Why you don't want to buy a mall
Terrence Belford, at the Globe and Mail, wrote a very interesting story about the commercial condominium projects and due diligence. A condominium is a type of collective ownership scheme in which some parts of the project are owned collectively and others are owned privately. The most recent commercial condominium development is the hotel condo. The hotel projects are pitched to investors this way:
"There are clear advantages for buyers. The condo-hotels offer room service, maids and other luxuries of hotel living. Someone cares for the property when you're away. And the rental income, which is shared roughly 50-50 with the hotel operator (depending on the contract), can help cover your mortgage, taxes and association fees.", USA Today.
But the disadvantages both in Canada and the US are very significant: when you try to resell your commercial condo, it is likely that the securities regulator is not going to let you advertise the "rental income" as an inducement to buyers. The reason for this is: the SEC and the OSC have taken the position that if a hotel condo project is going to be marketed to the public, then the public is entitled to securities level disclosure. Although there is some benefit to the hotel condo ownership, the resale of the unit is clearly one of the attractions to buyers. The securities regulators, aware of the attraction of passive income, require that a resale be regulated like the sale of a security, or stock. But since the cost of security level disclosure is so very high, when an individual- who cannot afford this level of disclosure- tries to resell his or her unit, the regulator clamps down on any representations about earnings preventing the sale being the sale of a passive investment.
It is a bit crazy: you are sold the commercial condo as a passive investment, but when it comes time to sell the unit, you as an individual are not allowed to represent the commercial aspects of the unit. Imagine buying Apple stock, but when you wanted to sell it, you could not talk about how much Apple was making. Very strange.
