or trust deed covering the entire subdivision. Unless the subdivider obtains a release from the lender for the lot sold, a default by the seller on the general encumbrance subjects the buyer's lot to foreclosure even though the buyer has kept up his payments to the subdivider. California meets the problem by prohibiting the sale of lots within a subdivision that are subject to a blanket encumbrance unless the encumbrance contains an unconditional release clause which allows the purchaser to obtain title free of the blanket encumbrance, or unless certain other alternatives are complied with: namely, placing the buyer's payments into escrow pending release of the encumbrance, or placing title in trust until the release is forthcoming, or furnishing bond for return of payments if the release is not obtained.

Impound requirements are necessary to assure buyers that the money they pay to the subdivider is used to pay off any loans the subdivider may owe on the property. California has not only made it a crime to fail to apply the buyer's payments to outstanding encumbrances, but has also promulgated extensive regulations which require that the money paid by the buyers must be impounded until legal title passes to the buyer or that certain other alternative plans be adopted. In the case of unimproved property, owned outright by the seller with no encumbrances, the seller is given the alternative of recording the contract or conveying the property into trust. In the situation where the property is encumbered, the buyer's payments must either go to a trustee, to a neutral depository, to the lending institution holding the trust deed, or provisions must be made for giving the buyer the right to make payments directly to the lender in case of default.

STATE LAWS TO ASSURE ADEQUATE INVESTOR INFORMATION

A variety of types of regulations are used in different states to safeguard subdivision buyers against buying undesirable land. The disclosure requirement is the heart of present-day statutory coverage of subdivision sales in several states. The practice is for real estate commissioners in these states to elicit much information from the subdivider regarding the state of the title, facts concerning the water supply, sewerage, fire protection, engineering reports on filled ground, and so forth. The commissioner then issues a public report stating the information that he has gathered. Some states require the seller to show the report to the buyer before entering into a binding contract.

The importance of advertising in marketing subdivision lots has driven some states to adopt provisions specifically referring to false and misleading advertising of subdivision land, making this a criminal offense and authorizing orders prohibiting false advertising. Statutes designed to prevent fraudulent misstatements in the advertising used in subdivision solicitation have not proved a full solution due to the fact that a totally incorrect impression can be created by an ad without the use of a single factual misstatement. A few states have regulations making it wrongful to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

OTHER APPROACHES TO REGULATION

1

Some states treat the sales of out-of-state land as securities. These states apply their securities statutes to the sale of land located more than 25 miles from their borders. The Ohio statute is the most comprehensive one in this group. It applies to the sales of out-of-state land except where a bona fide owner sells for his own account and not by way of repeated or successive transactions. The most important feature of this kind of regulation is the power of the state to prevent the sale of subdivision land unless it finds that such a sale is fair, just and equitable.

The intervention of the Federal Government in promotional land sales has not thus far been significant. The Federal Trade Commission has jurisdiction over false and deceptive advertising "in commerce." The FTC can issue a cease and desist order against further circulation of offending advertising; however, the extreme slowness of the investigations and hearings which lead up to an FTC cease and desist order lessen the effectiveness of FTC action in the promotional land business where new tracts may be sold out in a matter of weeks. The jurisdiction of the Securities and Exchange Commission over subdivision sales depends on whether the sale of promotional land is an "investment contract" and thus a security. There is some justification for believing that the investment contract concept could be stretched to cover land sales of this nature

whereunder the participants are led to expect profits from the efforts of promoters, but the SEC has not yet claimed jurisdiction. The SEC may enjoin the sales of securities only if it feels that the prospectus contains false or misleading material or omits relevant facts. Therefore, if a subdivider furnished all relevant information, the SEC presumably could not enjoin the sale even though it thought the sale would not be in the interest of the buyer.

The Post Office is empowered to stop the passage in the mails of fraudulent advertising, but here again fraud is hard to prove in subdivision sales and the administrative processes of the Post Office are slow.

CONCLUSION

Few states have any legislation regulating promotional subdivision land sales, and much of the legislation passed in states that have attempted to regulate the area has no proved effective in stopping the mass selling of virtually worthless land. Federal Government agencies have not intervened effectively in this field and their ability to do so under their present procedures is open to question. If the sale of out-of-state promotional subdivision land proves to be the major economic and social problem many believe it will become, the ultimate solution lies in adopting a requirement that a permit must be obtained from state officials before such land can be offered for sale. Adoption of the "fair, just and equitable" test as the standard for issuing permits-as is presently in effect in Maine, Ohio and Tennessee regarding interstate subdivision sales-is desirable. No other plan gives regulatory agencies the flexibility needed to deal with the ever-changing multitude of evils surrounding this economic activity.

