Securities Law & Instruments

Headnote

Trades by applicant or licensed real estate agents in condominium/hotel units included in a hotel reservation program are not subject to section 25 or 53 provided that purchasers receive certain disclosure prior to entering into an agreement or purchase and sale.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).

Condominium Act, 1998 S.O. 1998, c.19.

Real Estate and Business Brokers Act, R.S.O. 1990, c. R.4, as am.

Instruments Cited

National Instrument 51-102 Continuous Disclosure Obligations, s. 4.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")

AND

IN THE MATTER OF

TALON INTERNATIONAL INC.

 

RULING

(Subsection 74(1))

UPON the application of Talon International Inc. (the "Applicant") to the Ontario Securities Commission (the "Commission") for a ruling pursuant to subsection 74(1) of the Act (the "Application") that the sale by the Applicant of hotel condominium units within a certain building to be known as Trump International Hotel & Tower to be located at the south east corner of Bay Street and Adelaide Street, in the City of Toronto, Ontario, will not be subject to sections 25 and 53 of the Act;

AND UPON considering the Application and the recommendation of the staff of the Commission;

AND UPON the Applicant having represented to the Commission as follows:

1. The Applicant is a corporation incorporated under the laws of the Province of Ontario for the purpose of developing The Trump International Hotel & Tower. The Applicant's registered office is located at 77 King Street West, Royal Trust Tower, Toronto-Dominion Centre, Suite 4400, Toronto, Ontario M5K 1G8. The Applicant is not a reporting issuer (or its equivalent) in any of the provinces or territories of Canada.

2. The Applicant is proposing the development and construction of a comprehensive mixed-use project to be located at the south east corner of Bay Street and Adelaide Street, in the City of Toronto, Ontario.

3. The project will be comprised of a 71 storey building (the "Building") which it is anticipated will be divided and registered under the Condominium Act, 1998 S.O. 1998, c.19 (the "Condominium Act") as 2 separate condominiums, one of which will be a condominium operated as a full-service luxury hotel under the name "Trump International Hotel" ("Trump International Hotel", the "Hotel Component", the "Hotel" or the"Condominium") and the other a residential condominium (herein referred to as the "Residential Component").

4. The Hotel Component will include approximately 229 hotel condominium units (collectively, the "Hotel Units" or individually, as a "Hotel Unit"). Hotel Units will be hotel guestroom-type condominium units that will be used by the owners or guests of the owners for any periods of time that they may desire, or if the owners of the Hotel Units voluntarily participate in the Reservation Program (defined below), by members of the public who may rent the Hotel Units under the Reservation Program (defined below) during periods in which the owners will not be occupying their Hotel Units.

5. The Hotel Component will be comprised of

(a) the Hotel Units;

(b) portions of the ground floor level of the Building, where a ground floor lobby and elevators serving the Hotel will be located;

(c) a health club facility that the Applicant currently intends will be located on one or more floors of the Building, a restaurant and bar facility, meeting room facilities, lobby facilities, a front desk area, a concierge area, hotel management offices, housekeeping closets on each floor where Hotel Units are located, laundry facilities, elevators (both passenger and service), stairwells and certain other common element areas and facilities located in the Building and other facilities customarily associated with a first-class luxury hotel condominium operation;

(d) below grade areas of the Building; and

(e) a 7 storey above grade parking garage to be constructed within levels 1 to 7 of the Building to service and provide the Hotel with valet parking service on a pay-for-use basis.

6. Other portions of the Building will form part of the Residential Component including portions of the ground floor where a residential lobby and elevators serving the Residential Component will be located, together with floors 36 through 71 which will contain approximately 109 residential condominium units.

7. It is proposed that the Hotel Units will be located on the 11th to the 32nd floors of the Building.

8. The Applicant will have the right (and purchasers of Hotel Units will be advised of such right in the Disclosure Document (defined below)) to increase or reduce the number of Hotel Units in the Condominium by splitting or combining one or more proposed Hotel Units and/or changing the style or configuration and the types of Hotel Units contained in the Condominium in its sole discretion. In the event of such changes, the condominium declaration and the condominium budget will be amended accordingly and such changes shall not be construed as material amendments to the Disclosure Document (defined below) with respect to the Condominium.

9. It is intended that each Hotel Unit (or any two or more adjoining Hotel Units used together) be used for short-term transient hotel occupancy or for longer-term occupancy as may be required.

