Hospitality Industry Condo Hotel SEC Regulation, Alert - September 13, 2006 Government Regulations and Condominium Hotels: Another Case of an Unwelcome Guest? September 13, 2006 James M. "Jim" Norman- Ft Lauderdale Does it seem that when people discuss the future of condominium hotels, this is what you hear? “A storm of litigation over condominium hotels is inevitable; the only question is when?”... [more]
Hospitality Industry
Condo Hotel SEC Regulation, Alert - September 13, 2006
Government Regulations and Condominium Hotels: Another Case of an Unwelcome Guest?
September 13, 2006
James M. "Jim" Norman- Ft Lauderdale
Does it seem that when people discuss the future of condominium hotels, this is what you hear?
“A storm of litigation over condominium hotels is inevitable; the only question is when?”
“Purchasers are going to sue when they become unhappy with their investment in a condominium hotel.”
“The disputes will be endless, because condominium hotels will have all the issues of residential condominiums, plus owner-operator hotel issues.”
“The plaintiffs’ lawyers are impatiently waiting.”
If disclosure is the vaccine against litigation, and the Securities and Exchange Commission (SEC) has given the developers and marketers all those Intrawest no-action letter guidelines to prevent condominium sales from becoming investment securities, states heavily regulate the structure and marketing disclosures for condominium projects, and cities control construction and zoning, why all those dire predictions?
Maybe all that regulation is an example of government violation of the law of unintended consequences.
When Is a Condo Hotel Subject to SEC Regulation?
When developers talk about condominium hotel regulations, in most cases, they are referring to the SEC. No court has yet definitively set forth a test to determine what makes a condominium hotel a security that is subject to SEC regulation. As a result, developers and purchasers are forced to rely upon non-binding “no action” letters and the 1973 SEC Release No. 33-5347 that merely provide guidelines to avoid being labeled a security. Under these guidelines, developers cannot do the following:
• advertise that a profit will be made
• discuss the terms of rental agreements until the purchase sale agreement has been executed
• impose material restrictions on the owner’s use of his unit (with very limited exceptions)
• make the rental program mandatory or allow the owners to participate in a pooling of their units
• offer (as they can in the rest of the world) a guaranteed minimum return for a period of time
If these guidelines are not followed, then the condominium hotel could be deemed a security subject to registration with oversight by the SEC. That could mean very significant time delays, expense, and numerous obstacles upon resale.
The general thrust of the SEC’s guidelines is that a purchase of real estate (including condominium hotel units) should not be structured or sold as an investment. Ignoring the guidelines risks application of the penalties of the federal securities laws.
The Whole Story
Let’s look at this from a disclosure point of view. Since some 80-85 percent of condominium hotel unit purchasers do, ultimately, wind up participating in rental programs (never say “rental pool” because lawyers will yell at you), one might conclude that purchasers do have investment on their mind. Such is the inherent nature of real estate. Shouldn’t the “whole story” be given to those purchasers as they are considering a purchase? Given the cost of condominium hotel units, isn’t it fair to expect that they will have a certain level of business sophistication and are able to put together the pieces of their equity, debt and project returns from operations by looking at disclosure documents in evaluating whether or not to “invest” in one project versus another, or in a condominium hotel unit at all?
Some common discussion points among lawyers:
• Were the securities laws really even intended to apply to real estate purchases?
• Are the SEC registration avoidance requirements actually preventing or inhibiting disclosures that would in reality help prospective purchasers and limit future disputes and claims?
• How can the hotel operator be assured of sufficient rooms to sell if rental programs are purely voluntary, and, even after the contracts are signed, have limited duration?
The Zoning Law Dilemma
Zoning laws determine whether a developer can build a hotel in a certain area, based the standards and definitions in the particular ordinance. For example, if a given area is zoned for hotel use, a condominium hotel will also be allowed, as it is a hotel, but under condominium ownership. Local governments are allowed to regulate use, but not ownership modes. Restricting a condominium hotel in a hotel zoning district because it has multiple owners is generally not permitted. However, local government is allowed to restrict residential condominiums in appropriately drafted hotel zoning districts.
By local ordinance, areas zoned for hotels may require transient occupancy, rather than extended residential use. In such cases, owner occupancy generally can be restricted without running afoul of SEC guidelines. However, problems will arise if developers are involved with the preparation or adoption of such a transient occupancy ordinance, or if a developer imposes restrictions harsher than that required by ordinance. The risk of problems with the SEC is far less if the ordinance requiring and describing transient occupancy was in place when the developer acquired the property, but would you bet your project on it?
Who Knows Best?
