Desperate to recoup money paid to acquire condominiums in hotels, buyers from California to Florida are trying to use the courts to get their money back, arguing that condo-hotel developers violated securities laws when selling the units.
A few years ago, condo-hotels seemed like a great idea. Hotel developers could offset construction costs by selling rooms to individual buyers, then share the rental income with the owners every time a room was booked. However, instead of the lucrative venture some buyers claim they were promised by developers, condo-hotels have turned out to be one of the worst investments in decades.
The industry is getting hit on two fronts: The condo crash has wiped out the value of many units, and the hotel bust means the rooms are being rented only infrequently and at much lower rates than anticipated.
Now, some buyers are arguing in court that purchasing a unit in a condo-hotel is similar to buying a stock, where the buyer is entirely reliant on the operational skills of management for any return. Therefore, they contend, the purchases should have been regulated by the Securities and Exchange Commission, which would force companies to issue a detailed prospectus and have agents licensed to sell both real estate and securities, a rare combination.
"These were not simple real-estate purchases," said Jared Beck, an attorney in Miami who is working on dozens of suits against condo-hotel developers. "A hotel is a profit-making enterprise, and by purchasing a condo unit you are giving investment capital and you expect a return." Moreover, Mr. Beck said, "When you look through these marketing materials, there's no question that in the mind of a reasonable consumer you're going to think it's an investment."
But attorneys for developers say such cases represent little more than buyer's remorse.
"What we're seeing across this entire country are buyers who have signed contracts and now want to take the position that [the] contract doesn't exist. From a legal perspective, I find that highly problematic," said Alan Garten, assistant general counsel for the Trump Organization, a defendant in several such cases.
Dozens of cases are in lower courts. A wave of decisions over the next few years could determine whether the condo-hotel business model survives. Attorneys said that if the courts decide that condo-hotel purchases should be regulated, the condo-hotel model won't be viable.
Plaintiffs may have an uphill battle, however. Lower courts have shown little sympathy for buyers of regular condos who alleged similar violations of securities laws, blasting them for not reading purchase contracts closely enough. But Mr. Beck and other lawyers are undeterred. They argue that the revenue structure of condo-hotels clearly separates them from plain vanilla condos.
In 1973, the SEC released guidelines related to the purchase of condos that specified when such purchases are subject to securities law. If developers made claims about rental income, marketed a rental program without prompting or placed any limitations on occupying units, the purchase could be considered a security. The "smoking gun" is often a newspaper ad or marketing brochure, said Rob Webb, senior hospitality partner in the law firm Baker & Hostetler LLP in Orlando, Fla. "Quite frankly, the main exhibit to the complaint and the single piece of evidence that's most damaging is the developer's own sales brochures," Mr. Webb said.
The SEC elaborated on those rules in a nonbinding 2004 letter to Canadian developer Intrawest Corp. Plaintiffs in current suits allege that developers exceeded the guidelines set in that letter. An SEC spokesman said the commission wouldn't comment on cases it wasn't investigating and said he was unaware of any additional forthcoming guidance or regulation.
Buyers claim that even if developers didn't make such promises about rental income on paper or in marketing materials, they did verbally.
John Mansour, 67 years old, bought a unit for about $700,000 at a complex now known as the Signature at MGM Grand in Las Vegas. He said he told agents from the start that he intended to use the 30th-floor penthouse as an investment and was encouraged to do so, with promises of $600-a-night rents. Mr. Mansour, a resident of Los Angeles who also owns a regular condo in Las Vegas, said he explained to the developers that he had no intention or need to occupy the Signature unit.
"They said it was OK not to live there, 'we will rent it, you will make a lot of money on your investment.' " He expects his lender, Washington Mutual, to foreclose, although he is trying to arrange a short sale.
A class-action lawsuit filed against the project's developers is in arbitration. Steve Morris, a Las Vegas attorney representing MGM in the case, denied that the condo units were marketed as investments, and said contracts signed by all buyers specifically disclaimed that.
In at least one case, a buyer charges that a developer and lender hid the fact that condo-hotel units were being purchased as investments by changing the wording on loan documents.
Laurie McNulty, a 40-year-old pharmacist in Charleston, S.C., who is suing over her purchase of a nearly $700,000 unit in a condo-hotel in Clearwater, Fla., said that when she applied for a mortgage at First National Bank of Cape Coral, Fla., in 2004, she indicated that the condo was for an investment. However, the loan documents were changed to show that the loan was for a second home, a change she said she only discovered once she had hired an attorney.
In the lawsuit -- which was filed in federal court in Florida against the bank; Cay Clubs, the developers of the condo-hotel; and others -- she argued that because her unit "was marketed as primarily an 'investment' with a heavy emphasis on leaseback payments and expectation of a profit from the sale of the unit, the investment constituted an investment contract and therefore a 'security.' "
Cay Clubs, which left multiple properties unfinished in Florida and Nevada, has closed down and couldn't be reached to comment. Fifth Third Bancorp, which acquired First National Bank, wouldn't comment.
Learn more about how to market your law firm to condo buyersSource: online.wsj.com/article/SB124943301400306393.html