A REPORT ON OUT-OF-STATE SUBDIVISION ACTIVITIES, STATE OF CALIFORNIA, EDMUND G. BROWN, GOVERNOR, AND MILTON G. GORDON, REAL ESTATE COM

MISSIONER

(Prepared by Division of Real Estate, Headquarters Subdivision Section, Sacramento, Calif., 1966)

CONTENTS

A brief history of subdivision controls in California.

Public reports on "out-of-State" subdivisions.

Reports issued by the California Division of Real Estate on out-of-State subdivision (includes total lots and acreage).

Public reports and permits issued on "out-of-State" subdivisions.

Denials.

Inquiries received relative to intentions to apply for an "out-of-State" permit.

Price reductions.

Desist and refrain orders.

Exchange privileges.

Contract defaults.

Pending filings.

Appraised value of inspected subdivisions.

A BRIEF HISTORY OF SUBDIVISION CONTROLS IN CALIFORNIA

From its beginning in 1923, the control of the sale of subdivision lots in California has been for the purpose of protection of the individual purchaser. Protection of the public has been the goal. In accomplishing this protection always intended has been the least interference possible with the business operations of subdividers.

The Real Estate Commissioner was first given authority to investigate and make a public report on subdivided agricultural land. However, most of the controls applicable today actually have their beginning in 1933 when the Commissioner's authority was broadened to include business and residential subdivisions.

Except for the addition of impound requirements in 1955, the Subdivision Law remained virtually unchanged until 1963. This law was designed to protect the public from misrepresentation, deceit or fraud in the sale of subdivision lots.

The philosophy of the subdivision control statutes was one of "full disclosure". If all the facts concerning the sale, derogatory as well as commendable, were disclosed by the developer, this would be all that a purchaser would be entitled to have.

In 1963 the philosophy of subdivision control changed from one of "mere" full disclosure to one of full disclosure plus the setting of certain affirmative standards. Previously, if a developer had stated that he intended to complete

certain facilities within the subdivsion, it was not necessary to substantiate the developer's ability to perform. In 1963 to assure that the developer would be able to perform his promises, the Legislature added to the Subdivision Law a requirement that the subdivider provide “adequate financial arrangements" to assure completion of any promised off-site improvement or other common facilities.

The Legislature set up requirements to assure that the seller could deliver precisely as represented to the purchasing public. These are arrangements which any prudent businessman would set up for himself and most subdividers would do this with or without a statute.

By setting up the standards for all subdividers the confidence of the California purchaser was reinforced.

Also added by the 1963 statutes was a requirement that the land actually be capable of being used for the purpose for which it was being advertised for sale. For instance, if "residential" lots were being sold, the lots had to actually be suitable for residential purposes. This would mean that the normal amenities; such as, water, access, etc., would need to be available.

Also, in 1963 the Legislature separated out-of-state land sales into a different category than sales of California lands. During the early 1960's there had been a flood of advertising and sale of out-of-state lands in California. Most of these were sold sight unseen and some at fantastically high prices compared to the going rate of land where the parcels were located.

The Legislature compared the sale of such land to the sale of securities, in the sense that the individual purchaser could have no accurate knowledge concerning the actual value of the property and was largely dependent upon information furnished by the seller.

Oft-times this out-of-state land was purchased as an investment, the same as any other security.

1

The Legislature then considered this type of subdivision lot sale to be a" "real property security" and adopted a "fair, just and equitable" doctrine, the same as present in the California Corporate Securities Act. It required the Commissioner of Real Estate to make a determination that the sale of the lots were "fair, just and equitable" and required a securities permit in addition to the public report required for in-state sales.

Also of major importance, the 1963 Legislature added a false advertising section, making it a felony to advertise subdivided lands with any statement, pictorial representation or sketch which was false or misleading.

In 1963 the Legislature also added "condominium" legislation. This legislation, in effect, statutorially recognized the condominium as a legal estate in California.

The cooperative or community type of apartment house subdivision increased substantially during the early 1960's. In addition, many conventional subdividers were adding recreational and other facilities to their subdivision offerings. Swimming pools, golf courses, clubhouses, and various other recreational facilities became commonplace among California subdivisions.

