Company Name: Kauhale Makal, Inc.
Public Availability Date: 12-22-1976
[INQUIRY LETTER]MESERVE, MUMPER & HUGHES
35TH FLOOR, 333 SOUTH HOPE STREET
LOS ANGELES, CALIFORNIA 90071
TELEPHONE(213) 620-0300 November 01, 1976
November 1, 1976 The Securities and Exchange Commission
Office of the Chief Counsel
Division of Corporation Finance
500 North Capital Street
Washington, D.C. 20549 Re: Kauhale Makai, Inc. Gentlemen: We represent Kauhale Makai, Inc., a Hawaiian corporation (hereinafter the
"Company"). The advice of the Division of Corporation Finance is hereby
requested as to whether it would recommend any action to the Securities and
Exchange Commission (the "Commission") if the Company were to list for sale with
licensed real estate brokers condominium units in the hereinafter described
condominium development under circumstances in which the purchasers were offered
the option of subsequently entering into arrangements either to have the Company
or an affiliate offer non-exclusive non-pooled rental services to purchasers or
where the Company or an affiliate concurrently with the closing of the sales of
the units entered into arrangements to lease purchasers units under leasing
arrangements calling for fixed payments by such lessee over a period of two
years where offers and sales were made by licensed real estate brokers without
prior registration of the offers or sales under the Securities Act of 1933, as
amended (hereinafter the "Act"), in reliance upon an opinion of counsel that no
such registration was required. The proposed transactions are described in more
detail below. The Company is lessee under a Master Lease dated March 28, 1974, from Kihei
Properties, Inc., a Hawaiian corporation (hereinafter "Properties") as lessor.
Under said Master Lease, the Company leases a condominium located on the Island
of Maui, Hawaii, which contains 168 units. The Company proposes to offer for
sale the units in this condominium. The purchaser of a unit will receive a deed
executed by both the Company and Properties which will convey to the purchaser a
fee simple interest in his unit and proportionate share of the common area. The
amenities included in the common area are a swimming pool, jacuzzi, sauna,
putting green and recreational room. At present, the condominium building
containing the 168 units and all common amenities described above are fully
completed and operational. The units will be offered and sold by duly licensed
real estate brokers both in Hawaii and in other states where the offering may be
authorized for sale. Five types of units will be offered which presently range
in price from $49,000 to $97,500. A local bank, which is not affiliated with the
Company or any affiliate of the Company, has agreed to loan up to eighty percent
of the purchase price of a unit for a 30 year term. The units will be offered
under two plans that are pertinent to this request for advice from the
Commission. Plan I Under Plan I the owner, upon the after acquisition of his unit and in the
owner's sole discretion, and from time to time, may elect to do any or all of
the following: (1) use his unit solely for his own use and use of his personal
guests; (2) rent his unit through his own efforts; or (3) rent his unit through
one of the licensed real estate brokers in the area, including Kihei Condominium
Rental Management, Inc., a Hawaiian corporation (hereinafter "Kihei"), Kihei
being an affiliate of the Company. The rental arrangement to be offered by Kihei
will be voluntary on the part of the owners, will be cancellable at any time as
provided hereafter, and rentals which may be obtained will not be pooled. Kihei
will act as a separate agent for each individual owner. Kihei will charge a 45%
fee of the gross rental of the unit for its rental services, with the remainder
of the gross rental being remitted directly to the owner. In connection with the
rental of the units under Plan I, Kihei will give priority to units within the
Leaseback Program of Plan II and this fact will be made known to prospective
purchasers. As more fully described below, Kihei will attempt to rent any unit
available to it under the provisions of the Leaseback Program of Plan II prior
to using its best efforts to rent a unit which is participating under Plan I.