State condominium laws that make contracts entered into by the developer voidable by condominium associations pose risks relating to the continuity of management agreements, franchise and license agreements. If the brand is lost, the value of the condominium units may well fall. Experience with residential condominium associations suggests that condominium boards do not always act rationally or in the long-term best interests of the unit owners. What will happen when the condominium board decides to terminate a brand manager, or thinks they know better than hotel companies what kinds of beds, pillows, sheets and showers belong in a hotel room? Will the condominium associations versus developer and general contractor construction defect litigation so regularly seen in residential condominiums become a part of the condominium hotel landscape?
The states do not ignore the sale of condominium hotel units. Like miniature versions of the SEC, individual states may require detailed filings before a developer can offer condominium hotel units for sale in that state. New York and New Jersey are examples of states with substantial requirements. Others have a wide variety of exemptions from registration.
Who Will Speak for the Owners in Condo Hotel Matters?
A newly formed organization, the National Association of Condo Hotel Owners (NACHO), may well serve to further the interests of condominium hotel unit purchasers and owners. With a unified voice speaking for the unit owner side, NACHO may be able to help persuade government regulators to treat the condominium hotel for what it is – a unique hybrid real estate product – rather than for what it is not.
Some condominium hotel developers do contemplate registering their projects in order to sell the units as securities. As they navigate the spider web of federal, state and local regulations, they begin to think that all the time and all the money involved might just be worth it. Then, they start worrying about “missing the market” because of the delays and realize that “once a security, always a security” and they may be burdened with annual SEC filings and legal and accounting fees. The last realization is that the resale of a unit will involve both a real estate broker and a securities broker. That’s why registration is a rare thing.
Something is wrong when legislation intended to protect: inhibits disclosure; makes it difficult for a condominium hotel to operate as a hotel; precludes knowledgeable parties from contracting for real estate as they desire; and creates a multilevel maze of laws, rules and regulations. A tremendous amount of time and energy is expended in “working around” and complying with, all the governmental requirements. Where is the benefit to the condominium hotel unit purchaser? What is gained when the “owner use” restrictions of the SEC make it risky for developers and local government to work together to insure that the condominium hotel is actually able to operate as a branded hotel and protect the tourist tax revenues to a local government that wants to expand the tourism element of its economy?
Change is needed, but as things stand, it’s hard to see just who is really being protected, and from what.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
Condo-Hotel Buyers
See Investments Sour
by Michael Corkery, Sara Lin, and Ruth Simon
From The Wall Street Journal Online
April 08, 2008
For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble.
Many buyers purchased the hotel rooms from developers hoping to get paid every time the room was rented. But condo hotels, which account for as much as 10% of all hotel rooms under construction and a much greater percentage in resort markets such as Orlando, Fla., and Las Vegas, are coming back to haunt many of the people who bought the units, the developers that constructed the buildings, and the operators hired to run the hotels.
Some projects also are being brought to the attention of regulators by investors.
[Condo photo]
"It's been a very bad investment," says one person who bought a unit at what's called the Signature at MGM Grand (pictured) -- which calls itself "more than a Las Vegas luxury hotel."
"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit. Mr. Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.
He said the developer's sales staff led him to believe that the hotel would have 94% occupancy and $350-a-night rates, Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.
"I am in so much debt. I don't know how long I can sustain this," Mr. Adekunbi said. Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.
Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.
[Interior of condo] During the real-estate boom, many Americans scrambled to buy anything they could -- office condos, warehouse condos and high-rise residential condos, which are crowding the skyline of cities such as Miami.
But condo hotels were one of the most dangerous investments of them all. Hotels are risky investments in real estate because occupancy can swing with the weather or the economy. Developers loved condo hotels. "It minimized the upfront risk to the developer, and shifted it to the individual unit owners," said Mark Lunt, a lodging analyst at Ernst & Young. Many developers said they insisted that buyers regard condo hotels as vacation homes that they would use rather than income-producing investments.
Some condo-hotel buyers are happy. But other buyers are suing developers to get out of their contracts, claiming they were misled. In Florida, a group of buyers is suing WCI Communities Inc., claiming the developer sold them condo hotels in the waterfront Resort at Singer Island as unregistered securities. The buyers said they bought the units as investments, not primarily for their own use. WCI said it intends to "vigorously defend" against the lawsuit, according to a recent Securities and Exchange Commission filing.
Other buyers are staging revolts inside high-end hotels. At the Trump International Hotel & Tower in Las Vegas a group of condo-hotel owners are clamoring to rent out their own hotel units using their own operator because they said Trump takes too much of the rental revenue. A Trump spokesman said the company's rental agreements are competitive with other condo-hotel rental-management companies in the area.
