1. Condominium Hotels and the Securities Act of 1933 Prepared and Presented by: Raymond S. Iwamoto

2. Section 5(a) of the Securities Act of 1933.Section 5(a) of the Securities Act of 1933. SEC v. W.J. Howey, 328 U.S. 293 (1946)SEC v. W.J. Howey, 328 U.S. 293 (1946) Investment ContractInvestment Contract Common EnterpriseCommon Enterprise –Expect profits solely from third party efforts.

3. Consequences of Violation Injunctive ProceedingsInjunctive Proceedings Civil RemediesCivil Remedies –Rescission –Damages Criminal and Antifraud ProvisionsCriminal and Antifraud Provisions Maui HiltonMaui Hilton Rescission Offer RegistrationRescission Offer Registration

4. Condo Hotel Security? Offer of Securities ifOffer of Securities if Offered or Sold With Rental Pool ArrangementOffered or Sold With Rental Pool Arrangement Mandatory Rental AgreementMandatory Rental Agreement Based on Representations of Economic Benefit to be Derived from Managerial Efforts of a Third Party in Connection with Rental of the Units.Based on Representations of Economic Benefit to be Derived from Managerial Efforts of a Third Party in Connection with Rental of the Units.

5. How Does a Condo Hotel Avoid This? Manage the unit on your own.Manage the unit on your own. Procedures:Procedures: –Absolutely no mention of rental services. –Don’t Ask, Don’t Tell –IntraWest and Ballard Spahr –That’s Ridiculous –“Takes to an illogical extreme.” –Due Diligence –SEC: We agree –“Ownership may include the opportunity to place your unit in a rental arrangement”

6. Guidelines In Materials Only staff position and no legal precedent.Only staff position and no legal precedent. Facts and circumstances identical.Facts and circumstances identical. Refundable versus non refundable deposits.Refundable versus non refundable deposits.

7. Separation of Sales Office from Rental Management Office and Personnel Who can say what?Who can say what? No information about economic of tax benefits.No information about economic of tax benefits. Don’t Ask, Don’t Tell policy regarding rental information.Don’t Ask, Don’t Tell policy regarding rental information. Historic onlyHistoric only –No projections and only if publicly available.

9. Economics Buyer PerspectiveBuyer Perspective

10. LOAN PROGRAM 30 Year Fixed SECOND HOME LOAN AMOUNT $200,000 INTEREST RATE 6.875% DOWN PAYMENT % 20% DOWN PAYMENT $ $50,000 CLOSING COSTS $2,155 ESTIMATED PREPAID ITEMS $3,407 LOAN POINTS % 1.25% LOAN POINTS $ $2,500 BUILDER PREPAIDS $3,310 ESTIMATED CASH TO CLOSE $61,908 ESTIMATED PROPERTY TAXES $237 HOMEOWNER DUES $385 PRINCIPAL AND INTEREST $1,314 TOTAL MONTHLY PAYMENT $1,936

11. Annual Property Tax $2,844 Assoc Dues $4,620 Mortgage$18,000 Total$25,464 Assume 80% occupancy at $135 a night $40,000 Divided with Manager $20,000

12. NEGATIVES $5,000 Negative cash flow$5,000 Negative cash flow Positive or negative appreciation?Positive or negative appreciation? Tax benefitsTax benefits Future cash callsFuture cash calls Maintain Brand standardsMaintain Brand standards DisclosureDisclosure BudgetBudget Is Brand guaranteed?Is Brand guaranteed? Sophistication of a hotel ownerSophistication of a hotel owner

13. MAHALO