In practically all instances these recreational facilities were commonly owned by the individual lot buyers and thus required an organizational setup for management, operation and control.

In 1965 fairly extensive statutes were passed governing the organizational setup required of these cooperative and community ventures; such as, stock cooperatives, community apartments, condominiums and planned developments. Substantially, a planned development is a conventional subdivision with added common or community facilities.

This 1965 legislation set up standards to be met by the documents and organi zational control. It provided that the Commissioner should issue a public report › if he finds the organizational setup and documents of the proposed project were "reasonable".

The out-of-state subdivider must comply with both the out-of-state subdivision laws as well as the in-state standards. So, in the event that an out-of-state developer offered condominiums, community apartments, etc., in California, his plan would have to be a reasonable one.

The 1965 legislation also provided for a limited kind of continuing jurisdiction in the Real Estate Commissioner. Once a subdivision was completely sold, the Commissioner's jurisdiction, for all practical matters, lapsed as his only authority was to issue Desist and Refrain Orders preventing further sales.

The 1965 legislation provided, in substance, that no amendments, alterations, modifications, revocations, or any of the provisions contained in conveyances, restrictions, organization and management or other documents might be made

I

which would materially change the rights, preferences and privileges of any person or restriction upon any lot or unit without the prior written consent of the Real Estate Commissioner.

This continuing jurisdiction applies only to the cooperative, community, etc., developments.

This is the status of the California law. In summary, the sale of out-of-state land in California must meet a "fair, just and equitable" test. The sale of cooperative type, community type, etc., apartments must meet a reasonable test, and all other standard subdivisions, in-state or out-of-state, must meet certain affirmative standards, showing that they are suitable for the use which they are being sold and arrangements must have been made to assure that the purchaser will receive that for which he bargains.

PUBLIC REPORTS ON "OUT-OF-STATE" SUBDIVISIONS

Prior to September 20, 1963, the effective date of legislation requiring a “fair, just and equitable" determination, public reports were issued under the “full disclosure" principle.

The statistics indicated on the following page reveal the activity in this regard for the years of 1958 through September 19, 1963.

It is to be noted that in this period a total of 304 public reports were issued involving 399,648 acres divided into 166,236 lots or parcels.

Reports issued by the California Division of Real Estate on out-of-State subdivisions (includes total lots and acreages)

PUBLIC REPORTS AND PERMITS ISSUED ON "OUT-OF-STATE" SUBDIVISIONS Legislation which became effective on September 20, 1963, required that a determination be made that "out-of-state" offerings are "fair, just and equitable" before a public report and permit may be issued permitting the advertising for sale or lease in California.

Among other things, including full disclosure, adequate financial arrangements and/or guarantees for the installation of the promised improvements or amenities, etc., the developer is required to submit a current appraisal of the offerings. This is to be prepared by a qualified independent appraiser. In addition an appraisal is made by a staff appraiser of the Division of Real Estate. As a result of the "fair, just and equitable" concept, the tempo of filings has decreased and the quality of filings has increased.

To date permits have been issued as follows:

Denial of a permit was issued on one (1) development located in Utah and on four (4) tracts of a development located in Oregon because the Commissioner was unable to determine that the offerings met the "fair, just and equitable" concept. As a result of Administrative Hearings, findings were held in favor of the Commissioner in the Utah case and against in the Oregon case. Permits were issued on the Oregon offerings as a result of the findings.

In addition to these formal denials there have, in effect, been numerous informal denials as a result of inquiries about our requirements and no further action by the developer when he realizes he can not meet the requirements. See page 14 for further details on these inquiries.

Also, the withdrawal of parcels which do not meet our price or other criteria constitutes an informal denial as to those parcels.

INQUIRIES RECEIVED RELATIVE TO INTENTIONS TO APPLY FOR AN "OUT-OF-STATE" PERMIT

Many inquiries have been received by this Division since September 20, 1963, relative to intentions to advertise and sell "out-of-state” subdivisions in California. Many of these inquiries are cursory in nature and in all probability would never reach fruition, but are indicative of the interest in this field.

During the last three (3) months of 1963, inquiries were received from nine (9) persons or firms indicating intentions to sell lands located in Arizona, Florida, Hawaii, Nevada, Mexico and British Columbia.