Condominium Hotels and the Securities Act of 1933 Prepared and Presented by: Raymond S. Iwamoto.
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Transcript of Condominium Hotels and the Securities Act of 1933 Prepared and Presented by: Raymond S. Iwamoto.
Condominium Hotels Condominium Hotels and the Securities and the Securities
Act of 1933Act of 1933
Prepared and Presented by:Prepared and Presented by:Raymond S. IwamotoRaymond S. Iwamoto
• Section 5(a) of the Securities Act of Section 5(a) of the Securities Act of 1933.1933.
• SEC v. W.J. Howey, 328 U.S. 293 SEC v. W.J. Howey, 328 U.S. 293 (1946)(1946)
• Investment ContractInvestment Contract• Common EnterpriseCommon Enterprise
– Expect profits solely from third party Expect profits solely from third party efforts.efforts.
Consequences of ViolationConsequences of Violation
• Injunctive ProceedingsInjunctive Proceedings• Civil RemediesCivil Remedies
– RescissionRescission– DamagesDamages
• Criminal and Antifraud ProvisionsCriminal and Antifraud Provisions• Maui HiltonMaui Hilton• Rescission Offer RegistrationRescission Offer Registration
Condo Hotel Security?Condo Hotel Security?
• Offer of Securities ifOffer of Securities if• Offered or Sold With Rental Pool Offered or Sold With Rental Pool
ArrangementArrangement• Mandatory Rental AgreementMandatory Rental Agreement• Based on Representations of Based on Representations of
Economic Benefit to be Derived from Economic Benefit to be Derived from Managerial Efforts of a Third Party in Managerial Efforts of a Third Party in Connection with Rental of the Units. Connection with Rental of the Units.
How Does a Condo Hotel Avoid How Does a Condo Hotel Avoid This?This?
• Manage the unit on your own.Manage the unit on your own.• Procedures:Procedures:
– Absolutely no mention of rental services.Absolutely no mention of rental services.– Don’t Ask, Don’t TellDon’t Ask, Don’t Tell– IntraWest and Ballard SpahrIntraWest and Ballard Spahr– That’s RidiculousThat’s Ridiculous– ““Takes to an illogical extreme.”Takes to an illogical extreme.”– Due DiligenceDue Diligence– SEC: We agreeSEC: We agree– ““Ownership may include the opportunity to Ownership may include the opportunity to
place your unit in a rental arrangement”place your unit in a rental arrangement”
Guidelines In MaterialsGuidelines In Materials
• Only staff position and no legal Only staff position and no legal precedent.precedent.
• Facts and circumstances identical.Facts and circumstances identical.• Refundable versus non refundable Refundable versus non refundable
deposits.deposits.
Separation of Sales Office from Rental Separation of Sales Office from Rental Management Office and PersonnelManagement Office and Personnel
• Who can say what?Who can say what?• No information about economic of tax No information about economic of tax
benefits.benefits.• Don’t Ask, Don’t Tell policy regarding Don’t Ask, Don’t Tell policy regarding
rental information.rental information.• Historic onlyHistoric only
– No projections and only if publicly No projections and only if publicly available.available.
LOAN PROGRAM30 Year Fixed
SECOND HOME
LOAN AMOUNT $200,000
INTEREST RATE 6.875%
DOWN PAYMENT % 20%
DOWN PAYMENT $ $50,000
CLOSING COSTS $2,155
ESTIMATED PREPAID ITEMS $3,407
LOAN POINTS % 1.25%
LOAN POINTS $ $2,500
BUILDER PREPAIDS $3,310
ESTIMATED CASH TO CLOSE $61,908
ESTIMATED PROPERTY TAXES $237
HOMEOWNER DUES $385
PRINCIPAL AND INTEREST $1,314
TOTAL MONTHLY PAYMENT $1,936
Annual Annual
Property Tax Property Tax $2,844$2,844
Assoc Dues Assoc Dues $4,620$4,620
Mortgage Mortgage $18,000$18,000
Total Total $25,464$25,464
Assume 80% occupancy at $135 a night Assume 80% occupancy at $135 a night $40,000$40,000
Divided with Manager Divided with Manager $20,000$20,000
NEGATIVESNEGATIVES
• $5,000 Negative cash flow$5,000 Negative cash flow• Positive or negative appreciation?Positive or negative appreciation?• Tax benefitsTax benefits• Future cash callsFuture cash calls• Maintain Brand standardsMaintain Brand standards• DisclosureDisclosure• BudgetBudget• Is Brand guaranteed?Is Brand guaranteed?• Sophistication of a hotel ownerSophistication of a hotel owner