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What Every Condo Hotel Developer Needs to Know

By Joel Greene

In a condo hotel, some or all of the property’s units are sold to individual buyers with the expectation that they will place those units in the hotel’s rental program, and the revenues and expenses will be split in some fashion between the unit owners and the hotel.

This weaving together of condominium ownership and hotel operations brings into play real estate laws, hotel management arrangements and securities laws. If developers want to steer clear of potential lawsuits from unit owners or punishment by the SEC, they must pay particular attention to federal and state securities regulations.

Generally speaking, developers should avoid having their condo hotel units characterized as sales of “securities,” as that designation brings with it far more complexity, SEC scrutiny and expenses.

The following seven steps should be taken to avoid the securities label:

1. Make the rental program optional. The owner of each individual condo hotel unit has the right to decide whether he wants to participate in the rental program. The developer cannot obligate an owner to participate, nor can he refuse to sell a unit to a buyer who says he won’t participate.

2. Don’t pool revenues or expenses. The condo hotel’s rental program cannot group together all revenues and expenses and then split them via some formula amongst the individual owners. Instead, the revenues and expenses must be calculated separately for each individually-owned unit. The phrase “rental pool” should be avoided in rental agreements; “rental program” is the preferred terminology.

It’s worth mentioning that this rule regarding pooling of revenues and expenses applies to U.S. properties. Throughout Europe, the Middle East, the Caribbean and Asia, rental pools are common; they are legal and generally well-accepted by condo hotel buyers.

3. Don’t project potential revenues. Developers are not allowed to forecast the economic returns of participation in a condo hotel’s rental program. Buyers will need to do their own calculations and projections to predict whether the revenue their unit generates will cash flow.

4. Don’t advertise or promote a rental program. Developers can’t use the rental program as a selling point to market their units. The focus of their marketing efforts must be on selling the lifestyle and the real estate, not on potential return of investment.

5. Separate the sales team from the rental program managers. Questions regarding the rental program should not be answered by sales people. Instead, a rental program representative should be brought in to provide that type of information.

6. Don’t complete a rental program agreement before a purchase contract has been finalized. The buyer must first enter into a purchase contract before being asked to enter into a rental program agreement.

7. Do not impose living restrictions on unit owners. Developers can’t limit how many days a unit owner can occupy his unit. However, reasonable occupancy limitations can be imposed if the unit is put into the rental program or local zoning laws restrict usage.

Need more information on what you can or can’t do as a developer? Contact Joel Greene, CEO of Condo Hotel Center, who can answer your questions or refer you to a professional consultant or attorney knowledgeable in the development of condo hotels.  Contact Joel Greene at Joel@CondoHotelCenter.com or call 954-450-1929.