When I pointed to sharply lower values of units in the Ala Moana Hotel Condominium last week, I didn’t realize that similar issues have brought challenges across the country from unhappy purchasers.

According to a story last month in the Wall Street Journal, “buyers from California to Florida are trying to use the courts to get their money back, arguing that condo-hotel developers violated securities laws when selling the units.”

Access to the WSJ story may be restricted to subscribers only.

The industry is getting hit on two fronts: The condo crash has wiped out the value of many units, and the hotel bust means the rooms are being rented only infrequently and at much lower rates than anticipated.

Now, some buyers are arguing in court that purchasing a unit in a condo-hotel is similar to buying a stock, where the buyer is entirely reliant on the operational skills of management for any return. Therefore, they contend, the purchases should have been regulated by the Securities and Exchange Commission, which would force companies to issue a detailed prospectus and have agents licensed to sell both real estate and securities, a rare combination.

That sounds very familiar.

But whether that would apply to the case of the Ala Moana is far from certain.

A 2002 decision by the Securities and Exchange Commission in a case involving a hotel-condominium project by Intrawest Corporation is widely cited as an example of SEC guidelines.

That case cites an earlier SEC opinion spelling out several tests to determine whether a condo offering should be treated as a sales of securities. One of those tests raises questions about the Ala Moana Hotel project.

In that release, the Commission stated that a condominium unit can be treated as a security if it is offered in conjunction with any of the following three factors:…(iii) the offering of a rental or similar arrangement whereby the owner must hold his unit available for rental for any part of the year, must use an exclusive rental agent or is otherwise materially restricted in his occupancy or rental of his unit.

The Condominium Public Report for the Ala Moana Hotel Condominium, filed with the state Real Estate Commission, includes a restriction limiting owner-occupancy to less than 18 months out of 36 months, with the unit required to be in the hotel pool for the majority of the time.

But the Public Report explains that this is the result of the property’s current zoning, which no longer allows hotel use. The hotel was legal when built, and is now considered a legal non-conforming use. However, if it is not longer used as a hotel, it could not be later restored to hotel use without a variance. Conversion of hotel units to residential apartments, including the installation of microwaves or other kitchen appliances, could undercut its status as a hotel and make continuing hotel operations illegal, according to city correspondence included with the report.

One reference I found cites prior SEC decisions “that restrictions imposed by zoning regulations, local ordinances and building codes do not constitute material restrictions that would cause the sale of the units to constitute sales of securities.”

But that’s not the end of the story.

The former state regulator whose comment prompted this discussion added this later note:

First, No action letters are specific to each situation and not a general or blanket exemption. Just looking at the referenced page, the Ala Moana sales didn’t qualify.

Second, no exemption in Hawaii law exists and there should have been a full registration at DCCA as a securities offering. The Hawaii law is different from the Federal definitions as the Hawaii Market Center case has a broad definition of a security and there were some specific condotel cases in Hawaii as well.

This is pretty esoteric stuff, but interesting nonetheless.