Richard B Evans CHA CHAE CRME
Written: February 5, 2013
The offer and sale of a condominium by a developer can constitute the offer and sale of “securities”, subject to both federal and state securities laws, if the “totality of the circumstances test” is not met. This test has become increasingly more difficult to define and understand (as of the summer of 2011) when an appeal was made to the 9th Circuit Court.
IN LAYMAN’S TERMS:
The totality of the circumstances test: A test used to determine whether certain constitutional rights of a defendant have been violated. The test looks to all the circumstances surrounding the alleged violation, rather than to any particular factors; as had been the case before. While some factors may recur more frequently than others, the relative importance of any one factor depends upon the particular facts of a case.
The Definition of an Investment Contract: a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third-party (hotel operation); Or, when a purchaser is no longer buying real estate, but “investing in a business enterprise“ and can therefore be deemed to be purchasing a “security”.
What would happen if condo-hotel sales were deemed to be “securities”?
(1) The registration of securities by developers would be a costly, time-consuming and would likely drive the price of condo-hotel units higher.
(2) Claims made based on misrepresentation or fraud would look to securities law for remedy.
(3) Salesperson would need to be registered as broker-dealers
Guidelines being observed, by the majority of developers of Condo-Hotels today in selling units.
1). under no circumstances are revenues in a rental management program to be pooled with other participants. The pooling and distribution of revenues to unit owners, whose unit may or may not have been occupied during a specific period, constitute the sale of an investment contract and not the sale of real estate.
2). the purchaser of a unit in a condo-hotel cannot be required to enter any Rental Management Program. He or she must be given the option of allowing competing vacation rental companies or realtors to bid for their business or the owner must be given the option of renting his/her unit themselves.
3). The purchase of a unit in a condo-hotel cannot be “intermingled” with the specific enticement of a rental management agreement that will bring or estimate revenues or tax benefits.
4). The real estate sales person and the rental management sales person must be exclusive and no compensation may be paid to the real estate sales person if a rental management agreement is signed.
5). advertising, sales literature, promotional schemes, and/or oral representations may never promise economic inducement or benefit derived from the promoter or a third-party.
6). No significant restrictions can be placed on the purchaser of a unit in a condo-hotels use.
7). The Sales Agreement and a Rental Management Agreement must be separate. Prospective buyers that ask for more information about the Rental Management agreement should be given options and sent to companies who may represent details under certain circumstances and provide “raw data” on what comparable property rental management programs are producing.
8). There can be no expectation of PROFIT. The acknowledgement of NO EXPECTATION OF PROFIT is often required by developers and signed off on by the buyer.
9). Rental Management Agreements are executed after the Sales Contract is executed.
** the Developer of the Condo-Hotel project CAN voluntarily register with the SEC and have his/her Realtors do the same (becoming certified to sell securities), enabling them to sell units at the project deemed to be “security” transactions. In this case the property may POOL their REVENUES and share them amoungst unit owners. Keep in mind that this is an expense proposition for the Developer.
More information on the subject can be obtained from Mark F Grant Esq., Greenspoon Marder 954-527-2404 or email@example.com
SEC v. W.J. Howry Co. (1946) – HOWRY provided the test for determining whether a transaction qualified as an investment contract and hence, a security.
1973 SEC Public Release NO 33-5347 – “Offer and Sales of Condo or Units in a real estate development”
2002 Intrawest No-Action Letter – one of the clearest descriptions of how to conduct a condo unit sale w/o stepping over the line.
MAY 15 2012 – Salameh et al v Tarsadia Hotels, et al – California
2011 US District court for Southern District of California dismissed the above referenced complaint.
Appealed to the 9th Circuit 2011 – disregarding past Intrawest No-Action letters by SEC. SEC argues that the overall product structure should be analyzed; not just the meticulously followed sales process.
References used for this article:
The Condo-Hotel: When Might the Securities Laws Apply? By Bart Bartholdt ©2005 Graham & Dunn PC
Condo-hotels: stuck between a Hard Rock and the SEC rulings. By Christopher Payne; Ballard Spahr LLP, Denver