Why does the SEC care about condo hotels?
The Securities and Exchange Commission (SEC) may view the condo offering as a “security,” if any one of the following exists: 1) The condo is sold to the buyer with an emphasis on economic (or tax) benefits; 2) the condo is put into a “rental pool,” where income and expenses are pooled and each condo owner gets an allocated share; 3) the unit owner has substantial restrictions on use, occupancy or selection of a rental agent of the owner’s choosing, or 4) the condo was offered with certain “ancillary services” such as a rental program. Because a successful condo hotel must have an adequate and predictable inventory of rooms to rent out to hotel guests, it is easy to see how these factors could present challenges.
Most developers choose not to register their project with the SEC for the following reasons: First, the condo security must be registered with the SEC and in every state where it is offered (or be or offered in strict accordance with restrictive exemptions from the registration requirements). Second, a securities broker dealer (not a real estate broker) must sell the condos. Finally, because of the SEC’s anti-fraud rules, it is much easier for a dissatisfied “investor” to sue the developer, and the developer can be held personally responsible for non-compliance.
Making sure a developer doesn’t run afoul of the SEC requires that a long list of procedures, documentation, and training take place. It requires putting together a rather complex series of carrots and sticks to incentivize condo owners to participate in the rental program, and to make their condo association work with the operating hotel standards. This is an area where experience and expertise can make or break a project.
