New Options for the Sale and Operation of Condo Hotels as Investment Securities
By J.Thomas Cairns Attorney, Steckbauer Weinhart, LLP | December 2014
The marketing and operation of "condo hotels" – projects in which hotel rooms are owned by individual investors but managed and operated as part of a single project - offer many benefits to developers of hotel and resort projects and those seeking to reposition existing projects. The condo hotel structure can allow a developer to help finance construction and increase leverage through unit pre-sales and provide a quick exit strategy.
From a buyer's perspective, purchase of a condo hotel unit can offer more than just a vacation property. By placing the property in a rental program managed by an experienced hotel operator, an owner of a condo hotel unit can earn an income stream as well as tax benefits that might at least help offset the costs of acquiring and maintaining the property and perhaps even generate a profit.
For a hotel operator managing a condo hotel property, it is important to assure uniformity in how all rooms in the property are managed in order to maintain control over room inventory and protect brand integrity. It is desirable from an operator's perspective to have all or a large majority of unit owners participate in the management program and to have the ability to pool income and expenses for the entire property.
While condo hotel units may be attractive investments to prospective buyers, however, it has been difficult in the past to market them based on that investment potential. Moreover, it has been hard to structure condo hotel projects in a way that allows operators to maximize profits and returns on those investments by running the property as a true common enterprise. Most of these problems in marketing and operating condo hotel projects have arisen from the need to avoid characterization of such interests as investment securities that would be subject to registration and other requirements of the federal securities laws.
Recent changes to the federal securities laws, including provisions of the Jumpstart Our Business Startups (JOBS) Act of 2012, have changed the game and now allow an alternative approach to how condo hotels may be structured and marketed. Instead of trying to make condo hotels something they are not in order to avoid their characterization as securities, it may now make sense to simply call them what they are – investment securities.
New rules concerning the offer and sale of securities through private placements may allow the sale of condo hotel rooms as investment securities without the need for registration under federal securities laws. These changes will affect not only the way that condo hotels are marketed, but the way they are structured. Mandatory participation by owners in a rental pool may allow hotel operators greater flexibility and control, provide a critical mass of available room inventory and permit operation of a condo hotel as a true "common enterprise".