SYMPOSIUM ON FINANCING, DEVELOPING & OPERATING CONDO HOTEL
Date: December 12, 2005
Location: Las Vegas, Nevada
Speaker(s): Robert M. Freedman
Robert Freedman of Tharpe & Howell was recently an invited guest at a Symposium on Financing, Developing & Operating Condo Hotels that took place in Las Vegas. The meeting brought together hundreds of the top professionals in the real estate development and hospitality industry for two days of discussions about the present and future of this emerging real estate trend.
For those unfamiliar with the area, there are a variety of versions of the product being built. This includes traditional condominium projects in which the unit owners participate in a rental pool, condominium projects developed in conjunction with an attached hotel, and mixed use projects which include a combination of condominiums with rentals, hotels, and commercial.
While these types of properties have been around for some time, a staggering number of them have been developed in recent years primarily in destination resort areas such as Florida, Las Vegas, as well as various beach and mountain locals. However, their popularity in urban areas are growing, with major projects being built or planned in urban New York, Chicago, San Diego and San Francisco.
One of the main reasons for the popularity of these mixed-use projects is the financing aspect. By including condominiums in the mix, developers can sell the units early, thus generating large amounts of capital to significantly reduce the developers' need to invest their own capital for the development. From the consumer perspective, growth is being fueled by an "aging" baby-boomer generation, who want a second home with the amenities of a resort and without the maintenance obligations. From a hotel development perspective, this infusion of capital from the condo sales provides the incentive necessary for the development and operation of a hotel that would otherwise not pencil-out financially. Lastly, the inclusion of brand-name hotel operators into these projects provides instant consumer recognition and consumer acceptance.
The meeting provided insight and guidance as to the risks associated with these types of projects. Because of the nature of the relationships between the various participants, the development requires extensive documentation that starts with the planning and entitlements. It also includes the C&R’s, various design and construction agreements, the establishment of the homeowners association, operating agreements between developers, hotel operators, management and rental companies, and the unit owner sales agreements. In addition to sorting out the rights and obligations of the parties involved, the documentation is intended to identify and transfer the numerous risks associated with these types of operations.
While there are numerous risks involved in these type of projects, from a legal perspective, the primary risk is associated with the sales and marketing of the condominium units. The concern is that the developer will attempt to use the potential for rental income as an incentive for the consumer to buy a unit, and the rental income will generate a profit off the “investment,” or off-set the costs associated with owning a unit.
If sold as investment, it turns the transaction into the sale of a security thereby triggering the Security and Exchange Commission's jurisdiction. Once the transaction is subject to the SEC, unless the developer has complied with its extensive filing and disclosure obligations, the condo purchaser(s) may seek to rescind the purchase agreement, as well as obtain other types of restitution and damages. As such, the marketing of the units is focused on selling a "life-style” with very strict limitations as to what can be communicated to the purchaser with respect to increases in values of the units and potential income from participation in a rental program.
In the area of construction, the focus of the meeting was on the necessity for the developers to overlay all of their construction with layers and layers of quality control. This includes hiring private inspectors to document all aspects of the construction to avoid the necessity of opening walls to later determine how it was built. As expected, the primary concern related to water intrusion and mold. With respect to insurance coverage, the over-riding theme was that insurance is available however, in the future, the developers can expect the aggregate coverage to be reduced by half for the same premiums they are now paying.
In conclusion, Attorney Freedman believes we will see more and more of these types of developments which no doubt will bring with them a whole new waive of disputes. However, not only will there be disputes related to the construction, there will be disputes arising out of the rights and obligations, as well as the risk assumptions of the various participants in a project, as within the “four corners” of any project are numerous parties with sometimes conflicting interests.
Should you have any questions or would like additional information on this topic, feel free to contact Mr. Freedman at (818) 205-9955 or email him at rfreedman@tharpe-howell.com.
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Related Attorney(s):
Robert M. Freedman
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