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Are Condo Hotels Subject to SEC Regulations?

By James McGuire and Daniel Brown
January 27, 2006

The latest real estate trend in the hospitality industry, across the country and around the world, is the “condo hotel.” A condo hotel resembles, and is managed and operates as, a traditional hotel, except that certain hotel rooms are offered for sale as condominium units to individual buyers. In addition, unit owners usually have the option of placing those units in a reservation system or rental program and sharing in any associated fees. The proliferation of the condo hotel is largely the result of the benefits that condo hotels afford developers, lenders, and buyers. For a developer, the condo hotel provides the opportunity to turn a quick profit upon sale of condominiums as opposed to the incremental profits traditionally associated with the cyclical hotel industry. Lenders are also more likely to support developers as a result of the potential return on investment realized with condominium sales (even prior to construction). Finally, the condo hotel is attractive to buyers seeking a residence that includes all the amenities associated with traditional hotel stays. Condo hotel purchases and sales also raise new and unresolved legal issues, particularly whether the sale of a condo hotel unit constitutes the sale of a security requiring registration and compliance with federal securities laws.

Although generally the offer for sale of real estate does not involve the offer of a security, as explained below, because a condo hotel unit is associated with a rental or management program, it can, in certain circumstances, be deemed a security. If so, unless the sale is exempted, the sale must be registered with the SEC and comply with the SEC's rules and regulations, including its anti-fraud provisions. Accordingly, developers or brokers could face serious criminal and civil liability repercussions. In addition, condo hotel sellers could be deemed securities brokers or dealers within the meaning of the Securities Exchange Act and may be required to be registered as such. Finally, if a condo sale is considered that of a security and that sale is not registered, the buyer could void the sales contract.

Is the Sale That of a Security?

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