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CONDO HOTELS:
ARE THEY UNREGISTERED SECURITIES?
Developers Must Comply with Strict SEC Rules or Face
Consequences
Nearly
1.7 million people in the United States own a vacation
home or a second home, defined as property that they
use on a seasonal or periodic basis. Many people purchase
a second home expecting to rent it out when they are
not using it and see a return on the purchase price.
However, if the seller is appealing to a buyer’s desire
to make such a return, the sale of the real estate
could be considered to be the sale of a security,
the consequences of which can be significant for the
seller.
This
issue is especially relevant regarding the concept
of the condominium hotel in which the individual hotel
rooms are offered for sale. Buyers are then allowed
to rent their units when they’re not using them and
receive a percentage of the rental revenue.
Is
a condo hotel an investment or a vacation home? Many
people consider them to be both. For this reason the
Securities and Exchange Commission (SEC) has stated
that developers must be especially careful to comply
with federal and state securities laws if they are
to avoid prosecution.
A
developer can offer and sell condo hotel units in
accordance with the following requirements:
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No
emphasis is placed on the economic benefits to
the buyer to be derived from the managerial efforts
of a third party or from renting the condominium
hotel units.
-
No
representations are made regarding the economic
or tax benefits of ownership of the condo hotel
units.
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There
is no advertisement of the rental services.
-
The
availability of rental services is indicated to
potential buyers only in response to direct questions
from the buyer regarding rental activities.
-
Written
material provided to prospective buyers contains
publicly available information concurring existing
comparable facilities. The information must be
in the form of raw data and cannot contain rental
projections, estimates or assumptions involving
speculation.
-
No
contract with any buyer for the provision of rental
management services is entered into before that
buyer contracts for the purchase of a condo hotel
unit.
-
The
rental management services do not involve a pooling
arrangement.
-
There
are no limitations on owner occupancy of the condo
hotel unit other than those established in generally
applicable zoning regulations.
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