In other condo-hotel developments, a few buyers are talking to the SEC, alleging possible securities fraud, according to their attorneys. One issue could be whether developers sold these units as investments, which should have been registered with the SEC or other regulators. In some cases, lawyers said, a real-estate offering may be comparable to a security if the offering creates expectations of profits resulting from the efforts of a third party. An SEC spokesman declined to comment.
Historically, the SEC has suggested it wouldn't take enforcement actions against a condo-hotel developer as long as the company didn't provide prospective buyers with projections of income or expected occupancy, among other conditions.
Many developers were careful not to market condo hotels as investments, but "many others find it difficult to restrain themselves from creating expectation of investment returns and cash flow," said Rob Webb, a senior hospitality partner in the Cleveland office of law firm Baker & Hostetler LLP, which has represented condo-hotel developers in cases where buyers have tried to rescind their contracts. "All you have to do is find the developer's newspaper ads, and it could be a devastating blow."
Some buyers said developers should have registered their condo hotels as securities, which might have allowed them to review a detailed investment prospectus before they bought a unit.
For some buyers, a securities-law claim could provide a way to undo a purchase. "The rights of recovery are so much better if you can say it is a security," said Burton Wiand, a former SEC attorney who now practices at Fowler White Boggs Banker in Tampa, Fla.
If the transaction should have been registered, buyers can rescind the deal and get their money back, without having to prove fraud and misrepresentation, attorneys said.
Michael Trombley, a retired major-league pitcher who lives in Fort Myers, Fla., is one of several investors who have filed lawsuits alleging securities laws were violated in the sale of units in the Clearwater Cay Club in Clearwater, Fla.
"They were always trying to preach to people that the market is hot. This is a no-brainer. You'd better get in quick," said Mr. Trombley, 40 years old, who spent most of his career with the Minnesota Twins and Baltimore Orioles. In 2005, Mr. Trombley, along with five friends and family members, bought five units in the development for a total of about $2.2 million, according to his attorney, Bruce Barnes, taking out loans to finance the entire purchase price.
Mr. Trombley estimates the four units he holds are worth at best 40% of the original purchase price, he said. Carrying costs, meanwhile, are running about $14,000 a month.
SEC laws dictate that condo hotel developers cannot and should not sell their product based on cash flow and income that the property produces. This consumer protection, although well intended has created a void in the consumer’s ability to judge whether a condo hotel is an investment or a ‘consumption’ real estate purchase. Condo hotels should produce income, as any hotel room would, but there are many factors that create a successful hotel and the income should not be the sole reason for a purchase. Here is just one way to analyze a condo hotel’s potential income:
The Math: Consumer Since most people don’t use a second home more than 30 days per year; a cottage or a condo hotel unit is likely vacant for 330 days/yr. IF we Assume a hotel runs a 65% occupancy = 214 of potential rentable days. IF the Average Daily Rate (ADR) is $175/night = $37,537 year in potential gross revenue. ($175×214=$37,537)
Many condo hotel Rental Management Agreements (RMA) pay a 41-60% split with hotel management. Assuming this, your income could be $1,370/mo before your expenses of Debt Service, Taxes, Insurance, Dues. At current market rates, $1370/mo supports roughly a $250,000 loan (before taxes, dues, insurance). Numerous assumptions have been made in this example. Hotels traditionally have seasons, and regularly require maintenance and improvement.
With Condo Hotel you are purchasing Real Estate, NOT Revenue.
Tax Benefits, Potential Appreciation, and Hassle Free Use are other benefits of this form of real estate ownership, but every purchaser should consult their financial advisors.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
Developers love the concept because they can recoup much of their construction cost up front and still retain ownership of meeting facilities, restaurants, spas, and some traditional hotel rooms. Of the roughly 377,000 hotel rooms under development in the U.S., 30,500 are condo-hotel units. An additional 70,000 are private residences within hotels that are not designed to be rented out on a nightly basis, according to Lodging Econometrics, a research firm that collects hotel construction data.
From your example, assuming 20% equity, sounds like you earn about 15000 less RE tax, insurance, and due, which I am guessing is about 7500, on about $300K of investment. So 7500/300000 = around 2.5%. Am I off?
My guess is that these are not income earning alternative investments (cap rate likely too low), but pied a terre for people who can afford to get 2.5% on their money, or instruments for speculators who were hoping for a quick flip.
Desperate to recoup money paid to acquire condominiums in hotels, buyers from California to Florida are trying to use the courts to get their money back, arguing that condo-hotel developers violated securities laws when selling the units.
