Condominium Hotels and the Securities Act of 1933 Prepared and Presented by: Raymond S. Iwamoto

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Condominium Hotels and the Securities Act of
1933Prepared and Presented byRaymond S.
Iwamoto
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• Section 5(a) of the Securities Act of 1933.
• SEC v. W.J. Howey, 328 U.S. 293 (1946)
• Investment Contract
• Common Enterprise
• Expect profits solely from third party efforts.

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Consequences of Violation

• Injunctive Proceedings
• Civil Remedies
• Rescission
• Damages
• Criminal and Antifraud Provisions
• Maui Hilton
• Rescission Offer Registration

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Condo Hotel Security?

• Offer of Securities if
• Offered or Sold With Rental Pool Arrangement
• Mandatory Rental Agreement
• Based on Representations of Economic Benefit to
  be Derived from Managerial Efforts of a Third
  Party in Connection with Rental of the Units.

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How Does a Condo Hotel Avoid This?

• Manage the unit on your own.
• Procedures
• Absolutely no mention of rental services.
• Dont Ask, Dont Tell
• IntraWest and Ballard Spahr
• Thats Ridiculous
• Takes to an illogical extreme.
• Due Diligence
• SEC We agree
• Ownership may include the opportunity to place
  your unit in a rental arrangement

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Guidelines In Materials

• Only staff position and no legal precedent.
• Facts and circumstances identical.
• Refundable versus non refundable deposits.

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Separation of Sales Office from Rental Management
Office and Personnel

• Who can say what?
• No information about economic of tax benefits.
• Dont Ask, Dont Tell policy regarding rental
  information.
• Historic only
• No projections and only if publicly available.

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Economics

• Buyer Perspective

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LOAN PROGRAM 30 Year FixedSECOND 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
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  Annual
Property Tax 2,844
Assoc Dues 4,620
Mortgage 18,000
Total 25,464
   
Assume 80 occupancy at 135 a night 40,000
Divided with Manager 20,000
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NEGATIVES

• 5,000 Negative cash flow
• Positive or negative appreciation?
• Tax benefits
• Future cash calls
• Maintain Brand standards
• Disclosure
• Budget
• Is Brand guaranteed?
• Sophistication of a hotel owner

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MAHALO