The Securities and Exchange Commission (SEC) recently adopted a new rule that marks good news for condo-hotel developers. In the last real estate cycle, condo hotels were popular among domestic and international investors in Miami, Fort Lauderdale, New York, and Las Vegas. Yet, developers were restricted on how they could market their projects without violating SEC rules.
The SEC Rule 506(c)—which went into effect on Sept. 23, 2013—lifts that restriction, creating new business opportunities for developers and the real estate brokers marketing condo-hotels. What does that really mean?
GlobeSt.com caught up with corporate attorneys David T. Schubauer, a partner with Miami-based Bilzin Sumberg Baena Price & Axelrod, and associate Amy Podolsky, also with the firm’s corporate group, discuss how the new rule will impact the real estate market. Be sure to come back this afternoon for part two of this exclusive interview.
GlobeSt.com: How will the SEC Rule 506(c) impact the condo hotel market?
Schubauer: The SEC Rule 506(c) allows condo hotel units to be advertised and offered to the general public for the first time, provided that purchasers are verified to be "accredited investors" under SEC rules. Before, condo hotels couldn’t be marketed using any form of general advertising or general solicitation of purchasers unless the offering was registered with the SEC.
That meant units could not be offered together with a rental arrangement or a pooling or sharing of rental income among all units. Now condo hotels can be marketed together with a rental arrangement without any limitations on advertising or the manner of soliciting purchasers, subject to anti-fraud requirements. The impacts are significant.
First, buyers can now be required to participate in a mandatory rental program whereby each unit owner must keep his or her unit available for rentals for a certain number of days each year. This means that condo hotels can have a more reliable source of rental income and improved ability to book rooms since they would have certainty of guest room inventory.
Condo hotels are also able to implement a rental pooling arrangement, where revenues and expenses would be pooled and shared ratably among unit owners. This can help resolve various operational issues, such as the need to establish a fair rotation system for reservation of guest rooms in the rental program. In addition, developers and brokers can now emphasize the economic benefits of purchasing units when they are marketed for sale. This means that financial projections can be used in marketing materials to illustrate potential revenues from renting units.
GlobeSt.com: What are the US markets that may benefit the most from this rule—and why will they benefit?
Podolsky: Popular vacation destinations are most likely to benefit because they generally have a large pool of tourists to help ensure there is a consistent source of rental revenues. Since unit owners typically are able to use their units for specified periods each year, buyers would want the location to be in an area that they enjoy visiting. Some of the most popular locations for condo hotels include Fort Lauderdale, Las Vegas, Miami, New York City, and Orlando.
GlobeSt.com: Why could the new rule open the door to crowdfunding for these types of projects?
Schubauer: There are different forms of crowdfunding. Although the term historically has been associated with funding a project by raising very small amounts of money from a large number of people—typically via the Internet and social media—developers of condo hotels are able to engage in a form of crowdfunding by complying with Rule 506(c).
They can offer and sell units through the Internet and social media for a significant purchase price to persons who are verified to be "accredited investors" under SEC rules. This type of crowdfunding is sometimes referred to as accredited crowdfunding.
This article is reprinted with permission from GlobeSt.com.