Under Plan I there will be no limitations on owner occupancy of units, although
the owner may be required to give notice to Kihei if he has previously indicated
to Kihei that the unit is available for rent. Additionally, the owner may
withdraw his unit from the rental agency services program of Plan I provided by
Kihei on written notice of 60 days provided that such cancellation shall not
effect rental arrangements which Kihei has made prior to receipt of such notice. As in the sale of units under Plan II, the units will not be offered or sold
with an emphasis on the economic benefits to the purchaser to be derived from
the managerial efforts of Kihei or any other person. It is expected that the
units will appeal to prospective purchasers of vacation or retirement homes on
the Island of Maui. Opinion of Counsel It is the opinion of the undersigned that the offer and sale of the Kauhale
Makai condominium units on the basis described above in Plan I does not
constitute the offer and sale of an "investment contract" within the meaning of
section 2(1) of the Act and that the proposed transaction does not fail within
the purview of the Commissioner's Release No. 5347. The conclusion is based upon
the following facts: (1) The purchase of a condominium unit is not conditioned upon the purchaser's
participation in any rental program. (2) The purchaser may elect to rent his unit, or not rent his unit, in the
purchaser's sole discretion. (3) If a purchaser elects to rent his unit, he may do so himself, or through the
efforts of any person he selects, including Kihei. The use of an exclusive
rental agent is not required. (4) If the purchaser elects to use the rental agency services of Kihei, rentals
will not be pooled. The rental program will be conducted on a voluntary basis
and each owner will participate only in the actual rental obtained from the
rental of his unit, after deduction of Kihei management fees described above. (5) Unit owners will be required to pay all costs of the unit ownership and will
have the responsibility of furnishing the unit with satisfactory furniture and
furnishing or of causing it to be so furnished. In addition, it is the owner's
responsibility to keep the unit itself in good condition and repair. No
arrangement is offered which would relieve a unit owner of these
responsibilities under Plan I. (6) There is no limitation on the owner's right to use his unit although notice
of such intended owner use must be given to insure proper coordination of the
unit rental. (7) The unit purchaser may terminate the rental agency agreement with Kihei at
any time upon 60 days of prior written notice as more specifically described
hereinabove. (8) Other than the aspects of Plan II, hereinafter described, sales literature
and advertising will not emphasize the economic or tax benefits which could be
derived from the rental of the unit, but will stress the vacation and retirement
home aspect of purchasing a unit on the Island of Maui. (9) Sales personnel will be instructed not to voluntarily represent to
purchasers the availability of rental services such as those described under
Plan I; however, in response to unsolicited inquiries the prospective purchaser
will be told he may use the unit for his own use; rent the unit through his own
efforts or through any licensed real estate broker, including Kihei. Plan I is closely analogous to the offerings described in your no-action letters
In Re Big Sky of Montana, Inc., dated March 14, 1973, and, most recently in your
no-action letter In Re Tahoe Racquet Club Condominiums, dated July 1, 1976. Plan II In addition to the plan set out above, the Company will offer units under Plan
II. Under this plan, upon purchasing his unit, the lessor-owner will enter into
a lease agreement with Kihei. Under the individual lease agreements, the
Lessee-Kihei will agree in advance to pay a fixed amount of rental to the unit
purchaser-lessor. The lessee-Kihei will have the exclusive use of the unit for
nine months of each of the first two years following the purchase of the unit
(close of escrow). The lessor-owner will be entitled to the exclusive use of the
unit for the remaining three months of each such year. At the time the lease
agreement is entered into, the lessor-owner is allowed to choose one month of
each year in which he shall have the right to utilize his unit, with the
remaining two months of each year in which he has the right to utilize his unit
being assigned by lessee-Kihei. In all cases the fixed rental will be an amount
equal to nine monthly payments of what would be principal and interest on a
purchase money loan for eighty percent of the unit's purchase price for each
year of the two year lease term regardless of the lessor-owner's particular
financial arrangements in regard to the purchase of his unit, plus an amount
equal to nine-twelfths (9/12) of the homeowner's association assessment charges
based on the rate of assessment as of the date of purchase for his unit for each
year of the two year lease term, together with an amount equal to nine-twelfths
(9/12) of the property tax for the unit in question at the property tax rate as
of the date of purchase for each year of the two year lease term. The fixed
amount rental will not vary over the two year period. In the event that there is
an increase in either the association assessments or property taxes, the owner
will be responsible for such increase. Lessee-Kihei will make its rental
payments every month in which it has the right of use of the lessor-owner's unit
