Why Your Condo Hotel Sales Agent Cannot Discuss Rental Income

At no point in the sales process of a condo hotel may the sales agent representing the developer discuss any aspect of rental income. In fact, not a single piece of information provided in connection with a condo hotel sale may emphasizes the economic or tax benefits of the rental program. This has proven to be a point of major frustration for many potential purchasers.

The laws are very clear. A developer will get into massive trouble with SEC securities laws if he promotes the "investment" nature of a condo hotel. And any sales agent who discusses a condo hotel as an investment will lose their license and will no longer be able to practice real estate.

In fact, the only statement that a sales agent can provide to a prospective purchaser is a generic statement to the effect that "ownership may include the opportunity to place your condominium in a rental arrangement."

If a condo hotel is sold as an investment and the developer wants to tout the benefits of the rental program, then the property must be registered with the SEC and every other appropriate securities regulatory agency in the United States.

So, why not sell condo hotels as a security and avoid the headaches and restrictions that developers and sales agents currently deal with? Most developers consider securities compliance as being too expensive, far too time consuming, and poorly suited to the practice of selling real estate. Additionally, they would be forced to only sell their property through registered securities brokers and salespersons. Making the matter even more difficult from a sales and marketing standpoint, the developer would be prohibited from public solicitation of customers. Additionally, any misstatements or omissions of relevant information can equate to a securities fraud.

The irony in all of this is that by forcing developers to avoid security status, the potential buyer is deprived of rental projections and occupancy rates needed to help get an understanding for potential cash flow. This makes it infinitely more difficult for the buyer to make a fully informed buying decision. It also tempts aggressive salespeople to provide the information on the side, which if ever discovered, would turn the entire real estate transaction into an illegal offering of a security and criminal penalties would follow.

Fortunately for the prospective purchaser, there is a way to get more information before they commit to such an important purchase. Many condo hotels will refer the more serious buyers to their rental management division. The rental management staff can provide potential purchasers with the rental history of comparable properties. The information obtained is often more than enough for the prospective buyer to gain enough understanding of where the property might perform from a cash flow stand point.