This article reviews the regulation of timeshares and fractional interests at the federal level and discusses common threads that run through most state laws and regulations, with a particular emphasis on Florida, California, and Nevada.
Compared to other types of real estate offerings, the timeshare industry is highly regulated at the state level. The authors do not intend this regulatory overview to be a compendium of the various state laws. Instead, they emphasize Florida, California, and Nevada—which are among the top five states in the United States with the highest concentration of timeshare units. State timeshare laws regulate both timeshares and fractional interests. In general terms, most state laws do not distinguish between timeshares and fractional interests, the latter being simply a larger time component than the former; however, some state regulatory schemes do exclude the largest fractional interests from regulatory oversight (e.g., one-sixth interests). For purposes of this analysis, this article uses the term “timeshare” to include fractional interests unless otherwise noted. Some states, such as Florida and Nevada, are “disclosure” states, meaning that, for the most part, so long as the timeshare or fractional plan complies with state law, and the disclosure document given to prospective purchasers and the required purchase contract provisions satisfy the state’s consumer protection policy, the state regulatory authority will not dictate the terms of the timeshare plan. In addition, the Nevada Real Estate Division has the authority to waive any provision of the Nevada Time Share Act if it finds that the enforcement of that provision is not necessary for the protection of purchasers. Other states, such as California, are “compliance” states and require compliance with specifically mandated plan documentation and purchase contract requirements.
What Is the Basis for State Regulation?
The offering of timeshares for sale in a state, whether or not the project or a component site is located in the state, is the basis for state regulation. The State of Nevada regulates the sale of timeshares under the Nevada Time Share Act. The State of California now regulates the sale of timeshares under division 4, chapter 2, part 2 of the Business & Professions Code, section 11210 et seq. (BPC), and The Vacation Ownership and Time-Share Act of 2004 (the California Time Share Act), administered by the Department of Real Estate (DRE). The California Time Share Act completely replaced and superseded the original California Time Share Law. In Florida, the offering and sale of timeshares is regulated under chapter 721 of the Florida Statutes (FS), known as the Florida Vacation Plan and Timesharing Act (the Florida Time Share Act). The Division of Florida Condominiums, Timeshares and Mobile Homes (the Florida Division) has promulgated regulations, which are found at chapters 61B-37 through 61B-41 of the Florida Administrative Code (FAC). Generally, any written or oral communication that is disseminated or used within the state and is used to induce a person to buy a timeshare or attend a sales presentation is a regulated activity.
Who Is Required to Register the Timeshare Plan and Obtain a State Permit to Sell?
State statutes regulate “developers,” who are required to obtain a state permit to sell before conducting any sales activities in the state. See Nev. Rev. Stat. (NRS) § 119A.270; BPC § 11226(b); FS § 721.07. Developers generally include persons who create the timeshare plan or are in the business of selling timeshares and any person who succeeds to the interest of the original developer in the plan. See NRS § 119A.040; BPC § 11212(i); FS § 721.05(10). Exemptions from registration may include (a) the sale of a de minimis number of timeshares, (b) the sale of a timeshare by an owner who is not a developer, (c) owner referral programs, (d) the resale of timeshares by an owners’ association that acquires a timeshare from a defaulting member, and (e) the sale of short-term vacation plans. See NRS § 119A.170. Regarding short-term vacation plans, Nevada exempts from registration under the Nevada Time Share Act prepaid vacations of fewer than five years, unless the method of disposition is adopted to evade the law. In addition, mini-vacations, exit programs, and other “sampler” programs, which are commonly offered to persons attending a timeshare presentation who do not purchase a timeshare, are not regulated, provided the program contains a disclosure that it is not regulated by the Real Estate Division.
In California, BPC § 11211.5 exempts from the registration requirements of the California Time Share Act timeshare plans having a duration of three years or less. BPC § 11212(m) defines the term “Short Term Product” similarly, but the relevant time period is three years or less, rather than the five-year period referenced in the Nevada law. BPC § 11212(m) defines “Incidental Benefits” as “an accommodation, product, service, discount, or other benefit, other than an exchange program, that is offered to a prospective purchaser of a time-share interest prior to the end of the rescission period set forth in section 11238, the continuing availability of which for the use and enjoyment of owners of time-share interests in the time-share plan is limited to a term of not more than three years, subject to renewal or extension.” Note also that BPC § 11225 exempts from the California Time Share Act’s registration requirements timeshare plans located entirely outside of the United States.