10. Purchasers will be advised in the Disclosure Document (defined below) that as a condition of ownership of a Hotel Unit, each owner of a Hotel Unit (an "Owner") will be required to:

(a) participate in a Hotel Unit maintenance program (the "Hotel Unit Maintenance Program") to be managed by a management company engaged by the Applicant to manage the day-today operations of the Condominium, currently anticipated to be an affiliate of the Trump Organization LLC (the "Hotel Operator");

(b) enter into a Hotel Unit maintenance and operation agreement with the Hotel Operator in the form then in use by the Hotel Operator (the "Hotel Unit Maintenance Agreement");

(c) receive the services provided as part of the Hotel Unit Maintenance Program; and

(d) pay to the Hotel Operator all fees, costs and charges associated with the Hotel Unit Maintenance Program (the "Hotel Unit Expenses") as and when such Hotel Unit Expenses become due and payable (which the Applicant currently anticipates will be on a quarterly basis) in accordance with the terms and conditions of the Hotel Unit Maintenance Agreement.

11. Hotel Units will be offered for sale in Ontario through:

(a) the Applicant; and/or

(b) agents of the Applicant licensed under the Real Estate and Business Brokers Act, R.S.O. 1990, c. R.4 ("Licensed Agents").

12. Each Owner will be entitled (but not obligated) to participate in a reservation program administered by the Hotel Operator that makes participants' Hotel Units available to the public for rental (the "Reservation Program"). Notwithstanding a Hotel Unit owner participating in the Reservation Program, such Hotel Unit owner may occupy his/her Hotel Unit at any time and for any length of time as he/she desires, provided that the required notice is given to the Hotel Operator.

13. The Reservation Program provides the services which enable Owners to participate in reservation and registration services not provided as part of the Hotel Unit Maintenance Program. In order to enroll in the Reservation Program, Owners must execute and deliver a hotel reservation program agreement (the "Reservation Program Agreement") with the Hotel Operator, such Reservation Program Agreement to be in the form then in use by the Hotel Operator.

14. There will be no charge for an Owner's initial entry into the Reservation Program, but an administrative fee (currently anticipated by the Applicant to be $1,000.00) will be charged each time an Owner withdraws from the Reservation Program or subsequently re-enters.

15. Under the Reservation Program, the Hotel Operator will establish rental rates for the Hotel Units enrolled in the Reservation Program with the aim of establishing and maintaining the Hotel as a local leader in the international luxury segment while being competitive with other luxury hotels in the area. Hotel Unit rental rates will be adjusted by the Hotel Operator from time to time depending upon seasonal demands, the type and size of the Hotel Unit, location of the Hotel Unit, the views available from the Hotel Unit and other factors; however, none of the Applicant, the Hotel Operator or the sales agents for the Hotel Component will make any representation that any Hotel Unit will be able to be rented at any particular rate, or for any particular period of time.

16. Each Hotel Unit that participates in the Reservation Program will be assigned a rotation point for each day that the Hotel Unit is occupied by a hotel guest pursuant to the Reservation Program. In order to promote a fair allocation of rental opportunities, the Hotel Operator will assign reservation requests on the following basis:

(a) Whenever a prospective hotel guest requests a reservation, the participating Hotel Unit that has the lowest number of cumulative rotation points (within the requested type of Hotel Unit, if any) will be designated for rental to such prospective hotel guest; and

(b) All participating Hotel Units will be deemed available unless the Hotel Operator has previously made a reservation therefor or the owner thereof or its authorized rental agent has previously notified the Hotel Operator that the Hotel Unit is not available for public rental under the Reservation Program during such time period.

17. Revenues collected by the Hotel Operator under the Reservation Program are specific to each participating Hotel Unit. The Hotel Operator will maintain a separate account for each such Hotel Unit that details and accurately records all revenues received by the Hotel Operator in respect of rentals of that Hotel Unit and deductions therefrom.

18. Within 30 days after the end of each fiscal quarter of the Hotel, the Hotel Operator will furnish each Owner with a statement of all amounts received and deducted during such fiscal quarter and within 75 days after the end of each fiscal year of the Hotel, the Hotel Operator will furnish each Owner with a statement of the respective Owners' income and expenses for participation in the Reservation Program for such fiscal year, in accordance with applicable tax requirements, as well as an audited statement of the income and expenses for the entire Reservation Program. When income to an Owner for any quarterly period exceeds the amounts due to and deducted by the Hotel Operator, the Hotel Operator will transmit to the Owner funds in the amount of such net income, together with the quarterly statement. In addition, the Hotel Operator will furnish to each Owner:

(a) audited annual financial statements for the Reservation Program that have been prepared and delivered in accordance with Part 4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) as if the Reservation Program was a reporting issuer for the purposes of Ontario securities legislation (the "Audited Annual Financial Statements"); and

(b) interim financial statements for the Reservation Program that have been prepared and delivered in accordance with Part 4 of NI 51-102 as if the Reservation Program was a reporting issuer for the purposes of Ontario securities legislation (the "Interim Financial Statements").

