold fee title or an equitable interest (e.g., “Option to Purchase”) in 6 or more lots at one time, or subdivide an unsubdivided parcel or lots within an existing subdivision into 6 or more new parcels, lots or condominium units, a Public Report is required prior to offering any of those new parcels, lots or units for sale. Regardless of the State requirements, you may still be required to follow the requirements for “minor land division” or lot-split ordinances of the city or county in which the property is located, even if splitting into 5 or fewer parcels or lots. It is the act of selling that requires a Public Report, not ownership. There is no time limit connected with this. It makes no difference when you acquired or sold a lot. Upon acquiring fee title or an equitable interest in the 6th lot within a single platted subdivision, a Public Report is required prior to its sale. You could purchase and sell 2 lots every five years and as soon as you acquire an interest in the 6th lot and offer the lot/lots for sale, you would be in violation if you did not obtain a Public Report. Exempt sales and leases A.R.S. 32-2181.02 provides that the sale or lease in bulk of six or more lots, parcels or fractional interests to one buyer in one transaction is exempt from the requirement to obtain a Public Report.

Pre-Sales: “Can I sell a lot before I get my Public Report?”

When you’ve determined that you want to move forward with subdivision and sale of your 6 or more lots, of course, you want to advertise, put a sign on the property to grab the attention of passers-by and even reach out to potential buyers through the internet and social media. But, wait: those subdivision laws are lurking out there, waiting for you to make a misstep.

The subdivision laws govern the act of “selling” subdivided lots or condos (I’ll combine those terms and just use “lots” for our purposes). Selling includes the offering for sale (or lease) one of those lots. So, it’s clear that any advertising constitutes offering the property for sale.

So, you can’t do any of that — much less reach agreement with a buyer for the sale — without a Public Report having been applied for and issued by the Arizona Department of Real Estate.

But, to try to get a buyer on your hook there are other ways to go about your pre-sales, just to retain the buyers interest and even just take contact information so you can reach out later, after the Public Report is secured.

First, if you are going to advertise or solicit sales, any printed material or advertisements must include a clear statement to the effect that “The Arizona Department of Real Estate has not issued its Subdivision Disclosure Report/Public Report for this subdivision.”

Even then, you’re not following the law because you are actually offering the property for sale without having a Public Report.

So, before you do any of that, read on.

Next, the only thing you can do before taking either of the steps below is maintain a “guest list” of sorts. Take the name and contact information of anyone expressing an interest in the property for later contact. You can’t talk sales price or terms or reach any sort of verbal agreement yet.

You have two options at this point:


 

Lot Reservations:

Requirements: File a Notice of Intent with DRE

Form of Sales Document: Use prescribed form of “Lot Reservation”

Cost: $0

Binding effect: No cancellation by Seller (You); Buyer can cancel at any time for any reason

Maximum Deposit: $5,000 (Held by a neutral escrow depository)

 

Conditional Sales Exemption:

Requirements:

Final plat (recorded or final form as approved by the local municipality.)
Final draft of proposed Public Report.
ADEQ or County Health Cert, or acceptable alternative.
File Petition for exemption with DRE for approval.

Form of Document: Standard purchase contract with “conditional only” addendum

Cost: $100 DRE filing fee for the Petition

Binding effect: No cancellation by Seller (You); Buyer can cancel at any time for any reason.

Maximum Deposit: $ Unlimited  (Held by a neutral escrow depository)

Benefits: Unlimited deposit; You can arrive at a final sales price; Use your form of contract with all terms. Simply attach a conditional-sale addendum where Buyer has the opportunity to review and accept the Public Report or rescind the sale.


 

Decide which one is right for you and give me a call to move forward.

 

 

 

Amended Public Report

If, at any time after approval and issuance of the Public Report, there is a material change to the development, the offering or any disclosures in the Public Report, the Public Report must be amended and any existing purchasers under contract must be given a copy of the approved amended Public Report.

During the period between the material change and the approval and issuance of the amended Public Report, any contracts accepted by the Subdivider must be conditioned upon final approval and issuance of the amended Public Report by addendum to the contract in a prescribed form.

