1973, May, Pg. 19. The Condominium as a Security.

• Author: by Paul H. Metzinger

2 Colo.Law. 19

The Colorado Lawyer

1973.

1973, May, Pg. 19.

The Condominium as a Security

19Vol. 2, No. 7, Pg. 19The Condominium as a Securityby Paul H. MetzingerOnce a need or desire of the public becomes apparent, there invariably arises the imaginative entrepreneur to provide gratification. In recent years, the desire of many individuals to find a "retreat," a place to get away from it all, has prompted tremendous real estate activity in previously undeveloped areas of our country. One popular type of real estate development is the condominium project.

To entice investors into purchasing a condominium unit, developers have often offered some form of rental agency or service, either on an individual or common basis, whereby the condominium is rented out when not in use by the owner and net rental profits are returned to the owner. This glamorizes the condominium as a retreat which, under optimum conditions, can also be so profitable as to enable the owner to possess it without financial burden. This is indeed a benefit to the owner---but has become "poison" to the developer.

The boom in rental condominiums led to spectacular construction and marketing success, increasing emphasis on the investment aspects of ownership and, finally, the scrutiny of the Securities and Exchange Commission. The developers suddenly saw their brainchild transformed into something they never imagined: they were not selling real estate but securities.

Release No. 5347On January 4, 1973, the Securities and Exchange Commission issued Securities Act Release No. 5347, forebodingly entitled "Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums or Units in a Real Estate Development."(fn1) This statement of position constitutes the most current and definitive statement on the subject yet issued by a federal or state regulatory agency.

The Release states in substance that the offer and sale of condominium units or other units of a similar character in a real estate development coupled with an offer or agreement to perform or arrange certain rental or other service for the purchaser may involve the offering of a security in the form of an investment contract or a participation in a profit-sharing agreement within the meaning of the Securities Act of 1933. If a security is involved, the registration and prospectus delivery requirements of the Securities Act apply, unless an exemption is otherwise available. In either event, and assuming the jurisdictional requirements are present, the anti-fraud provisions

20of the federal securities laws apply. Additionally, any person selling such units may in fact be a broker-dealer and therefore required to register as a broker-dealer in securities under the Securities Exchange Act of 1934.

When Is a Condominium a Security?The SEC is of the opinion that the offer and sale of a condominium unit with any one of the rental arrangements discussed below constitutes either an "investment contract" or a "participation in a profit sharing plan." An investment contract has been defined as "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party...."(fn2) As the Release indicates in a footnote, very little reliance can be placed upon the term "solely" contained in the definition. An investment contract may still exist, even if the purchaser does have some active part in the rental arrangement. The terms "investment contract" and "participation in a profit sharing plan" are both included within the definition of a security.(fn3)

A condominium offered and sold with any one or more of the following arrangements would likely be considered a security: (a) the offering of a participation in a rental pool arrangement; (b) the offering of a rental or similar arrangement whereby the purchaser must hold his unit available for rental for any part of the year or use an...