You can check out any time you like
When you buy a slice of a property, is it real estate or is it a financial security?
Bring your alibis
Resolving such legal-metaphysical questions controls what recourse a buyer may have against a seller, and when the disputes involve thousands of buyers, the outcome can run to centimillions if not billions of dollars, as illustrated by this Wall Street Journal article:
Condo-Hotel Buyers Head to the Courts
Some Argue That Developers Violated Securities Laws; Looking for a ‘Smoking Gun’
Desperate to recoup money paid to acquire condominiums in hotels, buyers from
In I was dumb so give me my money back¸ I posted unsympathetically about people who bought condos and have been litigiously searching for evidence to turn their I-overpaid situation into a consumer-protection case, by finding material facts in the disclosure their were provided:
Any time of year (Any time of year)
You can find it here
There’s no defense unless the buyer can find some flaw in the disclosure or legal contract:
This is why lawyers have been known to use lasers to measure square footage to within a millimeter and to debate descriptions of views and amenities.
One is allowed to change one’s mind. One is also allowed to read the contract, as W. C. Fields said when rapt in contemplation of the Bible, “looking for loopholes.”
Go Lord, give me chastity, but not yet
At one end of the money-store continuum is physical property, which as I’ve often observed, is immovable, and as earth, it abides. At another is financial property, which is just as ethereal. Money is paper (or worse, just electronic bits) which have value only if we all believe it does. Because we cannot physically relocate property, we are forced to use intellectual forms – title deeds, mortgages, loans, P&S’s – to convey ownership, which is a pure intangible. Beyond the immutable of physical property and the intangible of ownership, we further slice ownership by adding new dimensions:
Two dimensions = land and real property.
Three dimensions (add verticality) = condominium, co-operative
Four dimensions (add time) = rental, time share
Each added dimension slices the occupancy/ use rights into a more discrete bundle, which on the one hand tends to add value (because you buy only as much as you need) and on the other complicates the contractual and financial relationships. Indeed, by multiply slicing the ownership, an unscrupulous developer could tunnel through zoning regulations via a portable hole:
Nobody can pull a comb over my eyes!
That chicanery ensnared the condo-hotel buyers by transferring the zoning risk to them through their declaration of non-use:
After the Trump SoHo is built, it will be occupied full-time by people who signed the restrictive declaration and then ignored it. The critics are right — the declaration will prove unenforceable in practice. The new residents will want to be in the city year-round (except when they’re jetting off somewhere), and they’ll be earning money, spending money, paying sales taxes, paying property taxes, and voting. Not only will the city have no incentive to enforce, it will have many financial and political incentives — votes and city revenue — to waive it or grandfather it in as a proper condo.
So there I was, livin’ happily in my own condo!
But the city council’s gonna bail me out!
Mr. Trump is shrewdly betting that this will happen, and that buyers will be so able to see that it’s inevitable, they’ll ignore the restrictive covenant in their pricing evaluations.
“They’ll tell you not to live there full time, got it, bub?”
Mr. Trump is right.
“Hey, what’s up, Donald?”
Such flim-flammery That works great when demand and prices are rising. Pre-selling condo-hotel rooms thus hard equity from the buyers (their down payments) and lowered the developer’s cost of hard debt (by lowering the takeout risk).
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.
That was the theory, anyway.
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.
Trump Grande Miami
And she said ‘We are all just prisoners here, of our own device’
Which raises the next question: was the purchase real property or a security? One shorthand indicator would be, was the purchaser buying the room for use, or for investment?
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.
As the room-investors have now discovered, their risks do not counterbalance, they correlate.
Conrad Hilton Condo Hotel
And I was thinking to myself,
‘This could be Heaven or this could be Hell’
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.
I’m surprised the Journal would be so inaccurate about the distinction between a security and property; it has very little to do with whether the investor relies on the operator, and much more to do with what the buyer actually owns – is it a thing in itself, or a fractional interest in another thing?
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.
‘Should have been regulated’? If that’s the best the buyers can do, they have a long row to hoe. How good is their argument? Consider the pieces:
[1] “These were not simple real-estate purchases,” said Jared Beck, an attorney in
Trump Grand International,
Last thing I remember, I was
Running for the door
No argument there, but complexity by itself does not make property into a security.
[2] “A hotel is a profit-making enterprise, and by purchasing a condo unit you are giving investment capital and you expect a return.”
So is buying a whole loan, or a rental apartment, or for that matter a single condo that you plan to rent.
[3] “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.”
Perhaps true — we haven’t seen the materials – but tangential. The essential distinction is not whether the buyer anticipated using it for an investment – that’s true of most sales of income-producing real estate property – but whether the investment is a fractional financial interest.
Which, I hasten to add, it might be.
But attorneys for developers say such cases represent little more than buyer’s remorse.
They would, wouldn’t they?
The Miami Condo Hotels
‘Relax,’ said the night man,
‘We are programmed to receive.
“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.
I would not wish to be Mr. Garten, for as I posted in I-do-declare, the legal documentation in Mr. Trump’s cases, all quoted at length in the post, are eyebrow-raising.
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.
This will decide it
Actually, I expect the condo-hotel business will collapse under its dubious economics without needing decisions as a coup de grace. The condo-hotel business has always seemed to me an ugly stepchild of the time-share-resort business, itself a sector at which I’ve always looked askance.
Attorneys said that if the courts decide that condo-hotel purchases should be regulated, the condo-hotel model won’t be viable.
Foolish argument. Any time someone says that regulation will ipso facto destroy a business, we’re entitled to ask whether the business has any business existing.
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.
As I previously posted, “I was dumb so give me my money back” tends to do poorly in court.
“Does poorly in court”
But Mr. Beck and other lawyers are undeterred. They argue that the revenue structure of condo-hotels clearly separates them from plain vanilla condos.
Yes, they are different. Does that make them a security?
In 1973, the SEC released guidelines related to the purchase of condos that specified when such purchases are subject to securities law. If developers:
[1] Made claims about rental income
[2] Marketed a rental program without prompting or
[3] 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
No smoking gun here
By the way, Mr. Trump’s condo-hotels explicitly did the third of these, for instance:
The Unit Owner. The Unit Owner’s obligations are extremely straightforward:
Section 2.02(a). No Unit may be occupied by its Unit Owner or by any other individual (i) for a continuous period of more than 29 days in any 36 day period, or (ii) for a total of more than 120 days in any calendar year.
Any time the fractional interest becomes complex, potential arises for hanky-panky:
Nothing magic about it
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.
Almost certainly fraud by somebody – but by whom?
The lawsuit was filed in federal court in
Some of whom are no longer in business, and as for the individual broker, wonder where or she is?
Cay Clubs, which left multiple properties unfinished in
That’s the big problem; the sponsors have already checked out.
You can litigate any time you like, but can you ever leave?
You can check-out any time you like,
But you can never leave.’
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