When you hear the latest news about condo hotels, you tend to hear a lot about the sky falling and the bottom dropping out as more and more disgruntled owners make their voices heard. Besides real estate trends moving markedly downward and owners worried about souring investments, there’s a plague of mistrust and argument over exactly what transpired between purchaser and developer in the first place. Owners are not seeing the return on investment that they claim the developer promised, room occupancy rates are lower, HOA associations are failing: how did we get here?
A good starting point to that answer is: The SEC.
Ironically, the same procedures that the government enacted to protect real estate transactions have become so obtrusive, complicated and expensive, that it’s through the very avoidance of becoming labeled such security, that problems arise.
A condo hotel is not subject to SEC regulation, which leaves purchasers and developers to rely upon non-binding “no action” letters and the 1973 SEC Release #33-5347 that merely provide guidelines to avoid being labeled a security. Under these guidelines, developers cannot advertise that a profit can be made, impose restrictions on the use of the unit, discuss the terms of the rental agreements until after the purchase has been made, make the rental program mandatory or even allow the owners to participate in a pooling of their units.
Of course, catch-22’s abound from the simple fact that the purchaser (unless obscenely wealthy) is more than likely purchasing the unit for both personal use and investment. (And isn’t investment an inherent motivation of acquiring real estate in the first place?) Add to this a hungry developer who now can take advantage of potential purchasers by hiding behind these SEC avoidance guidelines and instead say, “You’ll make money, I can’t tell you how much, just sign on the dotted line.”
Which leaves us with 2 simple questions: Are the SEC registration avoidance requirements actually preventing disclosures that would help prospective buyers and thus limit future disputes and claims?
And, given the substantial price of most condo hotel units, aren’t such purchasers inherently intelligent and economically savvy individuals, who, if they were presented with such disclosures before the transaction, could make informed decisions on their own?
Article Resources:
Government Regulations and Condominium Hotels: Another Case of an Unwelcome Guest? By James M. Norman, www.hklaw.com
Condo-Hotel Owners in Uproar by Sharon Vigoroso at www.sherpareport.com.
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