Catherine DeBono Holmes

Developers, banks and real estate brokers involved in condo hotel sales have been the targets of numerous class action lawsuits brought by condo hotel buyers in the years following the financial meltdown of 2008.

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. Continue reading →

This article was originally published in Hotel Business magazine, November 7, 2010

Mixed-use hotel projects offer benefits to hotel owners around the world. Steven Pan, chairman of Regent Global Holdings—the owner of the Regent hotel brand, was recently interviewed in the Wall Street Journal—and talked about the value added to the Grand Formosa Regent Hotel in Taipei by its luxury retail shopping mall and branded residential apartments.

Confirming his experience, some studies have shown that hotels adjacent to retail shopping achieve a RevPAR premium of 30% to 40%. The newest resorts in Hawaii, including the Trump International Hotel & Tower, Waikiki Beach Walk, feature condominium suites and residences. The benefits of offering hotel branded residences are borne out by some studies showing that they can achieve a 25% to 35% premium on sale price per square foot over unbranded residences. The synergies of hotels with retail and residential uses are likely to result in more mixed-use hotel projects in the future in Asia, the Caribbean and the Americas.

All of the areas of a mixed-use hotel project reflect on the quality of the hotel and the brand. As the saying goes, “You’re only as good as the company you keep.” A luxury hotel surrounded with discount stores will inevitably tarnish the image of the hotel and its brand name. Or, imagine a resort hotel with a dozen or more housekeeping vendors arriving in cut-off shorts and T-shirts at any hour of the day or night at the hotel to clean the units—this is exactly what did happen in some of the early condominium hotels in Florida.

How can the hotel owner or brand maintain quality control if units in a mixed-use project are sold or leased to multiple owners and lessees? As long as there is a single owner of a mixed-use hotel project, the owner and the operator can decide between themselves what the hotel quality standards will require for the entire project. Complications arise when, as is typical, the hotel owner sells individual hotel, residential or commercial units to multiple purchasers. The hotel owner and operator will need to build in controls on unit owners that will last throughout the life of the project, and will be binding not only on the original purchasers, but on subsequent purchasers as well. Continue reading →

Published in Hotel Business, September 7, 2010.

Joint ventures are popping up everywhere in the hotel industry. Nearly two years after the collapse of the old economic order of easy money, the biggest players in the hotel industry are using the joint venture structure to seize opportunities for acquisitions and expansion. In recent months, Starwood Capital and Hersha Hospitality Management announced their joint venture to expand Hersha’s hotel management platform, and Thayer Lodging Group and Jin Jiang Hotels formed a joint venture to acquire Interstate Hotels & Resorts. Though the number of hotel acquisitions is still small, several of those transactions that have successfully closed have used the joint venture model, including the just completed acquisition of the 279-room/suite Renaissance Syracuse Hotel in a joint venture between Richfield Hospitality and Shelbourne Falcon Investors.

Joint Ventures Offer an Alternative to Traditional Financing – and Have Different Risks and Rewards. Using a joint venture model for hotel acquisitions offers the benefits of increased access to capital, sharing of risks and rewards with a partner, access to greater resources, such as specialized staff, technology and expanded relationships. Particularly in the current economic environment where traditional lenders are reluctant to invest new capital in the hotel business, a joint venture with partners already active and committed to the hotel business offers an alternative means of financing potential future business expansion. Hotel investors hoping to seize buying opportunities for prime assets may find that the only way they can finance the cost of acquisition is by bringing in joint venture partners. However, a joint venture also creates its own risks, and these risks are best be addressed by the parties at the time the joint venture is formed, rather than waiting until problems develop later. Continue reading →

We are just now beginning to see how cities will want to use the new federal stimulus bill to create jobs and build new infrastructure. In the past few weeks, we at JMBM have received several calls from cities seeking to build convention center hotels. Convention center hotels can revitalize downtown areas and generate more revenues for both local businesses and local government services by attracting visitors to the community and providing a place for local events. However, financing for convention center hotels has been difficult to obtain. Will the new Build America Bonds provide the source of financing that will allow cities around the country to build their own convention center hotels? We think it will.

For at least the last twelve years, most convention center hotels have required public incentives and funding support. Several cities have used tax-exempt bond financing to attract investors to their projects, with good results.

We think the American Recovery and Reinvestment Act of 2009 signed by President Obama on February 17, 2009 will provide a new and welcome addition to the sources of financing that may be available to cities seeking to develop their own convention center hotels. Among other things, this Act has created a new type of bond called Build America Bonds that will allow cities to finance hotels at a lower cost than they could achieve with traditional tax-exempt bonds. Continue reading →

As a sign of its sweeping popularity, one of the best attended sessions at the recent Lodging Conference in Phoenix was: “Going Green: Environmentally Profitable Hotels.” Some of the pioneers of the green hotel movement, including panel moderator, Howard Wolff, Senior Vice President of the architectural firm Wimberly Allison Tong & Goo, and Wen-I Chang, President of Atman Hospitality Group of South San Francisco, were there to share their challenges and triumphs in working toward a carbon constrained future.

What Is The Cost Premium For LEED-Certified?

Naturally, the biggest question on everyone’s mind was: How much more does it cost to develop a new hotel that meets the silver, gold or platinum standards of LEED (Leadership in Energy and Environmental Design) green building rating system?

According to Chang, developer of the only LEED gold-certified hotel in the world (the Gaia Napa Valley Hotel & Spa), his first LEED gold hotel cost about 15% more than a hotel built using conventional standards — but that was largely because of a late decision to go green, and starting off with advisors who had never built a LEED project. His next hotels built to the same standard were close to a cost premium of only 5%. Continue reading →

Every developer who hopes to sell condominium hotel units as part of a development project needs to consider at a very early stage how they are going to sell the units. By now, many if not most developers are aware of the limitations that securities laws place on their ability to market a rental program as part of the sale of hotel condominium units.

However, developers are only beginning to understand the other federal and state laws that apply to their sales programs. This article focuses on the federal and state laws — other than securities laws — that developers need to think about when designing sales and marketing programs for hotel condominium units.

As a developer of a project that includes hotel condominium units, start by asking yourself these questions:

• Where will my buyers come from?
• How will I contact my buyers?
• What kind of marketing campaign do I need to run to sell my units?
• Do I want or need to gather reservations for units before I start accepting final purchase contracts for units?
• How long will it take me to complete construction of my units once I enter binding purchase contracts with the buyers of the units?

Continue reading →

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.

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, its 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.

Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.