News for the Hospitality Executive
By Jim Butler and the Global Hospitality Group®,
Author of www.HotelLawBlog.com
April 15, 2011
Hotel Lawyer with good news for well-structured condo hotel deals. With the experience gained as legal and business advisors on more than 100 condo hotel and hotel condo projects, we have said for many years that this type of project has earned an enduring place in the landscape of hotel and real estate development. We still believe that.
The main issues of successful hotel mixed-use development are managing consumer expectations, fulfilling those expectations, and creating a viable mixed-use regime structure. In the case of condo hotels, a viable structure must work from an operational standpoint, be economically sustainable, and avoid triggering violations of Federal and State securities laws.
In a recent lawsuit, involving the Hard Rock Hotel San Diego, a federal district court in California ruled against the condo hotel buyers, finding that no securities laws were violated -- the plaintiffs did not allege facts that would cause the condo hotel units to constitute "securities." We see the case as affirming the effectiveness in defeating plaintiffs' claims of two structural elements we have encouraged all our clients to use.
My partner, Catherine Holmes, who structures most of our condo hotel regimes, talks about these factors and the case below. Catherine advises clients in the specific business and legal aspects of condo hotel regime structuring and documentation, including securities compliance matters, documentation and training. In her article below, she talks about the case and what it means for us in the condo hotel world. It is good news!
Condo Hotel Wars
Banks and Broker Win Latest Battle
As we and other condo hotel experts predicted, the big guns being wielded by the plaintiffs are claims that the sale of condo hotels violated federal and state securities laws.
In the latest skirmish fought in the condo hotel wars, Salameh et al. v. Tarsadia Hotels, et al., involving the Hard Rock Hotel San Diego (HRHSD), a federal district court in California ruled on March 29, 2011, against the condo hotel buyers, finding that they did not allege facts that would cause the condo hotel units in the HRHSD to constitute securities.
For condo hotel developers, bankers and brokers, the case affirms some of the guidelines we have recommended to establish defenses against claims by condo hotel unit buyers based on securities law violations.
Background. The HRHSD is a 420 unit hotel condominium sold in 2006 through 2008. In December 2009, the plaintiffs filed their original complaint seeking class action status against seven bank defendants who provided financing either to the project or to the unit buyers, Playground Destination Properties, as the broker of the units, and Tarsadia Hotels and its affiliates, as the developer of the project. A few months later, the plaintiffs filed a first amended complaint, which was dismissed by the court in July 2010. The plaintiffs filed a second amended complaint in September 2010.
The second amended complaint alleged federal and state securities law violations based on the claim that the restrictions imposed on unit purchasers with respect to the maintenance and use of the units created a security that could only be sold in accordance with federal and state securities laws. Based on those allegations, the plaintiffs sought to rescind their purchase of units and receive a return of 100% of their original purchase price, plus other damages.
Plaintiffs Arguments. The plaintiffs based their securities claims on the theory that once they purchased their units at HRHSD, they had no control over the rental management of their units. Even though the rental program was voluntary, they claimed that for all practical purposes, it was in fact mandatory. In support of their position, the plaintiffs argued that they were restricted by city zoning ordinance from staying in their units for more than 28 days per calendar year, and they were required to pay for the daily management, operation and marketing of the units as a hotel on the days that they were not allowed to personally use their units. As a result, the plaintiffs claimed that the economic reality of the project was that the units were required to be managed as part of a common enterprise under the rental management contract.
The plaintiffs relied largely on a 1989 case, Hocking v. Dubois, in which buyers in a condominium project in Hawaii were offered a voluntary rental pooling agreement, where all of the participants would receive a portion of the profits of rental of the units.
Court Findings. The court concluded that the circumstances in HRHSD differed significantly in two important respects from the condominium units sold in Hocking, and that that those differences meant that the condo hotel units in HRHSD were not sold as securities.
the court found that there was a significant gap between the date of
of purchase contracts for units, on the one hand, and the execution of
management agreements, on the other hand. In HRHSD, the rental
agreement was not offered until at least 8 months after the purchasers
purchase contracts. By contrast, in Hocking, a rental management
offered just 6 days from the date of signing a purchase agreement, and
pooling agreement was offered less than 2 weeks after signing the
agreement. So, the court reasoned, the purchase contract and rental
contract were not offered as part of a single package, and therefore
part of a single investment contract as the plaintiffs alleged.
Lessons Learned. The court's ruling in Salameh et al. vs. Tarsadia Hotels, et al. points out the importance of two elements in any condo hotel sales program:
would have happened
if the rental management contract in HRHSD had been offered at the same
the purchase contract? Could other elements have been shown that,
the disclaimers in the purchase contract, would have caused the court
the same ruling? The court did not discuss the other elements that the
said are crucial to determining whether a condo hotel is a security,
it did mention two SEC no-action letters in passing, Marco Polo Hotel,
(1987) and Intrawest Corp. (2002). To what extent might the other
those no-action letters influence the court's ruling? There are still
unanswered questions that we hope will be addressed in future
thing we know for certain is that the latest battle will not be the end
condo hotel wars.
Catherine DeBono Holmes is a hotel lawyer with JMBM's Global Hospitality Group® and assists clients with hotel management and franchise agreements, purchase and sale transactions, and condo hotel regime structuring. She has significant expertise in condo hotels and advises clients in the specific business and legal aspects of condo hotel regime structuring and documentation, including CC&Rs, HOA docs, unit management agreements, shared facilities agreements, rental management agreement programs and securities compliance matters (structuring, documentation and training). For more information, please contact Cathy Holmes at 310.201.3553 or [email protected].
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at [email protected] or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.
JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.
JMBM’s Global Hospitality Group®
The hotel lawyers in the Global Hospitality Group® of Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier hospitality practice in a full-service law firm and are the authors of the Hotel Law Blog. We represent hotel owners, developers, investors and lenders and have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties worldwide. For more information about the Global Hospitality Group®, go to www.HotelLawBlog.com. For more information about full range of legal services provided by JMBM, go to www.JMBM.com.
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