A Developers Nightmare:
|by Catherine D. Holmes, February 2006
It seems that as fast as condo hotel building approvals are requested, municipal governments are responding with new ordinances to regulate these multi-use projects. In some cases, these increasingly detailed ordinance provisions are counterproductive both to the sale and operation of the condo hotel.
But developers must be cautious about how they get involved in the adoption of municipal ordinances, or they run the risk of converting the offering of their condo hotel units into an offering of “securities” under federal securities law. This is a potential disaster for developers (see “How to Make a Condo Hotel Deal,” Jim Butler, March 2005).
Participating in the Ordinance Process
Developers should be careful about working with city building authorities to craft ordinances that may provide flexibility or solve certain hotel operating issues by limiting owner use and occupancy rights. The Securities and Exchange Commission has said that restrictions on condo hotel owner use imposed by a pre-existing ordinance will not cause a project to be a security. However, if a developer uses the ordinance process to create restrictions on an owner’s use, it is possible that the SEC (or a court) could decide that the restrictions imposed by the ordinance were in fact caused by the developer’s own actions, rendering the condo offering a “security.”
Condo hotel developers can probably work to reduce municipally imposed restrictions on developers and owners, but these issues should be brought to the attention of officials in a conceptual way, so as to improve their understanding of condo hotels rather than providing the city with drafts of the developer’s desired ordinance provisions.
Placing Restrictions on Unit Owners
Overly restrictive use and rental conditions on condo-hotel unit owners in an ordinance could, under certain conditions, result in the condo hotel units being characterized as “securities” under federal and/or state securities laws.
Although the SEC has issued “no action” letters where zoning ordinances have placed restrictions on owners, it has stated recently, in informal advice, that it will examine the totality of all restrictions and requirements on unit owners, including those imposed by zoning ordinances, in determining when condo units will be deemed “securities.”
Developers should not assume that any restriction on unit owners contained in a zoning ordinance will automatically be acceptable to the SEC or other authorities in determining whether the condo units are securities.
Requiring Branded “Four-Star” Designation
One recently proposed ordinance would have required every condo hotel to be operated under a “brand” included in the “Upscale Segment” or “Luxury Segment” and, upon completion, to meet the published requirements to receive a rating of no less than a Mobil 4-star or AAA 4-diamond designation.
There are many legitimate reasons that condo hotels may desire to be owner-managed, rather than managed by a “brand.” In addition, most hotels that are regarded as luxury hotels are not, in fact, holders of the actual designation from Mobil or AAA. Cities should be cautioned against placing undue restrictions upon the developer or creating unrealizable expectations for unit owners.
Regulating Common Area Ownership
One recent proposed ordinance required that the common areas of the condo hotel be owned by the developer or an entity other than the condo hotel unit owners. However, the condominium regulations of some states require that common areas be owned by a Homeowners Association, or at least have the possibility of transfer to an HOA upon certain events. This provision could cause the condo hotel to violate provisions of state law and perhaps fail to receive approval for sale to purchasers in one or more states.
Regulating Hotel Management Agreements
Another recent proposed ordinance required that a condo hotel HOA enter into a management agreement with a hotel manager for at least five years. However, the condominium regulations of some states limit the duration of contracts that may be entered into by an HOA. In addition, some hotel operators may not agree to enter into a management agreement with an HOA, although they might agree to a management agreement with the developer and the individual unit owners. Management agreements are best left to the hotel professionals that enter into them and existing state laws.
Regulating Budgets and Other Operating Matters
Some ordinances require the developer to submit budgets for the condo hotel HOA to maintain the hotel. These ordinances assume that the HOA will be responsible for maintaining the hotel, but that is not the case in all circumstances. The standards for operating condo hotels, including the budgeting process, are undergoing significant changes within the industry and cities should not impede the process by micro-managing condo hotel operational matters.
Regulating With Care
Cities have legitimate reasons for imposing ordinances that protect their economic interests. But how cities address condo hotel regulation—and how developers participate in the process—can spell success or failure for all involved. Bad ordinances with unnecessary and ill-conceived restrictions will discourage good condo hotel projects that could otherwise contribute to a city’s economy. Good ordinances will benefit not only the cities themselves, but developers, residential unit buyers and the traveling public.
Copyright © 2006 Jeffer, Mangels, Butler & Marmaro LLP (JMBM).
All rights reserved. Global Hospitality Advisor® and Ask the Hotel Lawyer™ are trademarks/service marks of JMBM.
The Global Hospitality Advisor® is published four times a year for the clients and friends of JMBM.