19. The Applicant is proposing to have the Hotel operate under the name, "Trump International Hotel", or a similar trade name pursuant to a revocable license agreement with the holder of the legal right to use the name "Trump" and any variation thereof. It is also currently anticipated that pursuant to the terms of a condominium management agreement to be entered into with the Hotel Operator (the "Condominium Management Agreement"), the Hotel Component will be managed by the Hotel Operator.

20. The Condominium will enter into the Condominium Management Agreement with the Hotel Operator, pursuant to which the Hotel Operator is to be the sole and exclusive representative and managing agent of the Condominium subject to overall control of the Condominium for an initial term of three (3) years. In addition to its general condominium management duties, the Hotel Operator will manage the operations of the Hotel pursuant to the Hotel Unit Maintenance Program. These services as they relate to the Hotel Unit Maintenance Program and the Reservation Program will include, any and all management functions necessary or appropriate for the operation, maintenance and repair of a first-class luxury hotel operation, including, without limitation:

(a) paying from the Hotel Unit Maintenance Program funds all related expenses including costs of administration, operation, maintenance, repair and replacement, salaries, fees, commissions, credit card company payments, costs of goods and services and insurance premiums in connection with the operation of the Hotel;

(b) communicating with and collecting fees and charges from Owners under the Hotel Unit Maintenance Program;

(c) processing and delivering to Owners periodic payments generated from rental revenues of their Hotel Unit, if any;

(d) collecting room rental payments, monitoring and collecting miscellaneous charges such as telephone, pay-per-view and room service charges from Hotel guests, and keeping the financial records for each Hotel Unit;

(e) providing and procuring marketing and promotion for the rental of Hotel Units and promotion of the Hotel; and

(f) providing for housekeeping, maintenance and repair of the Hotel and Hotel Units; and providing the reservation system and staff for the Reservation Program.

21. The duties of the Hotel Operator will be fully set out in the Condominium Management Agreement which will be finalized and executed prior to the completion of the unit transfer date closing of the first Hotel Unit in the Condominium.

22. The Condominium Management Agreement may be terminated by the Corporation pursuant to the provisions of Section 111 of the Condominium Act.

23. Hotel Units will be marketed primarily as first-class luxury hotel condominium units to be used for short-term transient hotel occupancy or for longer-term occupancy. The Reservation Program is merely a secondary feature which offers participating purchasers a means to defray related ownership expenses, as opposed to an investment vehicle for making a gain or profit.

24. Prospective purchasers of Hotel Units will not be provided with rental or cash flow forecasts or guarantees or any other form of financial projection or commitment on the part of the Applicant.

25. The Applicant will deliver to an initial purchaser of a Hotel Unit, before an agreement of purchase and sale is entered into, an offering memorandum (the "Disclosure Document") in the form of a disclosure statement required under the Condominium Act and which will also include additional information in the body of the disclosure statement relating to the real estate securities aspects of the offering prepared substantially in accordance with the form and content requirements of 45-906F of the Securities Act (British Columbia), R.S.B.C. 1996, c.418, as amended ("Form 45-906F") including, but not limited to:

(a) a description of the project and the offering of Hotel Units;

(b) a summary of the material features of the Reservation Program Agreement to be entered into between a purchaser of a Hotel Unit, as Owner and the Hotel Operator;

(c) a description of the continuous reporting obligations of the Applicant or Hotel Operator, as the case may be, to Owners as more particularly described in paragraph 30 below;

(d) a description of the risk factors that make the offering of Hotel Units a risk or speculation;

(e) a description of the statutory right of action available to purchasers of Hotel Units as more particularly described in paragraph 27 below; and

(f) a certificate signed by the president or chief executive officer of the Applicant and by a director of the Applicant in the following form:

"The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made".

26. Each initial purchaser of a Hotel Unit will have a statutory right under the Condominium Act to rescind an agreement to purchase a Hotel Unit within 10 days of receiving the Disclosure Document or a material amendment to the Disclosure Document.

27. Each initial purchaser of a Hotel Unit will have a statutory right of action as referred to in section 130.1 of the Act. The Disclosure Document will describe the statutory right of action, including any defences available to the Applicant, the limitation periods applicable to the exercise of the statutory right of action, and will indicate that the rights are in addition to any other right or remedy available to the purchaser.

28. No purchaser of a Hotel Unit who elects to participate in the Reservation Program will be provided with rental or cash flow guarantees or any other form of financial projection or commitment on the part of the Applicant, except for the budget that must be delivered to an initial purchaser of a Hotel Unit pursuant to the Condominium Act.

