There have been several articles on it, here is one.
Las Vegas Sun
August 4, 2008
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Seeing no profits, condo owners sue
At issue: What hotel unit buyers were promised
By Liz Benston
Fri, Jan 4, 2008 (midnight)
Nevada's biggest Strip developer is embroiled in a dispute with mom-and-pop investors that offers a cautionary, buyer-beware tale involving the sale of high-rise residential units.
At issue: whether the developer insinuated that ownership of the Strip-front units would bring big profits.
In 2002, MGM Mirage partnered with Turnberry Associates, a major developer of condominium towers, to build a condo-hotel -- an animal new to Las Vegas but familiar to high-rise dwellers in other resort locales.
Some owners reside in the units part time and hope to make money by offering them for rent to outsiders, through a management company, the rest of the time.
The project, eventually called Signature, stirred potential investors and real estate watchers. Owning a piece of the Strip, with the backing of MGM Mirage, seemed like a sure thing.
Sales of the Signature units have generated more than $200 million in profit for 50 percent partner MGM Mirage.
But they have been a money-losing proposition for buyers with hefty mortgage payments.
With maintenance fees topping $1,000 a month plus mortgage payments on units, many of which sold for between $600,000 and $800,000, some buyers are paying thousands of dollars a month for their units without sufficient rental income to offset their costs.
Although rooms in Strip casinos continue to command rates in the hundreds of dollars a night, Signature rooms have generally rented for less than $200 a night -- not enough to cover monthly expenses on the units.
More than 40 Signature owners, of about 1,640, have sued the developers for fraud, saying they were lured to buy the units by promises of net profits generated by rental income. In some cases, they said, sales agents told buyers they could expect to charge room rates comparable to those of luxury Strip resorts and that the value of their units would likely increase as future towers were built and sold.
“Had they told us upfront that they couldn't guarantee a nickel of income, not one investor would have looked at this as a good idea,” said Rory Agnello, a real estate broker and Las Vegas resident who bought two studios in the first of Signature's three condo towers in 2004. “Instead, they took the Campbell's soup approach, saying ‘Trust us, this will make money.' In truth, these things have been disastrous.”
A Turnberry Associates attorney notes that, high in the sales contract, buyers are warned not to rely on oral representations.
Agnello says his studios have rented for an average of $175 a night -- much less than the $400 a night he expected based on “comparable” luxury rooms on the Strip.
Owners receive 60 percent of the nightly rent, which is actually closer to half when fees and taxes are factored in, he said.
Agnello says his studios sometimes fetch as little as $99 a night through the front office, which is good for hotel occupancy and filling the casino but attracts bargain hunters, some of whom have “destroyed” the well-appointed rooms, going so far as to steal bedding.
“They care about occupancy. They want people spending money at MGM Grand,” Agnello said of MGM Mirage and Turnberry.
Steve Morris, the developers' attorney, said owners should have carefully read their sales contracts.
“This was a straightforward condo purchase drafted and reviewed in accordance with state law. There are no promises made anywhere in the contract.”
Disclaimers in sales contracts make it difficult for buyers to win a lawsuit, even in the case of overzealous marketing reps intent on closing deals, said Jared Beck, a Miami attorney who specializes in condo disputes.
“It's definitely fraud to tell somebody a material fact that's not true in order to get them to sign a purchase agreement,” Beck said. “However, if you orally make a promise of something that may or may not happen in the future, that's when things get muddy.”
As a rule, room rates aren't guaranteed because they vary with supply and demand, he said.
Tara Young, a Las Vegas real estate attorney who isn't involved in the case, said developers with disclaimers in their contracts can still get in trouble with regulators if they emphasize condos as a moneymaking investment opportunity.
State and federal securities rules require developers to register condos as an investment vehicle if they are primarily marketed that way. That process is onerous and involves issuing a voluminous prospectus similar to that required of public stock offerings. Developers can get around this requirement by prohibiting their sales agents from emphasizing rental income as an incentive to buy condominiums. Those who violate these rules can be required to pay restitution to buyers, including what they paid for the units plus interest, Young said.
While Young declined to discuss specifics of the case, she said it could, regardless of the outcome, lead developers to be more careful about how they pitch their products.
Attorneys say the suit is unusual among numerous condo disputes because it involves not failed projects or abandoned sales contracts but representations made prior to signing contracts.
Morris denies the units were sold as investments. The investment rules for condos are well-known and are included as a disclaimer in the contract, he said.
Young said developers might not have been as careful about the securities requirements a few years ago during the condo boom, when speculators were able to make money merely by flipping their units a few months after purchase.
“During the condominium boom people were less concerned about the technicalities because everyone was making money,” she said. “Now that projections aren't coming in as people planned some are going to be looking at legal ways to get out of their contracts.”
Joel Greene, a Miami broker who has been marketing condo-hotel units for more than five years, blames the rash of condo disputes on buyer greed, enabled by aggressive marketing.
“Instead of riding out a long-term investment that will probably be OK, some buyers are looking for their attorneys to bail them out,” he said.
Condo rentals “are intended to offset the costs of maintaining a second home” rather than to make a profit, he said. “If you're looking for cash flow, call your stockbroker.”
Greene says many brokers, in their zeal to close a sale, haven't been as forthcoming.
At Signature, units in subsequent towers sold for $100,000 more than similarly sized units in the first tower sold for just months earlier.
But nightly rental rates didn't rise along with prices, squeezing more recent buyers hardest.
“This problem has nothing to do with the housing market, Agnello said. “It has to do with a bad marketing program. They sold units at the wrong prices to the wrong people.”
Liz Benston can be reached at 259-4077 or at
benston@lasvegassun.com.
Discussion: 1 comment so far…
By mojiade
1/18/08 at 6:30 p.m.
Suggest removal I would like to join this class action lawsuit as I am one of the disgruntled MGM owners.Any leads would be much appreciated
Moji
3014420436
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