In Florida, FS § 721.03(1) and (6) excludes from regulation under the Florida Time Share Act timeshare plans consisting of no more than seven timeshare periods or having a term of fewer than three years, and timeshare plans under which the prospective purchaser’s total financial obligation will be $3,000 or less during the entire term of the plan. Notwithstanding the former provisions, “regulated short-term products,” as defined in FS § 721.05(32) to be a contractual right to use accommodations without purchasing a timeshare interest, are subject to certain advertising and contractual limitations, as provided for in FS § 721.11(6). In addition, FS § 721.075 establishes minimum standards and procedures for the use of “Incidental Benefits” in timeshare offerings. Persons in the business of reselling timeshares are generally not required to obtain a state permit to sell but may be regulated under a separate statutory scheme, which is discussed below.
The Registration Process
Prior to offering timeshares for sale in a state, developers must register the timeshare plan with the state regulatory agency.
Statement of Record or Registration Application. In Nevada, the Statement of Record is that portion of the filing containing developer and timeshare plan information. In California, the DRE requires the filing of a registration application on a specified form. In Florida, the Florida Division requires that developers file a Filing Statement application form. The information and documents to be filed include the developer organizational and financial information, recorded maps, zoning compliance information, description of completed and promised improvements, title reports, sample sales contracts, association formation documents and budget, and exchange company affiliation agreements. If the units or amenities are not completed at the time of the application for a permit, the regulatory authority may require a completion bond, escrow, or other arrangement approved by the regulatory authority to ensure that the purchaser’s interests are protected. This is a mandatory requirement in California, Nevada, and Florida. See BPC §§ 11229(b)(3), (4), 11230; NRS § 119A.340; FS § 721.08(2), (5). The bond, which may exceed the completion costs, is generally issued in favor of the regulatory authority or the owners’ association.
Public Offering Statement or Public Report. The second part of the registration is the developer’s disclosure document, to be given to prospective timeshare purchasers, which may be called a “public report” or “public offering statement.” The state regulatory authority will generally provide forms to be filled out by the developer. These forms are reviewed by the state’s regulatory authority for compliance with laws and regulations. The disclosure document must be given to a prospective purchaser prior to signing the purchase agreement and includes information regarding the type of timeshare plan and vacation sites that are included in the plan, a general description of the accommodations, property information such as taxes and zoning, restrictions on use, and amenities offered as part of the plan. The disclosure document will be accompanied by copies of the project documents, either in paper or electronic format. The disclosure document may also contain certain disclaimers and cautionary warnings of the regulatory authority. Forms and instructions for rescission of the purchase contract by the purchaser will usually accompany the disclosure document.
Abbreviated Registration for Out-of-State Timeshare Plans. Some states will accept the public offering statement or public report approved by another state’s regulatory authority, if the disclosures required by the other state are “substantially equivalent to, or greater than,” the information required to be disclosed to purchasers in that state. This eliminates the developer having to deliver several different disclosure documents to a purchaser, which can be confusing to a purchaser and does not further the interest of consumer protection. The regulator makes a discretionary determination of “substantial equivalency” of the out-of-state disclosure document. As a practice tip, in an abbreviated registration filing, annotating the disclosure document with references to applicable statutes and regulations in the reviewing state will facilitate the review process.
Review Periods. Some jurisdictions may have time periods in which the state regulator must either approve the filing or notify the applicant of the deficiencies in the filing. In 2013, Nevada enacted statutorily-prescribed time periods within which the Real Estate Division must respond to the developer’s initial application. The response time is 60 days for a single-site plan and 120 days for a multisite plan. The developer has 90 days to respond to a deficiency notice. See NRS § 119A.320. In California, the Time Share Act is implemented by the California Real Estate Commissioner and by the DRE. The Commissioner has an obligation to issue a public report within a 60-day period after a registration filing has been determined by the DRE to be complete, and the Commissioner is required to issue a deficiency letter within 60 days after receipt of the developer’s application. See BPC § 11231(a). In practice in California, a filing is deemed complete only after all deficiencies have been addressed, so the 60-day issuance clock is a difficult one to enforce. The developer has an unlimited period within which to respond to the deficiency notice. The Florida Time Share Act is administered by the Florida Division, which must respond to a developer’s complete, initial registration application within 45 days for a single-site plan or within 120 days for a multisite plan by either approving an effective public offering statement or citing deficiencies in the application that must be resolved. The developer must respond to any deficiency notice within 20 days or the application may be rejected. See FS § 721.07(2)(a), (b).
