Author of www.HotelLawBlog.com
5 December 2006
Condo Hotel Lawyer: In my last two postings on www.HotelLawBlog.com, I have been reviewing where the condo hotel phenomenon is today and where its going, and what drives success in condo hotel projects. While there are a lot of reasons that condo hotels make sense and have an enduring legacy, the wildfire that has been burning in the U.S. for the past 5 years is now pulsing out in all directions. What has caused the condo hotel craze to spread to Latin America, the Caribbean, Europe, China, India and the Middle East? And why is anyone looking to emulate the state of the art developed over the past 5 years in the U.S.?
Foreign markets are hot!
As I noted yesterday, from our own experience and from the IMN Condo Hotel Symposium in Las Vegas last week, it looks like the condo hotel market outside the U.S. is exploding, particularly in Mexico, Costa Rica, the Caribbean, London, Spain, in other spots throughout Europe, Dubai and elsewhere in the Middle East, China, and perhaps India.
Why? Why hasn’t this phenomenon burned itself out? Why is it spreading to other continents and jumping oceans?
Why the condo hotel market is on fire outside the U.S.
I won’t go over all the basics again. (send me an email at email@example.com if you need the primer or poke around www.HotelLawBlog.com a bit). Initially condo hotels are catching on elsewhere for all the reasons they have in the U.S. — the confluence of benefits to all stakeholders, including real estate investment for unit buyers, convenience, amenities, lifestyle, ego gratification, and so on. But outside the U.S., there may be even more advantages than available here.
The additional advantages largely stem from freedom, or potential freedom, from U.S. securities laws. In some jurisdictions, the unit sale may still be treated as a ‘security” (such as in Canada), but the government is sufficiently enlightened to make that a reasonable and predictable process. In many others, as long as there is no fraud or misrepresentation, the sale is free from significant government intervention. In general, however, it is permissible in these other jurisdictions to sell the condo hotel unit as an “investment” and to treat buyers as “investors” instead of insisting that they use the units for personal purposes without any current income expectations.
As a result, foreign developers may be able to do all the things that U.S. developers would like to do but generally cannot. These things include the following:
- Structure and market the condo hotel unit sale as an “investment” in real estate — both for current income and for long term appreciation. Some may even guarantee a minimum return on investment.
- Require each condo hotel unit purchaser to place his or her unit into a clearly defined rental program, and if they do not wish to participate, they may be refused the ability to purchase the unit.
- Pool income and expense from the condo hotel units so that the risk of buying an individual condo hotel unit is spread over all the units in the hotel, or all units in a particular class or group of units.
- Provide potential condo hotel unit purchasers with all the relevant documents for the condo hotel program while they are evaluating their investment, instead of requiring a purchase before they can find out the relevant details of the rental program, see the rental agreement, learn about the “splits” and the like.
- Provide potential investors with reasonable and well-founded projections, comparables and other economic data to help them evaluate the investment.
- Impose use restrictions on the condo hotel unit purchaser either limiting the owner’s use of the unit to some time period (i.e. not more than 90 days per year on some kind of notice arrangement) or prohibiting it altogether to guarantee smooth hotel operations with a predictable hotel rooms inventory. After all, a condo hotel project must work first and foremost as a hotel … and a condo project.
WOW! What a concept! If only the U.S. SEC could get comfortable with a procedure to permit this in the U.S.
Editor’s Note: As a result of the Jobs Act, the SEC was mandated to change it rules on private placements, and since late 2013, Rule 506(c) may now make it feasible for developers to sell condo hotels as “securities” and access the benefits referred to above. See The “new breed” of condo hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .
And of course many foreign investors have a great appreciation for the everlasting value of real estate. So add the condo hotel advantages of hassle free ownership, the quality available from luxury brand management, a ready rental program from the hotel, plus all the lifestyle, convenience, and other benefits, and who needs to ask why this is catching on outside the U.S.? The question is, how did it work in the U.S. so well with all these crazy SEC-generated restrictions and contortions?
Why foreign condo hotel projects need U.S. condo hotel “technology”
Foreign markets are importing US condo hotel technology.
To get a leg up, developers outside the U.S. are studying the latest condo hotel “technology” from the U.S. for 3 reasons:
- After hundreds of deals and billions of dollars of projects, in the U.S., a handful of lawyers and advisors have figured out some excellent solutions to business and legal problems that have plagued condo hotel developers for 30 years — solutions to integrating the functional and operational aspects of the mixed hotel, residential and other real estate uses
- Many of the ultra-refined U.S. approaches will deliver highest levels of satisfaction to local and international buyers of condo hotel units without reinventing the wheel
- Many foreign-based projects will be marketed to or purchased by U.S. residents and it is wise to consider U.S. legal implications and deliver a product that looks like something they expect. In fact, many of the expectations of U.S. condo hotel unit buyers may reflect the needs and desires of their off shore brethren.
Foreign market condo hotel product may be free from U.S. SEC restrictions (or not, as noted above when marketing to US residents), and experienced U.S. advisors know all the sticking points to help develop an ideal regime structure for marketing. This will be very interesting to watch!
Other condo hotel resources
You can access the full library of Condo Hotel materials on Hotel Law Blog by going to the home page, selecting the tab at the top that says “HOTEL LAW TOPICS”, and then clicking on “Condo Hotels” in the drop down menu . . . or by clicking here.
Below is a partial listing of articles by JMBM’s Condo Hotel Lawyers:
- Condo hotels: Don’t forget the secret sauce!
- Condo Hotel Lawyer: What is a Condo Hotel?
- The “new breed” of condo hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .
- Using condo hotels for financing new hotel development: Traditional condo hotel structures as “non-securities”
- Condo Hotel fundamentals — 5 Keys to Success!
- Condo Hotels’ enduring legacy: hotel-enhanced mixed-use
- Hospitality Lawyer: The 5 biggest misconceptions about Condo Hotels
- Condo Hotel Lawyer: Why does the SEC care about condo hotels?
- Condo Hotel Lawyer: Standards must be “built in”
- Condo Hotel Lawyer: Not so fast! Locking down the condo hotel structure
- Condo Hotel Lawyer — What is fanning the condo hotel wild fire in Latin America, the Caribbean, Europe, China, India and the Middle East?
- Condo Hotel Lawyer — Las Vegas Report: What drives successful sellouts today?
- Condo Hotel Lawyer — What in the world is going on with condo hotels now?
- Hospitality Lawyer — Trump’s luxury residential mixed-use project in Hawaii sells out in 8 hours. New sales record claimed.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $68 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
Our Perspective. We represent hotel owners, developers and investors. We have helped our clients find business and legal solutions for more than $68 billion of hotel transactions, involving more than 1,500 properties all over the world, including more than 100 condo hotels and hotel condos. For more information, please contact Jim Butler at firstname.lastname@example.org or +1 (310) 201-3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.