The Ohio legislature enacted a sweeping amendment of Ohio’s condominium law when it passed new state legislation in this area, effective July 20, 2004.
While these legislative amendments have been in place for nearly a year, several key provisions are worthy of special note. Particular attention should be paid to those provisions in the amended statute that significantly alter the responsibilities that developers have with respect to escrowed deposits from purchasers. Here are some of the changes.
Deposits and down payments
Under the old version of the law, a developer was required to pay not less than 4 percent per annum on purchaser’s deposits or down payments of more than $2,000, held for more than 90 days. Although 4 percent was not an inappropriate interest rate at the time the law was enacted in 1978, even in the current rising interest rate environment, this rate is far above the average rate currently payable by financial institutions on similar deposits.
The rate of interest has changed from 4 percent to a rate “equal to the prevailing rate payable by federally insured financial institutions in the county of the condominium property on daily interest accounts.” The new statute now provides flexibility by taking into account the condominium site and the changing market conditions, which impact rates of interest. Developers should now never have to pay interest at a rate greater than the rate they are earning on the local interest-bearing accounts in which developers hold such deposits.
The new statute also stipulates that interest is payable only on the amount of the deposit or down payment that exceeds $2,000 and is held by the developer for more than 90 days. Therefore, a developer may safely hold a deposit of up to $2,000 for even extended periods of time without incurring an interest charge. Amounts collected in excess of the initial $2,000 are subject to interest requirements after the expiration of the 90-day statutory period.
A developer may also hold more than $2,000 for any amount of time, up to and including 90 days, without incurring an interest charge. Once the 90-day period expires, only the amount in excess of $2,000 will accrue interest.
Additionally, the statute stipulates that deposits and down payments held in trust or escrow pursuant to the statute’s requirements are not subject to attachment, garnishment or other legal processes by the creditors of the developer, of agents or of the purchaser of the condominium ownership interest.
Use of deposit money
Under the old Ohio law, a developer was required to hold deposit and down payment money in trust or escrow until surrendered at settlement. Under the new law, a developer is permitted to use the deposit or down payment money for specified purposes in the actual construction and development of the property, as long as the contract of sale contains specific language. The developer is not permitted to use the moneys for advertising purposes or for the salaries, commissions, or expenses of agents.
In addition, the withdrawal of funds from the escrow account in accordance with this new procedure relieves the developer of any further obligation to pay interest on the withdrawn amount used for such purposes.
A refreshed appreciation of the new statutory guidelines can help developers ensure that their interest-accrual obligations to purchasers are properly met. By doing so, a new source of cost-free capital to assist with condominium development funding may be revealed.
David M. Hunter is a partner with Brouse McDowell. Reach him at (330) 535-5711 or [email protected].