Preliminary Permits. Some state laws may authorize the issuance of preliminary permits prior to full registration to enable the developer to conduct limited activities. In Nevada, such permits are rarely applied for because a preliminary permit merely entitles a developer to solicit and accept reservations to purchase timeshares and accept refundable deposits. See NRS § 119A.290. In California, preliminary permits are also obtainable, see BPC § 11227(j), and are used in order to permit the advertising of the eventual purchase opportunity. In Florida, an applied-for and approved reservation program allows a developer to solicit and accept reservations to purchase timeshares and accept refundable deposits, with stipulated disclosures to be included in all promotional materials. See FS § 721.09. Preliminary permits to accept nonbinding reservations do not normally fit the developer’s sales model, which is to enter into a binding sales contract with an earnest money deposit (subject to purchaser rescission rights) immediately after the sales presentation.
Permit Renewals and Amendments. Timeshare sales permits generally must be renewed on a periodic basis. The renewal periods vary. In Nevada, annual renewals are required. See NRS § 119A.355. In California, public reports must be renewed every five years. See BPC § 11228. In Florida, there is no periodic renewal requirement, but the information in the public offering statement must be kept current as to all material facts. See FS § 721.07(3). If there is a material change to the timeshare plan, an amendment to the statement of record and revisions to the public offering statement or public report must be submitted to the regulatory authority prior to any renewal date. In Nevada, if there is a material change to the timeshare plan, the developer must file an amended Statement of Record, which is effective, unless a denial is issued by the Real Estate Division, 60 days after filing; however, in cases in which a new component site is added, the time period is extended to 120 days. What constitutes a material change will vary from state to state. Nevada has specifically excluded from the definition of “material change” those changes that result from the orderly development of the timeshare plan in accordance with the timeshare instrument (such as project phasing), so long as the change is made known to prospective purchasers by an addendum to the public offering statement. See NRS §§ 119A.055, 119A.304. In California, if there is a material change to the offering, the developer is required to disclose all amendments, supplements, and facts relevant to the material change in a filing with the DRE within 20 days after the date on which such change occurs, but the developer may continue to sell and close timeshare interests if the change is not both material and adverse to purchasers who have entered into contracts. If the change is both material and adverse, then all purchase monies must be held in escrow until the material change is reviewed and approved by the DRE. See BPC § 11226(F). In Florida, any change in fact or circumstance that would render any part of an approved public offering statement false or misleading triggers the requirement to file an amendment with the Florida Division within 20 days of the change. The Florida Division has 20 days either to approve the amendment or to cite deficiencies therein, or the amendment will be deemed approved. A developer must provide to a pending purchaser, no later than 10 days before closing, any amendment to the public offering statement that constitutes a change that is material and adverse to the purchaser, and such purchaser must be granted an additional 10-day period in which to cancel the purchase. See FS § 721.07(3)(a); FAC § 61B-39.001(2).