A few years ago, condo-hotels seemed like a great idea. Hotel developers could offset construction costs by selling rooms to individual buyers, then share the rental income with the owners every time a room was booked. However, instead of the lucrative venture some buyers claim they were promised by developers, condo-hotels have turned out to be one of the worst investments in decades.
Now, some buyers are arguing in court that purchasing a unit in a condo-hotel is similar to buying a stock, where the buyer is entirely reliant on the operational skills of management for any return. Therefore, they contend, the purchases should have been regulated by the Securities and Exchange Commission, which would force companies to issue a detailed prospectus and have agents licensed to sell both real estate and securities, a rare combination.
In 1973, the SEC released guidelines related to the purchase of condos that specified when such purchases are subject to securities law. If developers made claims about rental income, marketed a rental program without prompting or placed any limitations on occupying units, the purchase could be considered a security. The "smoking gun" is often a newspaper ad or marketing brochure, said Rob Webb, senior hospitality partner in the law firm Baker & Hostetler LLP in Orlando, Fla. "Quite frankly, the main exhibit to the complaint and the single piece of evidence that's most damaging is the developer's own sales brochures," Mr. Webb said.
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Response by kylewest
over 16 years ago
Posts: 4455
Member since: Aug 2007
Does anyone use independent financial advisors, or am I the only one? I'm sorry, but when investing $500,000+, I can't believe how naive some people are. Has anyone EVER known an actual person who made money on one of these? Of all the ways in which to invest a half million or more, this strikes me (and I have NO financial background) as completely idiotic and very high risk. Sad for the investors, but a completely predictable result.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
Has anyone EVER known an actual person who made money on one of these
Absolutely
Sales agent and Sponsor
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Response by rsl
over 16 years ago
Posts: 2
Member since: Aug 2009
This has been discussed to death. ad nauseum
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
funny
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Response by rsl
over 16 years ago
Posts: 2
Member since: Aug 2009
not to mention who can read such long articles going back to 2006.
Somehow I'd missed the whole thing so now I know what a condo-hotel is. Lots of unknowables & how would YOU like being in business with Mr. Trump? Not me.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
Like the articles say, Condo Hotels are wonderful things, they provide attractive financing for developers who only give up a fraction of the income. Not so good for the investor. And they get around the SEC by allowing the investor to mis-lead himself regarding ROI.
These should be regulated as securities, but these buyers are not being honest, they are only claiming this now because the markets have turned. A Solomon acting as judge should agree but only apply the rule of security for future transactions.
Billionaire Donald Trump was featured on advertising material for selling the hotel suites, his photo and comments praising the building appearing in magazine advertorials that highlighted the investment potential of the suites. He sold rights for the hotel to use his name and trademark via Trump Marks LP, his company that owns the Trump brand. He attended the tower’s opening in April. Donald Trump declined to comment through his attorney.
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Response by uwsbeagle
almost 13 years ago
Posts: 285
Member since: Feb 2012
I find it fitting that one wipes oneself with toilet paper embossed with 'T' for Trump. I couldn't have designed it better myself. However, despite the fact that I feel the need to shower every time I read or hear the word TRUMP, this investor did some seriously poor due-diligence. Granted, there may not be very many comps for such units in Toronto but the article mentions that the city has more skyscrapers under construction than any other city in the world AND the advertising literature was implying (if not directly promising) 27% annual returns. Anyone should step from those numbers for a moment and do some additional research as each data point is troubling. It seems the investor wasn't so much duped as he was drunk with the hopes of extraordinary returns. A fool and his money are soon parted.
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Response by Riversider
almost 13 years ago
Posts: 13572
Member since: Apr 2009
If Groucho Marx were alive today he might update his classic line to read
"I don't care to finance any Condotel that would have me as an investor"
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Response by columbiacounty
almost 13 years ago
Posts: 12708
Member since: Jan 2009
don't quit your day job.
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Response by KeithB
almost 13 years ago
Posts: 976
Member since: Aug 2009
@ Beagle: "The return on investment document shown to potential buyers outlines possible returns based on a 55 percent to 75 percent occupancy rate. Below the chart it reads: “This is not a guaranteed investment program.”
Another document that buyers signed known as the disclosure statement highlights the risks of buying a suite, including competition from other luxury hotels, periodic oversupply of rooms, and economic downturns."
It also states a possible return of from " 5% to 27%".
It's very unfortunate individual investors don't look deeper. I have seen this happen to many buyers of these condo-hotels in Costa Rica. If you are actually going to use the place for personal enjoyment these programs can help you offset costs. But if you are looking for an actual investment you would do better to purchase a 3-5 family building and pay someone a small fee to manage it for you.
