Do condo-hotels make good investments?

Hoteliers in resort locations are offering guests a stake in the business by selling individual units as condominiums. Not only is this an opportunity to own a second home in some of the country's favorite playgrounds, promoters say, but owners can look forward to some income when the property's management rents the room out to guests.

Realtor Christian Charre, a senior vice president with Jones Lang LaSalle, markets hotels throughout the Americas and the Caribbean. "If you live and work in New York and buy a residence in Florida that you use maybe two to four weeks a year," he says, "having a professional company renting the room for you the rest of the time, when it would otherwise be empty, can offset some of the expense -- and you still own a piece of the beach."

It sounds like a pretty good deal, but the facts show condo-hotel consumers would be wise to check the closet for financial skeletons before signing on the dotted line. The hotel business can be notoriously unstable -- and if that room doesn't rent out, the buyer won't see any of the income from it.

Where you'll find them
"Condo-hotels are usually upscale, full-service developments in the strongest hotel markets -- either popular vacation destinations or large cities where suburbanites frequent hotels for business or leisure purposes," says Tim Ford, vice president of operations at Lodging Econometrics, one of very few companies tracking the trend.

Some 43 condo-hotel projects containing 7,715 guest rooms are scheduled to open this year in the U.S., Ford says. Another 33 projects totaling 8,271 rooms will open in 2007. Of these, 70 percent will be built new, while 30 percent represent conversions of existing hotels. Nearly half are in Florida.

Hotels undergoing conversion run the gamut from the ultraluxurious to more modest family-style lodgings.

Ancient City Hospitality Group plans to convert the Casa Del Mar Inn & Suites. The property is a Spanish-style waterfront luxury hotel in Vilano Beach near St. Augustine, Fla., the state's oldest city, and is set in prime golf country.

Sales prices for Casa Del Mar's 94 rooms, ranging from 350 to 500 square feet, start at $329,000. The asking price for the 1,552-square-foot presidential suite is $1.8 million.

Buyers who prefer something quaint can get a unit at Tuckaway Shores Resort, in Indialantic, Fla., not far from Cape Canaveral. Developer Jacqui McPhillips says when she heard the 32-unit property was on the market, "I was tearing it down in my mind for high-rise condos. But when I saw it, I realized it was much too nice to tear down."

Two-room suites in the L-shaped building are selling for $244,900 to $274,900. Most of the roughly 400-square-foot units offer breathtaking views of the Atlantic Ocean.

While independents were the first to latch onto the condo-hotel concept, major hotel chains are starting to get into the act. For example, Boston-based Sonesta International Hotels has four condo-hotels completed or underway, all in Florida, says Stephanie Sonnabend, CEO and president. "That's where they're popular now, but I believe that the trend will be growing in other similar destinations," she says.

"We currently operate two in the Miami area -- the Sonesta Hotel Intervista Coconut Grove and the Trump International Sunny Isles Beach." A Sonesta property in Key Biscayne, Fla., will be closed this August and redeveloped as a combination condo-hotel and individual residences, she says, and a 900-unit condo-hotel, Sonesta Orlando Tierra del Sol, is planned.
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Jerrold Krystoff, principal and CEO of Hospitality Development Group, says InterContinental Resort & Residences will manage Villas at Palazzo del Lago, a condo-hotel his company plans to build near Disney World in Orlando.

The resort, he says, will offer 585 two- and three-bedroom guest suites within the hotel starting at just over $400,000, as well as separate residential condos starting at $300,000.

"If you look at the new hotel projects coming online," Krystoff says, "most of them are condo. The lenders like it."

In fact, says Charre, the driving force behind the trend is the preference bankers show to hotel developers who come to them with preconstruction contracts in hand.

"A condo-hotel is a financing mechanism to shift the risk to individual owners," he says.

Financing
Although isolated incidences of condo-hotels have been popping up for a few decades, the concept has begun to gather momentum only in the past couple of years. As a result, says George Kovac, a real estate attorney in the Miami office of Stearns Weaver Miller, there's still a lot of confusion about them in the marketplace, starting with what, exactly, a condo-hotel is -- and is not.