Marketing and Advertising. States generally regulate the content of advertising that promotes the sale of timeshares and may require submittal of the developer’s or project broker’s marketing plan and advertising materials for review and approval. Advertising includes the publication of material in any medium by a person regulated under the Nevada Time Share Act, including publication in newspapers; radio, television, telephonic, or other electronic broadcasts or displays (which includes internet advertising); written, printed, photographic, or artistic matter; vacation or other gift certificates; and oral statements made by the developer or its representative at a promotional meeting. Nev. Admin. Code (NAC) §§ 119A.010, 119A.060. As of July 1, 2013, Nevada no longer requires submittal of advertising materials to the Real Estate Division for approval; however, the regulations regarding the content of the advertising, found in NAC §§ 119A.305–119A.355, must be strictly followed. In California, there is no requirement that advertising be reviewed; however, BPC § 11245 specifically prohibits activities and promotions that are false or misleading. Further, California Civil Code (CCC) § 17200 prohibits certain unfair business practices, which include false advertising, and there are criminal penalties for such covered acts and omissions. California Code of Regulations, title 10, chapter 6 contains the Regulations of the Real Estate Commissioner. In article 12.2, section 2811, the Commissioner sets out the DRE’s “Time-Share Advertising Criteria,” providing “[s]tandards which will be applied by the Real Estate Commissioner in determining whether advertising for sale or lease of time-share interests is false, untrue or misleading within the meaning of those terms in Section 11245 of the [BPC].” There are a total of 23 subsections within Regulation section 2811. Take care to ensure compliance with these standards, although the DRE does not require prior review. In Florida, the submission of advertising for review under FS § 721.11 is at the discretion of the developer, but, if submitted, it must be reviewed by the Florida Division within 10 days. Advertising includes, among other things, any promotional material disseminated to the public, whether through radio, television, telephonic, or other electronic broadcasts (including the internet); billboards, signs, printed, photographic, or artistic matter; lodging or vacation certificates; and standard oral sales presentations. Prize and gift promotional offerings used in the sale of timeshares are treated separately under FS § 721.111 and must be submitted to the Florida Division for review and approval. If the advertising includes prizes, the developer may be required to provide to the regulatory authority financial assurances that the developer is able to honor its commitments. In addition, developers or project brokers who make false representations in the purchase transaction may be prosecuted under the state’s deceptive trade practices act and incur civil and criminal penalties for violations. See NRS §§ 598.0903–598.0999; CCC § 17200; FS § 501.204.
Purchase Contract Matters
Contents of the Purchase Contract. State laws may prescribe certain provisions that must be contained in the timeshare purchase contract. Almost every state mandates purchaser rescission periods, which range from 5 to 15 days, with 5 to 7 days being the most common. The purchaser’s rescission rights must be stated in the contract, usually in the form prescribed by state law or regulation.
Escrowing of Deposited Funds. State laws may require that purchaser deposits be escrowed or, in lieu of an escrow, that a bond be posted. Nevada requires that the purchaser’s deposit be escrowed for the five-day rescission period, unless (a) the project broker posts a bond in favor of the Real Estate Division equal to the greater of (i) $25,000 or (ii) an amount equal to the highest monthly total amount of deposits received and (b) the money received from a purchaser prior to closing is deposited in a trust account for the project. See NRS § 119A.420. California requires that the purchaser’s deposit be escrowed for the seven-day rescission period, unless the developer posts a bond in favor of the DRE equal to the amount of deposits received and disbursed; provided, however, if any portion of the project is not completed as of the time the rescission period expires, the developer may not have access to the deposits unless completion of construction is also otherwise financially assured by a bond or other acceptable method in favor of the timeshare owners’ association. See BPC § 11243. Florida requires that the purchaser’s deposit be escrowed through the end of the 10-day rescission period, the completion of construction, the closing of the purchase, and the receipt of evidence that the accommodations and facilities are either unencumbered or are subject to an encumbrance that is subjected to the terms of the timeshare plan and the rights of purchasers; however, the Florida Division is authorized to accept a surety bond or other assurances as an alternative to the required escrow. See FS § 721.08(2), (5).
Applicability of State Condominium Laws to Timeshare Projects
Florida. Condominiums and cooperatives are regulated in Florida under the Condominium Act (FS ch. 718) and the Cooperative Act (FS ch. 719). A timeshare plan that is created within either a condominium regime or a cooperative regime is regulated by chapter 718 or chapter 719, respectively, in addition to being subject to the Florida Time Share Act. To the extent express conflicts exist between the provisions of these different statutes, the Florida Time Share Act provisions prevail. Timeshare plans have been explicitly exempted from certain provisions of chapters 718 and 719 where their application would be impractical in a timeshare operation. See FS § 721.03(2), (3). Even so, to the extent a timeshare plan is subject to either of these other statutes, more of the terms of the plan will be dictated by that statute.