29. The economic value of a luxury hotel condominium of this type will be attributable primarily to its real estate component because Hotel Units will be marketed as luxury transient occupancy hotel condominium properties and will not be offered and sold with an emphasis on the expected economic benefits of the Reservation Program and the Reservation Program Agreement.

30. The Reservation Program Agreement will impose an irrevocable obligation on the Applicant or the Hotel Operator to send to each Owner:

(a) the Audited Annual Financial Statements for the Reservation Program; and

(b) the Interim Financial Statements for the Reservation Program.

31. The Reservation Program Agreement will impose an irrevocable obligation on the Applicant or the Hotel Operator to deliver to a subsequent prospective purchaser, upon reasonable notice of an intended sale by the Owner, and before an agreement of purchase and sale is entered into:

(a) the most recent Audited Annual Financial Statements (which include financial statements for the prior comparative year, if applicable) and, if applicable, the most recent Interim Financial Statements for the Reservation Program (collectively, the "Financial Statements"); and

(b) quarterly statements of revenues and expenses for the Hotel Unit for the 2 year period preceding the entering into of the agreement of purchase and sale for the Hotel Unit (the "Two Year Quarterly Statements"),

(The Financial Statements and the Two Year Quarterly Statements are collectively referred to as the "Financial Information").

32. The Reservation Program Agreement will impose an irrevocable obligation on the Applicant or the Hotel Operator to deliver:

(a) the Disclosure Document to a subsequent prospective purchaser of a Hotel Unit upon receiving reasonable notice of a proposed sale of the Hotel Unit that is to take place either prior to, or within 12 months of, the issuance of permission to occupy that Hotel Unit; and

(b) a summary of the Disclosure Document (the "Disclosure Document Summary") to a subsequent prospective purchaser of a Hotel Unit upon receiving reasonable notice of a proposed sale of the Hotel Unit that is to take place any time following the expiration of a period of 12 months from the date of issuance of permission to occupy that Hotel Unit

and it will also require the Disclosure Document or the Disclosure Document Summary, as the case may be, to be delivered to a subsequent prospective purchaser before an agreement of purchase and sale has been entered into.

33. A Disclosure Document Summary that is delivered to a prospective purchaser of a Hotel Unit will include:

(a) items 1, 3(1), 6, 7, 9(1), (2), (3) and (4), 10(b) and 16 of Form 45-906F with respect to the proposed sale, modified as necessary to reflect the operation of the Reservation Program and the form of disclosure, and

(b) items 12(2), (3) and (4) of Form 45-906F with respect to the Hotel Operator under the Reservation Program Agreement modified so that the period of disclosure runs from the date of the certificate attached to the Disclosure Document Summary,

and will be certified by the Hotel Operator in the form of the certificate required pursuant to item 19 of Form 45-906F.

34. The Reservation Program Agreement will impose an irrevocable obligation on each Owner of a Hotel Unit participating in the Reservation Program to provide:

(a) the Hotel Operator with reasonable notice of a proposed sale of the Hotel Unit; and

(b) a subsequent prospective purchaser of a Hotel Unit with notice of his, her or its right to obtain from the Hotel Operator, the Financial Information and the Disclosure Document or Disclosure Document Summary, as the case may be.

35. The Reservation Program Agreement will not require Owners to give any person any assignment of their right to vote in accordance with the Condominium Act or condominium by-laws, or to waive notice of meetings of the Condominium corporation.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS RULED, pursuant to subsection 74(1) of the Act, that the distribution of a Hotel Unit by the Applicant or Licensed Agents is exempt from sections 25 and 53 of the Act, provided that:

(a) every purchaser of a Hotel Unit receives, prior to the completion of the purchase transaction, a copy of the Disclosure Document and a copy of this Ruling; and

(b) any subsequent trade of a Hotel Unit acquired pursuant to this Ruling shall be a distribution unless:

(i) the seller of the Hotel Unit is not the Applicant or an agent acting on the Applicant's behalf;

(ii) notice is given by the seller to the Applicant or Hotel Operator of the seller's intent to sell his, her or its Hotel Unit;

(iii) the prospective purchaser of the Hotel Unit receives, prior to the completion of the transaction, all of the documents and information referred to in paragraphs 31 and 32 above; and

(iv) the seller, or an agent acting on the seller's behalf, does not advertise, market, promise or otherwise represent any projected economic benefits of the Reservation Program to the prospective purchaser.

May 25, 2004.

"Susan Wolburgh-Jenah"
"Wendell S. Wigle"