Condominium Hotels are a Tricky Business


Condo Hotels


Published: November 29, 2006

Imagine a vacation home complete with 500-thread-count linens on plush mattresses, daily maid service, and a 30-treatment spa. Hotels have rolled out condos at an increasing clip over the last several years, tempting buyers with amenities, hassle-free ownership and the potential for regular rental income, all rolled into one sleek package with a concierge desk.

Like the rest of the housing market, however, condo hotels are not immune to the slowdown, and several projects, after splashy sales releases, have quietly curtailed building plans because of sluggish sales and rising construction costs.

The Hard Rock Hotel’s plans for 1,200 condos in Las Vegas ended in February, with developers returning buyers’ 10 percent deposits, while Las Ramblas, a condo hotel development that counted George Clooney as a backer, scrapped its blueprints for more than 4,000 condos and hotel rooms off the Vegas Strip. A handful of condo hotels in the works in Orlando and Clearwater, Fla., have also lost momentum before ground was ever broken.

But even with setbacks like these, hotels continue to build condos on a more modest scale, and convert existing rooms for ownership.

“Offsetting those cancellations is the expansion of the concept into a lot of small marketplaces which aren’t necessarily large resort areas,” said Patrick Ford, president of Lodging Econometrics, a Portsmouth, N.H., hotel industry research firm. “It is spreading away from the major markets and into the secondary and tertiary resorts.”

Of the 168 condo hotel projects in the works, according to Lodging Econometrics, 81 are under construction and 46 are scheduled to start construction over the next 12 months. And the number of projects actually opening for business is on the increase: In the first three-quarters of 2006, a total of 14 condo hotels opened their doors, while in the fourth quarter of this year alone, 15 will open.

Although many new projects are in places like Orlando, Las Vegas, Miami Beach and Fort Lauderdale, an increasing number are popping up in less likely places. There are of course the condo hotels like Nicky Hilton’s Nicky O South Beach on Miami’s Ocean Drive, opening next year, and the Westin St. Maarten Dawn Beach Resort & Spa, opening in December and selling its 99 condos for $895,000 to $2 million. But expect to see more developments in golfing destinations like Arizona and other mountain enclaves. Condo hotels are even popping up near universities and in obscure gaming towns, like West Wendover, Nev.

Regardless of a condo’s location, potential buyers need to look closely at the development, beyond those grand spas, swim-up bars and concierge services.

Look at Comparable Condos

The longer the list of amenities at a hotel, the higher the asking price for units. Jones Lange LaSalle Hotels, a firm that brokers hotel sales, estimates that condo hotel units in areas like Miami, Las Vegas and the California beachfront are nearly twice the price of comparable stand-alone condominiums.

Get Ready to Research

Hotels selling real estate are legally limited in what they can share with potential buyers about hotel rates, expected occupancy and just how much an owner should expect to make from a rental pool. In fact, unless the developer files documentation with the Securities and Exchange Commission — a task that most consider costly and time consuming — he or she cannot reveal anything about the economic workings of the hotel to a potential buyer.

Before buying a one-bedroom condo in the Fontainebleau in Miami Beach last year, Kimberly Hartke looked at other hotels and condo hotels in Miami that were already open for business, and asked for their nightly rates in order to estimate how the Fontainebleau might stack up. She was swayed by the Jerusalem stone tile and soaring ceilings that highlighted the Fontainebleau’s interior, but she was equally impressed with its proximity to the convention center and its siting on the Intracoastal Waterway — an asset during big events like the annual boat show. “With these annual events, I thought the hotel was likely to sell out,” she said, noting that her condo now rents for anywhere from $300 to $800 a night depending on the season.

Understand the Management

Some condo hotels are made up entirely of condos, while others have a dedicated hotel with a separate area for condos. Regardless of the structure, buyers will want to know how the hotel integrates with the condominiums. Before a purchase, it is important to understand everything — from the number of days a buyer may use the unit (some have usage restrictions), to how far in advance he or she might have to book the unit, to how the hotel will maintain common areas like hallways and lobby.

Jim Butler, a lawyer with Jeffer, Mangels, Butler & Marmaro, a Los Angeles firm that represents hotels in structuring condo hotel contracts, also recommends that buyers reserve 4 to 5 percent of their revenues each year for incidental expenses.


Don’t Expect to Make a Profit

The prospect of rental income, and the fact that owners do not have to worry about finding a property manager, is no doubt attractive, but turning a profit may very well be an unattainable goal, according to Dante Alexander, chief executive of the National Condo Owners Association. “Most should not expect to make a profit even with full participation in the rental program,” Mr. Alexander said. “The average condo hotel will generate $7,500 a year but cost you $12,000 a year.” While a unit might rent out for $500 a night, remember that the hotel takes a large slice of that (typically at least 50 percent) and owners still need to pay real estate taxes, homeowner association dues and the mortgage.



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