California. Regulation of timeshares in California originated with a 1980 amendment to California’s Subdivided Lands Law (BPC § 11000 et seq.), incorporating the offering of interests in timeshare plans under the traditional subdivision sales regulation governing condominiums and other common interest developments; however, California’s Davis Sterling Common Interest Development Act (Davis Sterling), which regulates specified common interest developments in California, including condominium projects, has never defined common interest developments to include timeshare plans. See CCC § 4100. Hence, if a developer had created a timeshare plan within a condominium project, potentially the provisions of both Davis Sterling and the Subdivided Lands Law would apply such that the developer would have had to comply with both, the provisions of which were not necessarily harmonious on all counts. This potential for conflict was partially resolved with the enactment of the California Time Share Act in 2004. BPC § 11211.7(a) exempts timeshare plans registered under the California Time Share Act from the applicability of Davis Sterling, with certain exceptions listed in that section. Interestingly, however, BPC § 11211.7(b) goes on to say that if there are any inconsistencies between the provisions of the Time Share Act and Davis Sterling, those inconsistencies will be resolved in favor of the Time Share Act.
Nevada. Regulation of timeshares in Nevada originated with the enactment in 1983 of the Nevada Time Share Act found in chapter 119A of NRS. Timeshares were regulated exclusively under the Nevada Time Share Act until January 1, 1992, the effective date of the Uniform Common-Interest Ownership Act as adopted in Nevada (UCIOA). From January 1992 until October 2001, timeshares were regulated by a bifurcated statutory scheme, partly by the Time Share Act and partly by UCIOA. In the 2001 session of the Nevada legislature, the regulation of timeshares was consolidated under the Nevada Time Share Act, and some of the consumer protection provisions of UCIOA were incorporated into the Nevada Time Share Act. UCIOA no longer applies to timeshare projects in Nevada, with one exception: mixed-use projects where the owners’ association governs both a timeshare project and a common interest community (such as a condominium or cooperative apartment project in which the units are not timeshared). In such a mixed-use project, the master association is subject to both the Nevada Time Share Act and the provisions of UCIOA. See NRS § 116.212. An association or subassociation governing only a timeshare project is regulated solely under the Nevada Time Share Act.
Regulation of Resales
Resales of timeshares (the sale by a person other than a developer of a timeshare that has been previously sold) have recently come under legislative scrutiny in many states because of abuses by unscrupulous marketers. Among the abuses are the collection of advance fees without marketing the timeshare for sale and the sales of timeshares without disclosing that the use rights attributable to such timeshares cannot be used in the year of sale. Most egregiously, there are predatory companies that charge the timeshare owner substantial sums of money to transfer the timeshare to the company (in order for the timeshare owner to avoid liability for maintenance fees), without any intention of paying the maintenance fees or reselling the timeshare, which harms the owners’ association. Nevada has enacted consumer protection laws against predatory resale marketers, including the requirement that only a timeshare resale broker may list a timeshare for resale on behalf of another and that a timeshare resale broker must be a licensed real estate broker. The listing agreement must contain a five-day right of rescission and 80 percent of any advance fee collected must be placed in a trust account. Violation of the advance fee statute is expressly made a criminal act and a violation of the deceptive trade practices act. See NRS §§ 119A.4771–119A.4779. In California, although no resale-specific statutes have been enacted, the DRE monitors the activities of resellers through enforcement of the provisions of the real estate brokerage and licensing requirements found in BCP § 10130 et seq. and the advance fee regulations found in BCP § 10167 et seq. In addition, CCC § 17200 prohibits certain unfair business practices, which include false advertising, and there are criminal penalties for such covered acts and omissions. In Florida, the Florida Timeshare Resale Accountability Act was added to the Florida Time Share Act in 2012 as FS § 721.205; it stipulates the disclosures and contractual provisions that a resale service provider must use, requires a resale service provider to be a licensed real estate broker, and details numerous activities that a resale service provider is prohibited from performing. See FS § 721.205.
Federal Laws and Regulations
Federal laws that may affect the sale of timeshares are (1) the Interstate Land Sales Full Disclosure Act (ILSA), see 15 U.S.C. §§ 1701–1720, and (2) the Securities Act of 1933, see 15 U.S.C. § 77, and the Securities and Exchange Act of 1934. See 15 U.S.C. § 78.
