Condo Hotels: Are They Unregistered Securities? SEC Rules Apply

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:

• 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.
• 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.