Keith Burkhardt
The Burkhardt Group
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Response by Riversider
almost 13 years ago
Posts: 13572
Member since: Apr 2009
Condo hotels are mis-understood. The investors are suckers. Sorry but this is the truth. They should be considered securities, or at the very least regulated by the SEC(in this country) but the SEC gave a no-action letter/safe harbor to those selling the investments. Anyone investing is getting next to nothing after fees, expenses, profit sharing, etc. They only came to you because other forms of financing were too expensive.
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Response by rb345
almost 13 years ago
Posts: 1273
Member since: Jun 2009
I agree with Riversider that condotels are very questionable investments but for other reasons
as well: possible hotel market oversaturation; small investors might suffer from management
policies which favor rental of large investor or sponsor or management rooms first.
The lack of control over marketing and guest allocation males condo-tels something I would avoid
unless I was looking for a tax write-off.
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Response by Al_Assad
almost 13 years ago
Posts: 107
Member since: Jul 2011
"investors might suffer from management policies which favor rental of large investor or sponsor or management rooms first."
Thats exactly what i've heard. I've spoken to a few folks who've gone in for this in Miami, in high end hotels. They tell me that their is bias in who gets assigned to which rooms. People paying full rack rate always go to the hotel's rooms, not the investors rooms, unless the hotel is 100% occupied (which is not that common). But large groups, conventions, etc paying a hugely discounted rate - he gets those customers allocated to him! And when their is lots of vacancy, which rooms do you think the hotel assigns guests to - their rooms (for which they get 100 cents of the guests dollar), or the condo hotel investors room (for which they get a 15% commission on the dollar)? It's a no brainer.
Condo hotels work best for people who want a vacation home in a specific area but want SOME amount of income to defray the cost for a few years. But as an investment only? No way.
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Response by Al_Assad
almost 13 years ago
Posts: 107
Member since: Jul 2011
Sorry for the "their" vs "there" issue...too much egg nog :/
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Response by rb345
almost 13 years ago
Posts: 1273
Member since: Jun 2009
Al:
Your posting confirms my concern. It confirms my basic concern that a small investor
will have real trouble preventing self-dealing which results in his or her rooms being
rented last and for least.
Repair and upgrade is also a possible source of self-dealing. Some rooms can be given
nicer amenities - or start with them, such as terraces, better views, more sunlight,
being located over the trash dunpsters - which objectively make them more desirable and
more likely to be requested by quests, particularly return guests.
Bottom line: putting aside market saturation, hotel location and poor construction issues,
and financing - for a while several years ago lenders stopped lending on condo-tels, it is
enormously risky to invest in condo-tels on any basis other than as a TIC investior, because
TICs are IRS-sanctioned incorporated partnerships
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Response by Al_Assad
almost 13 years ago
Posts: 107
Member since: Jul 2011
RB: If you want to avoid self-dealing when it comes to real estate, the best way is to not buy real estate...
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Response by huntersburg
almost 13 years ago
Posts: 11329
Member since: Nov 2010
Al_Assad, welcome back to Streeteasy.
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Response by rb345
almost 13 years ago
Posts: 1273
Member since: Jun 2009
Al:
1. you can safely buy real estate without becoming exposed to self-dealing
2. you just need to own it outright, control it or manage it
3. but what's true in real estate limited partnerships is also true for all LPs
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Response by Truth
almost 13 years ago
Posts: 5641
Member since: Dec 2009
Al_Assad:
I join huntersburg in the welcome back expressed to you.
streeteasy is a safe place, unlike the Middle East.
We won't tell Hillary Clinton that you're here.
The Accountability Review Board won't get any info out of us.
Just please don't go exploding any USA Ambassadors up.
At least not until her State Department officials return from their paid administrative leave.
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Response by huntersburg
almost 13 years ago
Posts: 11329
Member since: Nov 2010
Wow Truth, you ought to team up with Lucille on this issue.
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Condo-Hotel Buyers
See Investments Sour
by Michael Corkery, Sara Lin, and Ruth Simon
From The Wall Street Journal Online
April 08, 2008
For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble.
Many buyers purchased the hotel rooms from developers hoping to get paid every time the room was rented. But condo hotels, which account for as much as 10% of all hotel rooms under construction and a much greater percentage in resort markets such as Orlando, Fla., and Las Vegas, are coming back to haunt many of the people who bought the units, the developers that constructed the buildings, and the operators hired to run the hotels.
Some projects also are being brought to the attention of regulators by investors.
