Fee simple ownership of the "bricks and mortar" of real
estate is not a securities transaction. "The
offer of real estate as such, without any collateral arrangements with the
seller or others, does not involve the offer of a security." As you move
further away from that model, you move closer and closer to the ownership a
security than the ownership of real estate. The line between the two is not a
bright line. One of the latest cases to address the difference is Salameh v.
Tarsadia Hotels 2011 U.S. Dist. LEXIS 30375, on appeal to the Ninth
One of the seminal cases is SEC v. W.J. Howey Co.,
328 U.S. 293 (1946) [an enhanced version of this opinion is available to lexis.com
subscribers / unenhanced version available from lexisONE Free Case Law]. That case involved an offering of units of a citrus grove
development, coupled with a contract for cultivating, marketing, and remitting
the net proceeds to the investor. They held that it was an offering of an
"investment contract" within the meaning of that term as used in the provision
of § 2(1) of the Securities Act of 1933 defining "security" as including any
"investment contract," and was therefore subject to the registration
requirements of the Securities Act.
Even though decades have passed, the line is bit a
clearer, but still muddy as the Salameh case illustrates. The developer of the
Hard Rock Hotel in San Diego used a condominium- hotel ownership structure to
help provide capital. The purchase/investment turned out to be a bad one,
so the they sued the developer.
Their claim was that a series of documents, including the
Purchase Contract, the Unit Maintenance and Operations Agreement, and the
Rental Management Agreement turned the ownership into a "security" and not the
mere ownership of real estate. Since the securities were not registered, they
could seek rescission. In this case, the ownership and control issues were not
just split into separate documents, some of the documents were entered into at
significantly different times.
The issues are not that new. The Securities and Exchange
Commission noted the problem as far back as 1973 when it issued Release
No. 33-5347 which had guidelines on the applicability of federal securities
laws to the sales of condominiums and units of real estate development.
The investors/purchaser lost the court case. The case is now under appeal and there are numerous other issues involved
in the case so we may not have any new insight on when an investment in real estate
becomes an investment in a security.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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