under the lease agreement. A sum equal to the aggregate rental payments due to lessor-owner under the lease
agreement will be deposited at the time the lease is executed in an escrow
account with a local bank to insure performance of lessee-Kihei's obligations
under the lease agreement. Escrow will be instructed to make the monthly payment
required under the lease agreement directly to the first mortgage lender, if
any, the homeowner's association and the tax impound account for each
lessor-owner and remit the remaining rental payments, if any, directly to the
lessor-owner. In addition to purchasing his unit, the lessor-owner in Plan II must also
purchase a "furniture package" for his unit. This furniture package will be
provided by a furniture company not associated with the Company or any affiliate
of the Company. Neither the Company nor any affiliate will in any way profit
from the owner-lessor's required purchase of the furniture package. The
furniture package is required to be purchased in order to insure that all units
participating in the Leaseback Program are fully furnished with furniture of a
sufficient quality to operate a successful rental program. The Company has taken
a consignment of the furniture for many units and as each package is purchased
the Company's liability for payments for the entire consignment will be reduced
by the amount represented by the sale of that particular furniture package. The
contract for purchase will be entered into directly between the lessor-owner and
the furniture company. Under the terms of the lease agreement a participant lessor-owner in Plan II
will relinquish to Kihei his voting rights in connection with the ownership of
his unit. It is presently anticipated that at least 50% of the units in the
project will be sold under Plan II. This will result in the Company or its
affiliate retaining actual or practical control of the homeowner's association
for the two year period of the Leaseback Program. At the end of the lease the
owner will be returned his voting rights. At the present time, the Company has not yet determined whether it, Kihei, or
some other affiliate will extend or renew any of the lease agreements entered
into pursuant to Plan II after their initial two year term expiration. That
decision will only be made after the relative success of the program is judged.
The salesmen for the project will be instructed that there can be no
representation as to any leasing on the part of the Company, Kihei, or any
affiliate, beyond the two year period of the Leaseback Program. If specifically
asked by a prospective purchaser whether or not there will be any Leaseback
Program after the initial term, the salesmen will be instructed to say "There
may or may not be such a program depending upon its success for the initial two
year period". However, should the Company determine to extend its program it
would only do so under a fixed rental plan as described herein. Again, as with Plan I above, the units under Plan II will not be offered with an
emphasis on the economic benefits to the purchaser to be derived from the
managerial efforts of any third party from rental of the unit. Opinion of Counsel It is the opinion of the undersigned that the offer and sale of the Kauhale
Makai condominium units on the basis described in Plan II above does not
constitute the offer and sale of an "investment contract" within the meaning of
section 2(1) of the Act and that the proposed transaction does not fall within
the purview of the Commission's Release No. 5347. This conclusion is based upon
the following facts: (1) The purchase of a condominium unit will not be conditioned upon the
purchaser's participation in the Leaseback Program. (2) The rental due the owner-lessor under the Leaseback Program will be a fixed
amount, and will not be dependent upon the occupancy rate of the project or upon
any other variable factor. (3) The interests being conveyed are those which are traditionally defined as
interests in real property which are not intended to be regulated by the Act. (4) Any income which results from the purchase of a unit is a result of the
purchaser's ownership interest rather than the managerial efforts of another. Plan II is very close to the offering described in your no-action letter In Re
RDS Associates, dated August 7, 1975. In RDS Associates, as in this offering,
the return to the owner did not depend upon any variable factors but rather was
a fixed amount. In that regard both this offering and the one described in RDS
Associates differ red from the offering described in your letter In Re
Traveler's Motor Homes, Inc., dated November 10, 1972, in which a Leaseback
Program was offered to purchasers of Traveler Motor Homes. In Traveler's Motor
Homes, Inc., however, the payments due under the Leaseback varied by the
lessee's ability to sublease the motor homes. Additionally, in Traveler's Motor
Homes, Inc., the advertising in connection with the offering emphasized the
economic benefits via profits to be derived from the purchase of a Traveler's
Motor Home Leaseback. This is not the case here. Thank you for your consideration of this matter. If you need further information
from us before reaching a decision, please call the undersigned collect at
(213)620-0300. We respectfully request a telephone conversation prior to any
adverse determination. Very truly yours, David G. Ellsworth
For MESERVE, MUMPER & HUGHES DGE:sl [STAFF REPLY LETTER]NOV 22 1976 David G. Ellsworth, Esq.