[Condo photo]
"It's been a very bad investment," says one person who bought a unit at what's called the Signature at MGM Grand (pictured) -- which calls itself "more than a Las Vegas luxury hotel."
"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit. Mr. Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.
He said the developer's sales staff led him to believe that the hotel would have 94% occupancy and $350-a-night rates, Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.
"I am in so much debt. I don't know how long I can sustain this," Mr. Adekunbi said. Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.
Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.
[Interior of condo] During the real-estate boom, many Americans scrambled to buy anything they could -- office condos, warehouse condos and high-rise residential condos, which are crowding the skyline of cities such as Miami.
But condo hotels were one of the most dangerous investments of them all. Hotels are risky investments in real estate because occupancy can swing with the weather or the economy. Developers loved condo hotels. "It minimized the upfront risk to the developer, and shifted it to the individual unit owners," said Mark Lunt, a lodging analyst at Ernst & Young. Many developers said they insisted that buyers regard condo hotels as vacation homes that they would use rather than income-producing investments.
Some condo-hotel buyers are happy. But other buyers are suing developers to get out of their contracts, claiming they were misled. In Florida, a group of buyers is suing WCI Communities Inc., claiming the developer sold them condo hotels in the waterfront Resort at Singer Island as unregistered securities. The buyers said they bought the units as investments, not primarily for their own use. WCI said it intends to "vigorously defend" against the lawsuit, according to a recent Securities and Exchange Commission filing.
Other buyers are staging revolts inside high-end hotels. At the Trump International Hotel & Tower in Las Vegas a group of condo-hotel owners are clamoring to rent out their own hotel units using their own operator because they said Trump takes too much of the rental revenue. A Trump spokesman said the company's rental agreements are competitive with other condo-hotel rental-management companies in the area.
In other condo-hotel developments, a few buyers are talking to the SEC, alleging possible securities fraud, according to their attorneys. One issue could be whether developers sold these units as investments, which should have been registered with the SEC or other regulators. In some cases, lawyers said, a real-estate offering may be comparable to a security if the offering creates expectations of profits resulting from the efforts of a third party. An SEC spokesman declined to comment.
Historically, the SEC has suggested it wouldn't take enforcement actions against a condo-hotel developer as long as the company didn't provide prospective buyers with projections of income or expected occupancy, among other conditions.
Many developers were careful not to market condo hotels as investments, but "many others find it difficult to restrain themselves from creating expectation of investment returns and cash flow," said Rob Webb, a senior hospitality partner in the Cleveland office of law firm Baker & Hostetler LLP, which has represented condo-hotel developers in cases where buyers have tried to rescind their contracts. "All you have to do is find the developer's newspaper ads, and it could be a devastating blow."
Some buyers said developers should have registered their condo hotels as securities, which might have allowed them to review a detailed investment prospectus before they bought a unit.
For some buyers, a securities-law claim could provide a way to undo a purchase. "The rights of recovery are so much better if you can say it is a security," said Burton Wiand, a former SEC attorney who now practices at Fowler White Boggs Banker in Tampa, Fla.
If the transaction should have been registered, buyers can rescind the deal and get their money back, without having to prove fraud and misrepresentation, attorneys said.
Michael Trombley, a retired major-league pitcher who lives in Fort Myers, Fla., is one of several investors who have filed lawsuits alleging securities laws were violated in the sale of units in the Clearwater Cay Club in Clearwater, Fla.
"They were always trying to preach to people that the market is hot. This is a no-brainer. You'd better get in quick," said Mr. Trombley, 40 years old, who spent most of his career with the Minnesota Twins and Baltimore Orioles. In 2005, Mr. Trombley, along with five friends and family members, bought five units in the development for a total of about $2.2 million, according to his attorney, Bruce Barnes, taking out loans to finance the entire purchase price.
Mr. Trombley estimates the four units he holds are worth at best 40% of the original purchase price, he said. Carrying costs, meanwhile, are running about $14,000 a month.
Anyone know the Cap rates for nyc Condo hotels?
This was from http://cyberspacediversion.com/archives/2008/12/14/condo-hotels-the-math/
SEC laws dictate that condo hotel developers cannot and should not sell their product based on cash flow and income that the property produces. This consumer protection, although well intended has created a void in the consumer’s ability to judge whether a condo hotel is an investment or a ‘consumption’ real estate purchase. Condo hotels should produce income, as any hotel room would, but there are many factors that create a successful hotel and the income should not be the sole reason for a purchase. Here is just one way to analyze a condo hotel’s potential income:
The Math: Consumer Since most people don’t use a second home more than 30 days per year; a cottage or a condo hotel unit is likely vacant for 330 days/yr. IF we Assume a hotel runs a 65% occupancy = 214 of potential rentable days. IF the Average Daily Rate (ADR) is $175/night = $37,537 year in potential gross revenue. ($175×214=$37,537)
Many condo hotel Rental Management Agreements (RMA) pay a 41-60% split with hotel management. Assuming this, your income could be $1,370/mo before your expenses of Debt Service, Taxes, Insurance, Dues. At current market rates, $1370/mo supports roughly a $250,000 loan (before taxes, dues, insurance). Numerous assumptions have been made in this example. Hotels traditionally have seasons, and regularly require maintenance and improvement.
