DAR File No. 28753

Commerce, Real Estate

R162-11

Undivided Fractionalized Long-Term Estates

NOTICE OF CHANGE IN PROPOSED RULE

DAR File No.: 28753
Filed: 07/27/2006, 02:48
Received by: NL

RULE ANALYSIS

Purpose of the rule or reason for the change:

The changes are made in response to public comment received at a 06/21/2006 hearing on the proposed amendment.

Summary of the rule or change:

The term "investor" is changed to "purchaser" throughout. A subsection is added requiring disclosure of whether any affiliate of the sponsor is a master lease tenant or whether the sponsor is an affiliate of any master lease tenant. Subsections containing certain restrictions on the structure of the master lease and the management agreement are deleted. A reference to the right of presentment is also deleted from Subsection R162-11-2(11.2.1.2)(g). (DAR NOTE: This change in proposed rule has been filed to make additional changes to a proposed new rule that was published in the June 15, 2006, issue of the Utah State Bulletin, on page 13. Underlining in the rule below indicates text that has been added since the publication of the proposed rule mentioned above; strike-out indicates text that has been deleted. You must view the change in proposed rule and the proposed new rule together to understand all of the changes that will be enforceable should the agency make this rule effective.)

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 General Session) has no budgetary impact in addition to that imposed by S.B. 64 itself. (DAR NOTE: S.B. 64 (2005) is found at Chapter 257, Laws of Utah 2005, and was effective 05/02/2005.)

local governments:

None--Local governments are not affected by S.B. 64 (2005), and therefore, there is no anticipated cost or savings from the rules implementing S.B. 64 (2005). Local governments do not act as affiliates, entities, sponsors, or marketing agents of undivided fractionalized long-term estates and thus are not affected by the rule.

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 (2005) 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. 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:

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 swismer@utah.gov

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:

09/14/2006

This rule may become effective on:

09/22/2006

Authorized by:

Derek Miller, Director

RULE TEXT

R162. Commerce, Real Estate.

R162-11. Undivided Fractionalized Long-Term Estates.

. . . . . . .

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]purchasers 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) Whether any affiliate of the sponsor is a master lease tenant or whether the sponsor is an affiliate of any master lease tenant.

(d) Any use that will be made of [investor]purchaser 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]purchasers in a reasonable amount of time in advance of closing to allow adequate review by the purchaser, financial statements of the master lease tenant[lessee], audited according to generally accepted accounting principles. If the master lease tenant is an entity formed for the sole purpose of acting as the master lease tenant, then the financial statements of the owners of that entity shall be furnished.

11.2.3 All real estate licensees who market an undivided fractionalized long-term estate shall, in a reasonable amount of time in advance of closing to allow adequate review by the purchaser:

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

(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]purchasers 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]3. Regulation D Offerings.

11.[5]3 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

ADDITIONAL INFORMATION

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For questions regarding the content or application of this rule, please contact Shelley Wismer at the above address, by phone at 801-530-6761, by FAX at 801-530-6749, or by Internet E-mail at swismer@utah.gov

For questions about the rulemaking process, please contact the Division of Administrative Rules (801-538-3764). Please Note: The Division of Administrative Rules is NOT able to answer questions about the content or application of these administrative rules.