“Material change” is not necessarily a defined term. The Arizona statutes state, “‘Material change’ means any significant change in the size or character of the development, development plan, or interest being offered, or a change that has a significant effect on the rights, duties, or obligations of the developer or purchaser, or use and enjoyment of the property by the purchaser.” It is the responsibility of the Commissioner of the Department Real Estate to determine if a change is material or not. Therefore, it’s advisable to seek an amended Public Report for any change that a reasonable person might determine is material. This could include, without limitation, a change in the ownership structure, new finacing affecting the subdivision, amended Covenants, Conditions and Restrictions, change in land use in the vicinity to the extent that a purchaser may be affected adversely or that might affect a prospective purchasers decision to buy, etc.

The cost for filing an application for an amended Public Report is $250.00

Availability of Lot or Unit for Sale – Partial Releases

When selling a lot or condominium unit, a Subdivider must provide evidence that he has a marketable interest in the property. Further, the Subdivider must have the ability to make the property individually available for sale, free of liens and encumbrances before entering into a legal contract or agreement for the purchase by a prospective buyer.

There are only three forms of marketable interest that qualify for issuance of a Public Report:

1. Outright ownership (fee simple title by a Deed of record).
2. Interest as Optionee under an option-to-purchase agreement disclosed of record.
3. Interest as a beneficiary under a title-company trust agreement disclosed of record.

In any case above, or if the property is encumbered by a recorded Deed of Trust at the time of sale, the Subdivider must provide in his application for Public Report documentation indicating terms under which a single lot or unit would be available for sale independently, one-at-a-time, free and clear of liens and encumbrances.

If a recorded Deed of Trust fails to disclose a provision for partial release of individual lots, provisions may exist in the master loan agreement or promissory note that is not of record. We would need to provide the face page of any such document, and the page containing the terms under which partial releases can be obtained. If no provisions already exist, a letter from the Lender assuring availability of partial releases must be provided.

Assurance of Completion of Subdivision Improvements

[UPDATE: I’ve created a link to the Arizona Administrative Code regarding assurance of completion, setting forth the requirements in order to obtain a Public Report while common-areas and/or infrastructure remains incomplete.]

If you are planning to offer for sale lots within a subdivision where public or private infrastructure improvements are ongoing, you must provide an “assurance of completion” of all planned improvements in order to obtain a public report and be allowed to take binding contracts prior to completion of the improvements. “Improvements”, in this context, includes underground/overhead utilities, streets (private or public), common-area amenities and landscaping, boundary walls, entry gates, etc.

This requirement is contained in the Real Estate Commissioners Rules and Regs.

There may be other arrangements, but it comes down to protecting the buyer against having to come up with more money after the purchase in order to complete all promised improvements.

Internet or Print Advertisements of Subdivided Lots

Several new bills impacting the real estate industry passed through the Arizona State Legislature recently. Included is Senate Bill 1136 (Effective July 29, 2010), regarding subdivision public reports (ARS 32-2183 [J]), which requires that any print or internet advertisement that advertises a specific lot or parcel for sale must include a disclosure statement that states, “A public report is available on the State Real Estate Department’s website.” [www.azre.gov]

This bill is a result of an agreement between the Arizona Department of Real Estate and the Home Builders Association of Central Arizona. The effective date of the bill is July 29, 2010.

“Unsubdivided” Subdivisions

It may be an oxymoron, but a Public Report (now known as a “Subdivision Disclosure Report”) is required for sale of an unsubdivided subdivision of 6 or more parcels, each less than 36 acres (un-platted lands, without municipality approval or street/easement dedications).