Jeffer Mangels Butler & Marmaro LLP
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|Also See:||Condo Hotels and the Americans with Disabilities Act: A Case of Mistaken Identity? Is your condo hotel a “residence” or a “place of public accommodation”? / JMBM / February 2006|
|Outlook 2006: GHA Hospitality Roundtable / JMBM / December 2005|
|The Condo Hotel Boom - What Does it Mean for the Hotel Industry / JMBM / December 2005|
|Ask the Hotel Lawyer™ / New Business Uncertainty: Jury Trial Waivers Struck / December 2005|
|Five Keys to Successful Condo Hotel Regimes / “Ask the Hotel Lawyer” / October 2005|
|Americans With Disabilities Act Update: the Hospitality Industry, A Consistent Target of Abusive ADA Litigation, May Get Some Relief from Abusive Lawsuits / Marty Orlick / October 2005|
|Labor Wars: A Hotel Survival Guide - Watch Out For Neutrality Agreements / Marta M. Fernandez / September 2005|
|How to Make a Condo Hotel Deal - Part II / Jim Butler and Guy Maisnik / June 2005|
|Avoiding The Pitfalls of Condo Hotel Structuring; Steps To SEC Compliance / Peter Connolly / June 2005|
|The 2005 Lodging Industry Investment Council Top Ten; LIIC's List of Major Hotel Investment Opportunities and Challenges / May 2005|
|Copyright Laws Applicable to Hotels / Jim Abrams / March 2005|
|Condo Hotels - How to Make Them Work / Jim Butler and Guy Maisnik / February 2005|
|The Condo Part of Condo Hotels; A Primer on How to Create a Common Interest Development / David Waite, JMBM / The Global Hospitality Advisor / February 2005|
|Catching the Buzz on Condo Hotels, A Roundtable Discussion / The Global Hospitality Advisor / JMBM / December 2004|
|Outlook 2005: Hotel Industry Fundamentals, Where have we been? Where are we going? / The Global Hospitality Advisor / JMBM / December 2004|
|How to Master Your Next Disaster Protect your guests, educate your employees, and limit your liability / Julia L. Rider / JMBM / October 2004|
|Wage & Hour Class Action Lawsuits: Hospitality Employers Caught in the Cross Hairs / Marta Fernandez / JMBM / September 2004|
|Adopting Pet And Service Animal Policies To Avoid Lawsuits from Disabled Hotel Guests / Marty Orlick / JMBM / September 2004|
|Politics Over, New ‘Overtime’ Law Takes Effect; The Significant Changes / JMBM / September 2004|
|Hotel Franchise Agreements: Opportunities And Pitfalls / JMBM / September 2004|
|ADA Lawsuit Alert: Beware the Internet Surf-by; A new twist on the ADA drive-by lawsuit / JMBM / September 2004|
|Hotel Unions Challenging Work Rules Found in Hotel Employer / The Global Hospitality Advisor Handbooks; Claim Interference with Employees’ Rights to Organize / JMBM / October 2003|
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|Prepare NOW for an ADA Attack; Myths and Tips on How to Minimize Exposure / The Global Hospitality Advisor / JMBM / October 2003|
|Sarbanes-Oxley Update / The Global Hospitality Advisor / JMBM / Arpil 2003|
|Equal Public Access or Access to Deep Pockets? The Hospitality Industry Remains a Target of Lawsuits by Disability Rights Groups Under the Americans with Disabilities Act / The Global Hospitality Advisor / JMBM / March 2003|
|Outlook 2003: A Roundtable Discussion / The Global Hospitality Advisor / JMBM / Dec 2002|
|Time Bomb Waiting to Explode: Wage & hour Claims Over Exempt Employees / The Global Hospitality Advisor / JMBM / Oct 2002|
|I'm Mad as Hell, and I'm Not Going to Take it Anymore! / The Global Hospitality Advisor / JMBM / Oct 2002|
|Settlement Procedure Available to California Hotels Plagued by Prop 65 Cases - The Global Hospitality Advisor / April 2002|
|Top Ten Investment Challenges Facing the Lodging Industry / Lodging Industry Investment Council / April 2002|
|Decertifying a Union? The Employer’s Bill of Rights / The Global Hospitality Advisor / JMBM / April 2002|
|Outlook 2002: A Roundtable Discussion / Bruce Baltin, Bjorn Hanson, Randy Smith, Jack Westergom - The Global Hospitality Advisor / January 2002|
|New Rules for Hotel Workouts: REMICs for Dummies / The Global Hospitality Advisor / JMBM / December 2001|
|Living in the Wake: Predictions & Practical Implications / The Global Hospitality Advisor / JMBM / December 2001|
|Avoiding Liability for Lay-Offs / The Global Hospitality Advisor / December 2001|
|The Worker Adustment and Retraining Notification Act: Impact on the Hotel Industry / JMBM|
|When is an Apartment a Hotel ... and Who Cares? / The Global Hospitality Advisor / JMBM / September 2001|
|The 'Perfect Storm' / The Global Hospitality Advisor / JMBM / September 2001|
|Richard Kessler's Grand Theme Hotels - Interview with GHG Chairman Jim Butler / March 2001|
|Stephen Rushmore's Industry Trends / Top Markets, Predictions & Opportunities / Jan 2001|
|Outlook 2001: A Roundtable Discussion The Global Hospitality Advisor / Jan 2001|
|Perspectives on Hotel Financing in 2001; Jim Butler, JMBM's Global Hospitality Group Chairman, Interviews Two Active Players in Hotel Finance / Jan 2001|
|Robert J. Morse: Millennium’s New President / Interview with GHG Chairman Jim Butler / Nov 2000|