CONDO HOTELS: THE GOOD,THE NOT SO GOOD AND THE UGLY David M. Neff DLA PIPER RUDNICK GRAY CARY US LLP 203 N. LaSalle Street Suite 1900 Chicago, IL (312) (phone) (312) (fax) INTERNATIONAL SOCIETY OF HOSPITALITY CONSULTANTS MID-YEAR SYMPOSIUM April 27, 2006

Condo Hotels Typically in major cities and resort areas, especially south Florida Usually four- or five-star hotels Often major name or chain affiliation Professional management

Aspects Similar to timeshare, but unit owners own their units outright rather than for a limited period of time such as one week of the year Amenities of a hotel for condo owners Fully furnished units Ability to defray expenses while not using unit Owners may pay real estate taxes and insurance Owners may be able to claim various deductions, such as real estate taxes and mortgage interest

Targeted Customers Individuals looking for asset appreciation Individuals looking for rental income to offset expense of ownership Individuals desiring hassle-free condo ownership 1031 exchange buyers

Appeal to Developers Easier to finance than hotels Significantly lower marketing costs than timeshare Allows developers to pay down debt with sale of units

Florida Model Developer maintains ongoing interest in the project as it relates to revenues generated by hotel occupancy Developer maintains control over common areas of the hotel Allows Developer to ensure that proper upkeep occurs

Other States Laws vary from state to state Key differences may exist Example – Illinois Condominium Property Act allows majority vote of unit owners to cancel contracts of longer than two years in duration after turnover date

Various Buyer Programs Trump Program Owners can use their units as much or as little as they want Owners pay monthly condo assessments and hotel expenses Owners get 100% of room rental after expenses

Hotel Blake Program Owners can use their units full-time or choose from three rental programs for use of the room for 0, 14 or 35 nights a year Hotel pays monthly assessments, but remits only a percentage of the revenue to Owners

Securities Laws issues Goal is to prevent having the sale of units be considering the offering of securities SEC guidance Developer cannot emphasize the economic benefits from rental of the units or from third- party management efforts Developer cannot make representations regarding the tax benefits of ownership Developer cannot advertise rental services Developer can only mention rental services in response to questions from prospective buyers Developer cannot limit owner occupancy of unit Developer cannot designate an exclusive rental agent Developer cannot sell units with a pooling arrangement