With Condo Hotel you are purchasing Real Estate, NOT Revenue.
Tax Benefits, Potential Appreciation, and Hassle Free Use are other benefits of this form of real estate ownership, but every purchaser should consult their financial advisors.
Developers love the concept because they can recoup much of their construction cost up front and still retain ownership of meeting facilities, restaurants, spas, and some traditional hotel rooms. Of the roughly 377,000 hotel rooms under development in the U.S., 30,500 are condo-hotel units. An additional 70,000 are private residences within hotels that are not designed to be rented out on a nightly basis, according to Lodging Econometrics, a research firm that collects hotel construction data.
http://www.businessweek.com/bwdaily/dnflash/dec2005/nf20051210_3131.htm
Cap rate:
From your example, assuming 20% equity, sounds like you earn about 15000 less RE tax, insurance, and due, which I am guessing is about 7500, on about $300K of investment. So 7500/300000 = around 2.5%. Am I off?
My guess is that these are not income earning alternative investments (cap rate likely too low), but pied a terre for people who can afford to get 2.5% on their money, or instruments for speculators who were hoping for a quick flip.
http://ny.therealdeal.com/articles/condo-hotels-gone-for-good
http://online.wsj.com/article/SB124943301400306393.html
Desperate to recoup money paid to acquire condominiums in hotels, buyers from California to Florida are trying to use the courts to get their money back, arguing that condo-hotel developers violated securities laws when selling the units.
A few years ago, condo-hotels seemed like a great idea. Hotel developers could offset construction costs by selling rooms to individual buyers, then share the rental income with the owners every time a room was booked. However, instead of the lucrative venture some buyers claim they were promised by developers, condo-hotels have turned out to be one of the worst investments in decades.
Now, some buyers are arguing in court that purchasing a unit in a condo-hotel is similar to buying a stock, where the buyer is entirely reliant on the operational skills of management for any return. Therefore, they contend, the purchases should have been regulated by the Securities and Exchange Commission, which would force companies to issue a detailed prospectus and have agents licensed to sell both real estate and securities, a rare combination.
In 1973, the SEC released guidelines related to the purchase of condos that specified when such purchases are subject to securities law. If developers made claims about rental income, marketed a rental program without prompting or placed any limitations on occupying units, the purchase could be considered a security. The "smoking gun" is often a newspaper ad or marketing brochure, said Rob Webb, senior hospitality partner in the law firm Baker & Hostetler LLP in Orlando, Fla. "Quite frankly, the main exhibit to the complaint and the single piece of evidence that's most damaging is the developer's own sales brochures," Mr. Webb said.
Does anyone use independent financial advisors, or am I the only one? I'm sorry, but when investing $500,000+, I can't believe how naive some people are. Has anyone EVER known an actual person who made money on one of these? Of all the ways in which to invest a half million or more, this strikes me (and I have NO financial background) as completely idiotic and very high risk. Sad for the investors, but a completely predictable result.
Has anyone EVER known an actual person who made money on one of these
Absolutely
Sales agent and Sponsor
This has been discussed to death. ad nauseum
funny
not to mention who can read such long articles going back to 2006.
something shorter..
http://www.star-gazer.ca/images/katz19.jpg
Somehow I'd missed the whole thing so now I know what a condo-hotel is. Lots of unknowables & how would YOU like being in business with Mr. Trump? Not me.
Like the articles say, Condo Hotels are wonderful things, they provide attractive financing for developers who only give up a fraction of the income. Not so good for the investor. And they get around the SEC by allowing the investor to mis-lead himself regarding ROI.
These should be regulated as securities, but these buyers are not being honest, they are only claiming this now because the markets have turned. A Solomon acting as judge should agree but only apply the rule of security for future transactions.
http://www.bloomberg.com/news/2012-12-24/trump-tower-woes-signal-top-of-toronto-condo-market.html
Billionaire Donald Trump was featured on advertising material for selling the hotel suites, his photo and comments praising the building appearing in magazine advertorials that highlighted the investment potential of the suites. He sold rights for the hotel to use his name and trademark via Trump Marks LP, his company that owns the Trump brand. He attended the tower’s opening in April. Donald Trump declined to comment through his attorney.
