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Effective immediately, developers of planned communities do not have to maintain deposits received from purchasers in an escrow account if they comply with Act 3 of 2006 (the "Act"). The Act gives developers the choice of using a corporate surety bond or an irrevocable letter of credit instead of placing deposits in escrow. This enables the developer to use deposit money immediately upon receipt, rather than maintaining the money in escrow until the sale is consummated or otherwise terminated.
The minimum amount of the bond or letter of credit is $1 million, regardless of the number of units that may be in the planned community. The amount of the bond or letter of credit cannot be reduced until all deposits received by the developer have been properly credited or refunded to all purchasers or redeposited in escrow. If you choose a corporate surety bond, the bond must be issued by a surety authorized to do business in Pennsylvania. If you choose an irrevocable letter of credit, the letter of credit must be issued by a financial institution whose accounts are insured by a governmental agency or instrumentality. The developer cannot have a direct or indirect ownership interest in the surety or financial institution.
The process of substituting these forms of security in lieu of maintaining escrow accounts requires the submission of a registration application to the Pennsylvania attorney general along with the surety bond or letter of credit. There is no application fee. Although there is no timeline by which the attorney general must approve or deny your registration application, it has been taking about 5 to 10 days to get a response from the attorney general's office.
For further information or assistance, please contact Marc D. Brookman, David I. Haas, Darin Steinberg or any of the other attorneys of the firm's Real Estate Practice Group.
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