New SEC rules prompt another look at this niche property.
of complex legal issues and Securities Exchange Commission regulations have
historically impeded the sale of condominium hotel units. New SEC rules adopted
under the Jumpstart our Business Startups, or JOBS, Act of 2012 have loosened
the legal structure and marketing process for condominium hotels, opening up a
new opportunity for investors and developers. Going forward, selling
condo-hotel units as securities is expected to become a more profitable — and
more common — option.
the Great Recession, any discussion of condominium hotels began with the
premise that this product, which had gone from relative obscurity to wide-scale
adoption in the space of about five years, had been a disaster for all
involved. Along with high condominium unit prices, U.S. securities laws created
complicated sales and marketing rules and imposed operational restrictions —
resulting in the unavoidable sense of fitting a square peg into a round
purchasers, the failure of the average daily rate and occupancy to meet
expectations, combined with the cost structure of maintaining a rental program
consistent with brand standards, often resulted in significant buyer’s remorse. This, in turn, resulted in unit
owners challenging and frequently attacking developers and hotel brands.
Notwithstanding the careful disclosures set forth in properly drafted offering
documents, unit owners dissatisfied with the economics of their purchase often
became indignant over the relative lack of control provided to them within the
condominium documents and other project covenants and restrictions. For their
part, the brands became acutely aware that they had underestimated — and
underpriced — the additional complexities involved in operating a condominium
Today’s Market Challenges
sure, business and investment memories can be short. But this does not fully
explain the renewed interest in condominium hotels. Have developers and hotel
brands learned their lessons? Have the factors influencing the prudence of
condominium hotel development changed?
answer to both questions, at least in part, is yes. Lessons learned from the
last generation of condominium hotels are likely to influence market
participants and enable them to avoid a number of mistakes. Today’s risk-averse climate minimizes such gambles as
building condominium hotels in markets where even traditional hotels cannot
survive; using the condominium hotel structure in projects with unsupportable
real estate prices; and failing to carefully manage the balance between
traditional and condominium hotel keys.
same time, there are significant contextual changes that may impact the
viability of condominium hotels, both negatively and positively. On the
negative side, unit financing is essentially nonexistent other than through
personal lines of credit. On the positive side, the often mentioned JOBS Act
and, in particular, new Rule 506(c) under Regulation D, which became effective
in September 2013, provides a mechanism for selling condominium hotel units as
securities through general solicitations. As a result, developers are permitted
to require rental program participation, pool revenues among all units, and
provide pro formas. Sales force licensing and securities law considerations
relating to the resale of condominium hotel units offered as securities
introduce new complexities, but these seem to be far outweighed by the economic
and legal advantages available to developers under the JOBS Act.
certain markets for condominiums are very strong, perhaps overheated, this is
not true across the board. In many markets there is a degree of conservatism
among purchasers. On the other hand, selling into overheated markets makes it
difficult to deliver a reasonable return on investment through the rental
program. For investors interested in parking money in a safe haven or with
optimistic views toward capital appreciation, this situation may not present a
problem, but this only applies in select locations.
hotel brands are looking at condominium hotels with a keen understanding of the
problems that can arise but appear to be willing to at least experiment with
carefully structured condominium hotels in appropriate markets and under
appropriate conditions. In cases in which the brand is not necessary to
facilitate real estate sales or fill beds, the unbranded model has the distinct
advantage of greater flexibility concerning cost containment during difficult
difficult to predict what the ultimate impact of the JOBS Act will be on the
condominium hotel market. There is growing interest in condominium hotels under
the old (non-securities) structure. However, even though there have not yet
been any condominium hotel units sold as securities under the JOBS Act, the
opportunity to sell units as securities may eliminate several of the challenges
of offering and operating condominium hotels — most importantly the risks
pertaining to rooms inventory.
Robins is chair of lodging and lifestyle practice and Kenneth G. Alberstadt is
chair of the capital markets practice at Akerman LLP. Contact them at
firstname.lastname@example.org and email@example.com.