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.

EconomicsEconomics

• Buyer PerspectiveBuyer Perspective

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

MAHALOMAHALO