I find it fitting that one wipes oneself with toilet paper embossed with 'T' for Trump. I couldn't have designed it better myself. However, despite the fact that I feel the need to shower every time I read or hear the word TRUMP, this investor did some seriously poor due-diligence. Granted, there may not be very many comps for such units in Toronto but the article mentions that the city has more skyscrapers under construction than any other city in the world AND the advertising literature was implying (if not directly promising) 27% annual returns. Anyone should step from those numbers for a moment and do some additional research as each data point is troubling. It seems the investor wasn't so much duped as he was drunk with the hopes of extraordinary returns. A fool and his money are soon parted.
If Groucho Marx were alive today he might update his classic line to read
"I don't care to finance any Condotel that would have me as an investor"
don't quit your day job.
@ Beagle: "The return on investment document shown to potential buyers outlines possible returns based on a 55 percent to 75 percent occupancy rate. Below the chart it reads: “This is not a guaranteed investment program.”
Another document that buyers signed known as the disclosure statement highlights the risks of buying a suite, including competition from other luxury hotels, periodic oversupply of rooms, and economic downturns."
It also states a possible return of from " 5% to 27%".
It's very unfortunate individual investors don't look deeper. I have seen this happen to many buyers of these condo-hotels in Costa Rica. If you are actually going to use the place for personal enjoyment these programs can help you offset costs. But if you are looking for an actual investment you would do better to purchase a 3-5 family building and pay someone a small fee to manage it for you.
Keith Burkhardt
The Burkhardt Group
Condo hotels are mis-understood. The investors are suckers. Sorry but this is the truth. They should be considered securities, or at the very least regulated by the SEC(in this country) but the SEC gave a no-action letter/safe harbor to those selling the investments. Anyone investing is getting next to nothing after fees, expenses, profit sharing, etc. They only came to you because other forms of financing were too expensive.
I agree with Riversider that condotels are very questionable investments but for other reasons
as well: possible hotel market oversaturation; small investors might suffer from management
policies which favor rental of large investor or sponsor or management rooms first.
The lack of control over marketing and guest allocation males condo-tels something I would avoid
unless I was looking for a tax write-off.
"investors might suffer from management policies which favor rental of large investor or sponsor or management rooms first."
Thats exactly what i've heard. I've spoken to a few folks who've gone in for this in Miami, in high end hotels. They tell me that their is bias in who gets assigned to which rooms. People paying full rack rate always go to the hotel's rooms, not the investors rooms, unless the hotel is 100% occupied (which is not that common). But large groups, conventions, etc paying a hugely discounted rate - he gets those customers allocated to him! And when their is lots of vacancy, which rooms do you think the hotel assigns guests to - their rooms (for which they get 100 cents of the guests dollar), or the condo hotel investors room (for which they get a 15% commission on the dollar)? It's a no brainer.
Condo hotels work best for people who want a vacation home in a specific area but want SOME amount of income to defray the cost for a few years. But as an investment only? No way.
Sorry for the "their" vs "there" issue...too much egg nog :/
Al:
Your posting confirms my concern. It confirms my basic concern that a small investor
will have real trouble preventing self-dealing which results in his or her rooms being
rented last and for least.
Repair and upgrade is also a possible source of self-dealing. Some rooms can be given
nicer amenities - or start with them, such as terraces, better views, more sunlight,
being located over the trash dunpsters - which objectively make them more desirable and
more likely to be requested by quests, particularly return guests.
Bottom line: putting aside market saturation, hotel location and poor construction issues,
and financing - for a while several years ago lenders stopped lending on condo-tels, it is
enormously risky to invest in condo-tels on any basis other than as a TIC investior, because
TICs are IRS-sanctioned incorporated partnerships
RB: If you want to avoid self-dealing when it comes to real estate, the best way is to not buy real estate...
Al_Assad, welcome back to Streeteasy.
Al:
1. you can safely buy real estate without becoming exposed to self-dealing
2. you just need to own it outright, control it or manage it
3. but what's true in real estate limited partnerships is also true for all LPs
Al_Assad:
I join huntersburg in the welcome back expressed to you.
streeteasy is a safe place, unlike the Middle East.
We won't tell Hillary Clinton that you're here.
The Accountability Review Board won't get any info out of us.
Just please don't go exploding any USA Ambassadors up.
At least not until her State Department officials return from their paid administrative leave.
Wow Truth, you ought to team up with Lucille on this issue.