Some of the minimum requirements to obtain a Public Report in this case are as follows:

  • A map or survey of the entire “subdivision” with boundaries and identifying parcel numbers of the individual parcels.
  • Disclosure of utilities location (distance from the furthest lot in the subdivision) and an estimate of how much it would cost a buyer to bring the utilities to the foundation of a residence to be constructed on a parcel.
  • A letter from a civil engineer stating the flood potential of the parcels and the designation given the area or subdivision by FEMA on the Flood Insurance Rate Maps.
  • A statement by the Subdivider (within the Public Report itself, but based on expert knowledge… a soils engineer’s report) whether the soils of the parcels are subject to subsidence or expansion, and if there are any ground fissures in or near the subdivision.
  • Health Certificate, or “Approval of Sanitary Facilities for Subdivision” from Maricopa County Environmental Services Department (only if in Maricopa County), otherwise from the Arizona Dept of Environmental Quality.
  • A letter from a title company or engineer identifying the means of legal access to the individual parcels from a known public right of way by conventional motor vehicle.
  • Certificate of Assured Water Supply (“CAWS”) for the subdivision from Arizona Dept of Water Resources, unless the property is in the service area of a water company or municipality determined to have an adequate water supply. Further, if that company or municipality, or this “subdivision”, is a member of the Central Arizona Groundwater Replenishment District, a Notice of Payment of any fees associated with the membership.

There will be more requirements. But, this gives an idea of the curves you’ll need to negotiate on your path to selling unsubdivided land while complying with the laws and rules of the State of Arizona and the Commissioner of Real Estate.

Vacant Lot Sales (Considered “Unimproved” Lots by AzDRE) Require Rescission Periods

In the current real estate market, many subdivided lots are being acquired by lenders and other parties planning to “flip” the lots to other prospective purchasers, presumably for some semblance of a profit.

In addition to the requirement of providing a valid Subdivision Disclosure Report (Public Report) to a purchaser when selling 6 or more lots to individual purchasers, and in all cases where selling vacant real estate, purchasers enjoy certain rights of rescission. From the body of the Public Report:

ARIZONA LAW STATES:

1. THE SALE OR LEASE OF SUBDIVIDED LANDS PRIOR TO ISSUANCE OF THIS REPORT OR FAILURE TO DELIVER THIS REPORT TO YOU SHALL RENDER THE SALE OR LEASE RESCINDABLE BY YOU. ACTION TO RESCIND MUST BE BROUGHT WITHIN 3 YEARS FROM DATE OF EXECUTION OF PURCHASE AGREEMENT.

2. CONTRACTS OR AGREEMENTS FOR THE PURCHASE OF AN UNIMPROVED LOT (WITHOUT A BUILDING)* MAY BE RESCINDED BY YOU WITHOUT CAUSE BY SENDING OR DELIVERING WRITTEN NOTICE OF RESCISSION BY MIDNIGHT OF THE SEVENTH CALENDAR DAY FOLLOWING THE SIGNING.

3. IF YOU HAVE SIGNED A PURCHASE AGREEMENT FOR THE PURCHASE OF AN UNIMPROVED LOT (WITHOUT A BUILDING)* PRIOR TO INSPECTING THE LOT, YOU HAVE SIX MONTHS TO INSPECT AND UPON INSPECTION MAY RESCIND THE PURCHASE AGREEMENT.

* A contract or agreement for purchase of a lot which includes a building or obligates the seller to complete construction of a building within two years from the contract date does not constitute the purchase of an unimproved lot. Therefore, if your purchase includes a lot and a building or a building to be built, you are not entitled to the rescission rights described in paragraphs 2 and 3.

New, Simplified Filing Forms (“Expedited Registration Procedure”) Introduced

The Arizona Department of Real Estate has introduced new application forms for all Public Report filings, available and effective immediately. The Public Report has also been renamed “Subdivision Disclosure Report”.

Under the Expedited Registration process, Rather than the full MS Word-formatted questionnaire of some 30 pages or more seeking answers for individual data-points required in the statutes, the new questionnaire is limited to just the signed affidavit portion where the Subdivider provides answers to questions such as “Have you ever been convicted of a felony?”, and other details regarding the subdividing entity. This results in an application form of just about 5 pages.

The DRE began requiring, some time ago, that Subdividers prepare a draft form of the Public Report to be approved by the Department, saving DRE personnel the typing of the report itself. All required data-points are provided in that proposed document, making the full questionnaire superfluous.

The required form of draft report has also been revised to include an index or table of contents, among other cosmetic changes.

These are welcome changes, simplifying the approval process for Subdividers.

Application Form

Subdivision Disclosure Report (Public Report) Template