Condo Hotels As Securities: Has the Litigation Boom Begun?

By Dan Brown Partner, Sheppard Mullin Richter & Hampton LLP | January 14, 2010

During the past couple of years, it's been hard to miss articles in the press concerning one or more aspects of the proliferation of the "condo hotel." Those articles have generally dealt with potential issues that might arise from the new mixed property uses, the soundness and reasons for investments in condo hotels, and legal issues relating to the purchase, sale, and management of the condo hotel. One potential issue that was the subject of many articles concerning the condo hotel boom - - including an article by this author - - was whether dissatisfied condo-hotel unit owners would seek to assert claims against developers alleging that the sale of a condo hotel unit constitutes the sale of a security, thus giving rise to the right to rescind a condo unit purchase contract and seek damages, under federal and state securities laws.

Thus it is not surprising that a review of recent press reports concerning failing condo hotel projects indicates that disgruntled condo hotel owners and investors are, indeed, relying on federal and state securities laws to attempt to rescind their purchase agreements and seek damages. As such, and because the issue of whether the sale of a condo hotel unit constitutes the sale of a security has been thus far unresolved by any court, the outcomes of these first cases will be watched closely by, among others, attorneys, purchasers of condo hotels, developers, and management companies involved in condo hotels.

For example, the Wall Street Journal recently reported about a lawsuit filed in federal district court in Florida by the owners of condo hotel units at the Clearwater Cay Clubs Resort (the "Clearwater Resort") in Clearwater, Florida. In that lawsuit, the plaintiffs allege that the Clearwater Resorts' vendors and developers violated both federal and Florida state securities laws by fraudulently inducing them to invest in condo hotel units. Specifically, the plaintiffs allege that defendants promised them: (i) "substantial profits" from the investments through guaranteed income from a pool of short-term rental units; and (ii) capital appreciation due to a large scale conversion/development. Based on the allegation that the sale of a condo hotel unit constitutes a sale of a security, plaintiffs allege that the units were required to be, but were not, registered with the Securities and Exchange Commission ("SEC"), and seek damages.

A similar lawsuit was filed by condo hotel unit purchasers at the Resort at Singer Island (the "Singer Island Resort") in Palm Beach, Florida. The Singer Island Resort plaintiffs allege that defendants violated federal securities law by selling the condo hotel units as investments without registering the units with the SEC. As a remedy, the plaintiffs are seeking monetary damages and the rescission of their purchase agreements.

Finally, the New York Attorney General's Office has joined the condo hotel as securities fray, recently ordering The Related Group to refund pre-construction deposits to buyers who were marketed and sold Florida condo hotel units in New York State. The directive was issued under New York State securities law.

It is still difficult to predict whether the recent lawsuits alleging federal and state securities laws violations arising from the sale of condo hotels will prove to be successful. The difficulty in answering this question is, among other things, that courts have yet to decide whether a condo hotel sale constitutes the sale of a security.

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Social Media: Engagement is Key

There are currently 2.3 billion active users of social media networks and savvy hotel operators have incorporated social media into their marketing mix. There are a few Goliath channels on which one must have a presence (Facebook & Twitter) but there are also several newer upstart channels (Instagram, Snapchat &WeChat, for example) that merit consideration. With its 1.86 billion users, Facebook is a dominant platform where operators can drive brand awareness, facilitate bookings, offer incentives and collect sought-after reviews. Twitter's 284 million users generate 500 million tweets per day, and operators can use its platform for lead generation, building loyalty, and guest interaction. Instagram was originally a small photo-sharing site but it has blown up into a massive photo and video channel. The site can be used to post photos of the hotel property, as well as creating Instagram Stories - personal videos that disappear from the channel after 24 hours. In this regard, Instagram and Snapchat are now in direct competition. WeChat is a Chinese company whose aim is to be the App for Everything - instant messaging, social media, shopping and payment services - all in a single platform. In addition to these channels, blogging continues to be a popular method to establish leadership, enhance reputations, and engage with customers in a direct and personal way. The key to effective use of all social media is to find out where your customers are and then, to the fullest extent possible, engage with them on a personal level. This engagement is what creates a personal connection and sustains brand loyalty. The February Hotel Business Review will explore these issues and examine how some hotels are successfully integrating social media into their operations.