"There are several related products," he says. "First there were people who wanted a condo lifestyle, but with hotel-like amenities."

Condo towers built in tandem with hotels fulfill that demand, he says, but "that's quite a different product from buying single guestrooms."

The financing structure of a condo-hotel also sets them apart from superficially similar products such as time shares or fractional ownership, Kovac says. Consumers who choose those options buy occupancy rights for specific time periods in shared properties. Buying a condo-hotel is a straight real estate deal. You don't ever have to rent it out if you don't want to, and if you do, you're not obligated to use the on-site management company.

The rental deal
Owners who opt to put their rooms into the hotel inventory agree to a number of ground rules, says Charre. First, forget about calling a decorator. Your room will have to match all the others in the hotel.

Second, he says, "in general, especially if it's operated by a major chain, there will be restrictions as to the amount of time an owner can use it." He says this is particularly true during peak seasons -- a constraint that could benefit the owner financially, since that's when the hotel is most likely to be booked solid at premium rates.

Sometimes, Charre says, local city ordinances restrict the amount of time an owner can occupy the unit.

These terms are spelled out in the rental agreement between individual owners and management and are not negotiable, Kovac says, though "buyers always have the option of not being in the rental program."

In a typical arrangement, Charre says, "the hotel operator takes 10 percent off the top for cleaning the room, direct reservation costs and so on. There's a 50-50 split on the remainder between hotel and condo-hotel owner."

Owners have the same expenses as they would with a residential condo property -- mortgage, real estate taxes, insurance and condo association fees -- but the unit price is higher. "They sell at an average of $800 to $1,000 a square foot, as opposed to $400 for a residential condo," he says. "So the buyer has to reconcile his costs."

The jury is still out on a number of legal issues, Kovac says. For example, how do you divvy up common operational costs when there are a number of components under one roof -- say, a restaurant, convention facility and shops, in addition to guestrooms under individual ownership?

"There's no boilerplate for how to allocate various common and operational costs," he says, "and that naturally becomes more complicated when it involves end users who are not business players."

What if an owner wants to keep some personal possessions on site? "In those situations," Kovac says, "there needs to be a locked storage area or an armoire stored elsewhere and moved in when the owners are in residence."

Fact-finding
The bottom line? Buyers need to do some homework before taking the plunge into the volatile hospitality business. "I don't know of a single property where renting the room out would cover all costs," Charre says.

Also, the hotel industry is among the most volatile around. "Hotels are the first to feel the repercussions of an economic downturn. If you're a condo-hotel owner in 2006, you may be enjoying the fruits of a rolling economy. But if there is a downturn, very shortly that room will be empty.

"The value of your condo-hotel could be negatively impacted, and it's too early in the market cycle to know whether there is a secondary resale market or how much condo-hotels are likely to appreciate over time."

If the hotel runs into financial difficulty, the condo association "could potentially be exposed to a cash call," Charre says.

For the would-be purchaser, one of the most frustrating aspects might be that the developer of a condo-hotel is prohibited by securities law from revealing the kinds of information buyers would most like to know -- such as how many nights they can expect the room to be rented out, what the forecast is on rental rates, and how a property's performance compares with others in its geographic area.

That's a dilemma the newly minted National Association of Condo-hotel Owners, or NACHO, hopes to resolve. The organization serves both buyers and sellers.

"Condo-hotels are in fact the best secondary vacation-home purchase available today," says Dante Alexander, NACHO president and CEO, and a former executive with Starwood Hotels & Resorts.

To help buyers make informed decisions, NACHO plans to publish "categorical ratings that can only be viewed by members," he says. Criteria include:

* Complex and unit maintenance.
* Ability of the development team to complete the project.
* Likely profitability of the hotel.
* The hotel's long-term competitive sustainability.
* Unit economics -- what a buyer can expect to pay in insurance, taxes, homeowner association fees and other costs.

As is true of all new ventures, it takes time to work out kinks that may be difficult to foresee. Before delving into this market, prospective owners should be clear about what they're looking for. Condo-hotels don't make good investment properties. They do make relatively affordable second-home options in some very expensive locales -- with an opportunity to recoup some of the expenses.
source from www.bankrate.com