ILSA. If timeshare sales commence before the construction of the timeshare project is completed and the timeshare is a deeded or leasehold interest, then there is an issue as to whether ILSA applies. ILSA regulates the sale of lots in a subdivision by a developer. See 15 U.S.C. §§ 1701(5), 1703. The term “lot” is defined in the regulations as “any portion, piece, division, unit or undivided interest in land located in any State or foreign country, if the interest includes the right to the exclusive use of a specific portion of the land.” See 24 C.F.R. § 1710.1(b). Because the term “lot” is not only a subdivided lot or unit, but also includes an undivided interest in land, it may be argued that the definition could include a deeded or leasehold timeshare interest. See Guidelines to the Interstate Land Sales Regulation Program, 61 Fed. Reg. 13,596, 13,598 (Mar. 27, 1996). (Although the HUD Guidelines are no longer recognized by the Consumer Financial Protection Bureau (CFPB), which administers ILSA, the explanatory note in the Guidelines as to what constitutes a “lot” for purposes of ILSA is worth noting. The Guidelines state: “If the purchaser of an undivided interest or a membership has exclusive repeated use or possession of a specific designated lot even for a portion of the year, a lot, as defined by the regulations, exists. For purposes of definition, if the purchaser has been assigned a specific lot on a recurring basis for a defined period of time and could eject another person during the time he has the right to use that lot, then the purchaser has an exclusive use.”) If the timeshare is not characterized as a “lot,” ILSA will not apply.
In the last three decades, most deeded timeshares have been sold on a “floating-unit,” “floating-week” basis. The question as to whether a timeshare is covered by ILSA turns on the meaning of “exclusive use of a specific portion of the land.” In a floating-unit timeshare plan, a timeshare owner does not have the right to use a specific unit, but rather has the right to use a “unit type” that is assigned at the time a reservation for the use year is made; however, it may be argued that during the owner’s occupancy period, the owner has the right of exclusive use of the assigned unit.
There are three cases that may be instructive in analyzing whether a deeded timeshare is a “lot” as defined in the ILSA regulations. First, Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 127 F.3d 478 (6th Cir. 1997), involved the sale of condominium-hotel units. At the time of purchase of a unit, the purchaser’s use rights were restricted to 14 days per year. The condominium documents dedicated the units for the remainder of the year to be rented as hotel rooms to transient guests. Applying the “exclusive use” test, the court held that because the condominium owners’ occupancy rights were severely restricted, the condominium interests (termed “hotel interests” by the court) were not “lots” under ILSA.
Second, Beaver v. Tarsadia Hotels, 816 F.3d 1170 (9th Cir. 2016), involved the sale of hotel-condominium units in the Hard Rock Hotel and Condominium Project. The purchase contracts required the purchasers to execute an agreement restricting the owner’s use of the unit to 28 days a year and required that the units be managed as part of the Hard Rock Hotel. The Beaver court distinguished the Becherer case on the facts. When the units in Becherer were purchased, they were already restricted for use as a hotel business investment and were never available for use at the discretion of the unit owners. In Beaver, the court interpreted the Hard Rock’s use restrictions to be less restrictive and to not directly interfere with the owner’s right to eject tenants during the designated period of use. It should be noted that many timeshare instruments provide that the timeshare owner does not have the right to eject a hold-over tenant. Rather, if the assigned unit is unavailable, the owner will be provided accommodations comparable to the assigned unit within or outside of the timeshare project. The Beaver court found that the unit owner was entitled to use a “specific lot on a recurring basis for a defined period of time” and concluded that the sale of the unit was the sale of a “lot” and therefore subject to ILSA.
Third, PFW Inc. v. Residences at Little Nell Development, LLC, 292 P.3d 1094 (Colo. 2012), addressed the question of whether a deeded fractional interest in a condominium is a “lot” under ILSA. The purchaser of the fractional interest alleged it had a right to rescind the purchase contract because the seller failed to comply with ILSA’s registration and disclosure requirements. The fractional plan was a “floating-unit,” “floating-week” plan that provided each owner would participate in a rotating reservation system. The owner was guaranteed four weeks of use in a unit of the same “unit type” as that purchased. The PFW court held that the fractional interest was not a “lot” under ILSA because no right of exclusive possession of a specific unit attached to ownership of a fractional interest.