Meserve, Mumper & Hughes
333 South Hope Street
Los Angeles, California 90071 Dear Mr. Ellsworth: This refers to your letter of November 1, 1976, concerning the applicability of
the registration requirements of the Securities Act of 1933 (the "Act") to the
proposed sale of 168 condominium units by Kauhale Makai, Inc. (the "Company"). The facts are as follows. The Company intends to offer for sale units in a
condominium which it leases from Kihei Properties, Inc. Each purchaser will
receive a fee simple interest in his unit and proportionate shares of the common
area. The units will be offered under two Plans. Under Plan I, the owner in his sole discretion may elect to: (a) keep the unit
solely for his own use and that of his guests; (b) rent his unit through his own
efforts; or (c) rent his unit through any licensed real estate broker in the
area, including Kihei Condominium Rental Management, Inc. ("Kihei"), an
affiliate of the Company. Kihei will act as a separate agent for each owner, and
rents received from different owners will not be pooled. In finding tenants for
units, Kihei will give priority to units sold under Plan II over those sold
under Plan I, and Plan I owners will be informed of this. The rental arrangement
is voluntary and cancellable at any time by the owner (with proper notice). The
sales personnel will be instructed not to volunteer to prospective purchasers
the availability of these rental services. In response to unsolicited inquiries,
purchasers will be told of the three alternatives available. Sales literature
and advertising will stress the vacation and retirement home benefits of
purchasing a Hawaiian condominium, not the economic or tax benefits which could
be derived from the rental of the units. Units will also be offered under Part II, whereby upon purchase of a unit, the
owner will enter into a two-year lease agreement with Kihei. Under such a lease,
Kihei agrees in advance to pay a fixed amount of rent to the owner in return for
the exclusive use of the unit for nine months of each year. This amount will not
vary except that the owner will be responsible for increases in homeowner's
association assessments and property taxes. Accordingly, Plan II participants
will receive no economic benefit from the efforts of Kihei in renting the unit.
Owners participating in Plan II must also purchase a specified furniture package
from a non-affiliate of the Company. Plan II participants will relinquish their voting rights for the period of the
leaseback. It is anticipated that at least 50% of units sold will be sold under
Plan II, so the Company will retain control of the homeowner's association for
the first two years. No decision has been made as to whether the leaseback
program will be renewable after two years. On the basis of the facts and representations presented, as more fully described
in your letter, this Division will not recommend any enforcement action to the
Commission if the units are sold under Plans I and II without compliance with
the registration requirements of the Act, in reliance upon your opinion as
counsel that such offer and sale does not involve a "security" within the
meaning of Section 2(1) of the Act. In your letter you represent that rental possibilities will not be emphasized to
potential Plan I purchasers, and that the advertising and sales literature for
Plans I and II will not emphasize economic benefits to be derived from the
managerial efforts of Kihei in renting the units. In connection with these
representations and the position expressed above, the Division wishes to
emphasize that it is aware that the offer and sale of condominium units and
similar properties often involves oral representations made to potential
purchasers by sales personnel. In this regard, the Division wishes to make clear
that the position expressed in this letter will no longer be applicable if any
sales personnel make and oral representations concerning the properties or the
rental program which differ from the representations contained in your letter.
Further, this letter only expresses the Division's position on enforcement
action and does not purport to express any legal conclusion on the questions
presented. Sincerely, William E. Toomey
Assistant Chief Counsel
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