To hedge against an ILSA challenge, it may be prudent to add self-serving language in the declaration of covenants, conditions, and restrictions for a floating-unit, floating-week timeshare project, such as a provision stipulating that the timeshare owner has no use rights in a specific unit during a specific time period and that the owner has waived its right to eject another occupant of the owner’s assigned unit. It may also be advisable, if feasible, to comply with ILSA’s two-year construction completion exemption. See 15 U.S.C. § 1702(a)(2). Under this exemption, the developer’s contract with the purchaser must obligate the developer to complete the construction of the building within two years from the date the sale contract is executed. Questions as to the applicability of this exemption arise from clauses that negate the seller’s obligation to complete, either by eliminating the purchaser’s remedy of specific performance or including a force majeure clause that is not allowed as a defense to performance under state law. See Richard Linquanti, Aspects of the Interstate Land Sales Full Disclosure Act, 44 Real Prop., Trust & Est. L.J. 441 (2009) (provides a complete discussion of this exemption).
Federal Securities Laws. The sale of a timeshare is not the sale of a security requiring registration under federal securities laws, unless it is characterized as an “investment contract.” See 15 U.S.C. §§ 77b(a)(1), 78(c)(a)(10). An investment contract under the Securities Act is defined by the Supreme Court 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 a promoter or a third party.” SEC v. W. J. Howey Co., 328 U.S. 293, 298–99 (1946).
If the timeshare is represented by the seller as an interest that will appreciate in value or can be rented at a profit, then the timeshare potentially could be characterized as an investment contract. For this reason, most large timeshare developers will require that the buyer acknowledge that the timeshare is being purchased as a vacation experience and not as an investment with an expectation of profit. Nevada codified this disclosure by requiring that the public offering statement contain the following described language on a separate page: “A timeshare is for personal use and is not an investment for a profit or tax advantage. The purchase of a timeshare should be based upon its value as a vacation experience or for spending leisure time, and not for purposes of acquiring an appreciating investment or with an expectation that the timeshare may be resold.” S.B. 195, 79th Leg. (Nev. 2017).
Because fractional interest timeshares can be in the range of as little as three weeks per year to as much as quarter-shares (13 weeks per year), purchasers are interested in renting their unused weeks. Developers or developer affiliates offer rental management programs to fill this need. The federal securities issue of an investment contract arises if a purchase agreement is combined with a rental management agreement. Salameh v. Tarsadia Hotels, 726 F.3d 1124, 1128 (9th Cir. 2013), examines the question of whether the sale of condominium units in the Hard Rock Hotel San Diego was the sale of a security under the Howey test. The plaintiffs claimed that the purchase agreement obligated them to enter into rental management agreements with Tarsadia Hotels and that the purchase contract and rental management agreement, when taken together, constituted an investment contract. The facts showed that the rental management agreements were entered into with distinct entities 8 to 15 months apart. Therefore, the court concluded the sales of the condominiums to plaintiffs were not sales of securities under federal law.
The Intrawest No Action letter issued by the U.S. Securities and Exchange Commission offers guidance to developers to minimize the risk of violating the federal act. See U.S. Sec. & Exch. Comm’n, Securities Act of 1933—Section 2(a)(1), No Action, Interpretive and/or Exemptive Letter—Intrawest Corp. (Nov. 8, 2002). Among the suggested practices that should be adopted when the developer or its affiliate offers a rental management program are:
- The sales team should not discuss the fractional interest as an investment or quote rental rates for comparable units;
- The developer’s rental management program should be completely voluntary, and, if a prospective purchaser asks about rental management, the purchaser should be given a choice to speak with either an affiliated or unaffiliated management company;
- The rental management program should not be discussed by the sales team and should operate from a management office separate from the sales office;
- The rental management agreement should not be entered into until after the purchaser has signed the purchase contract; and
- Both the sales team and the rental management team should be provided with scripted answers to investment questions.
Timeshares are very highly regulated in comparison to other forms of real estate ownership. In addition to federal regulation, regulations of multiple states may be applicable to a single development because the offering of timeshares for sale in a state, whether or not the project is located in the state, is the basis for regulation.