THE CONDO HOTEL REPORT - TWO PRONG STRATEGY

South Florida's Condo Hotel Developers Target Foreign Investors, Short-term Residents

Reprinted from The Daily Business Review
By William Plasencia
August 29, 2003

For some people pampering is not a luxury, it is a necessity. These same folks who populate South Florida's posh beachfront hotels part of the year are now regular fixtures at a new type of year-round resort - the condominium hotel.

"South Florida is the king of condo-hotels just like Orlando is the king of time-shares," said Joel Greene, vice president of North Miami Beach-based real estate firm Condo Hotel Center. Greene estimates there are between 16 and 20 condo-hotel projects at various stages of development from Palm Beach to Miami-Dade counties - and more are on the way.

The developers and management companies behind the projects are familiar ones: Four Seasons, Sonesta Beach, Ritz-Carlton and Hilton. Each is either planning or operating opulent high-rise hotels that in some cases have separate residences that share the hotel's amenities while keeping a Chinese wall between guests and full-time residents.

Other condo-hotels are following a more traditional formula of selling units to individuals or groups of investors who in turn are allowed to enjoy the unit part of the year while the rest of the time the hotel room is let out to guests. In the latter arrangement, 50 percent or more of the rental revenue typically is shared with the owner to help defray costs, Greene said.

Ricardo Dunin, chief executive of Flagler Holding Group, the developer of the Mutiny and Mutiny Park in Coconut Grove, said condo-hotels make "business sense to the developer in two instances: The first is that it's a type of property that has a lot of appeal to off-shore buyers, and you can use that knowledge as an effective way to market the units. The second is if the developer wants to keep the hotel, this is a way to finance the hotel."

The Mutiny Park is part of the Sonesta Hotel & Suites at 2889 S. McFarlane Road and the Mutiny is nearby at 2951 S. Bayshore Blvd.

Before arriving here, condo-hotels were popularized in South America, particularly in Brazil, where dozens sprang up in the major urban centers of São Paulo and Rio de Janeiro during the past decade. Indeed, these so-called "apart-hotels" had become so popular an investment vehicle for real estate-crazed Brazilians that many unscrupulous developers simply slapped a hotel sign on existing condos and charged investors hefty sums to buy in. That money later was lost when the market became over-saturated with hotel rooms, witnesses recounted.

The problems turned acute after the Sept. 11 terrorist attacks and the subsequent global slowdown in tourist traffic that, for example in São Paulo, drove occupancy rates below 30 percent and forced many hotels to close.

"Not all condos can be converted," Dunin warned. "You need to be concerned that the building works as a hotel and then you can 'condominium-ize' it."

That's because unit sales are fueled by the hotel's amenities and once most of the units are sold the real money comes from successfully running the hotel. It is an expensive proposition, say experts.

Beachfront condo-hotels such as the Trump International in Sunny Isles Beach or the Four Seasons in Miami paid hefty price tags for their land. The large public spaces and amenities add to the costs.

Marketing them, too, can be a challenge. Buyers looking for larger units or customized spaces may be disappointed by condo-hotels. The units themselves are uniform, in many cases, to allow them to fit into a hotel rental scheme. Though larger than a regular hotel room, most are smaller than what might be found at other condos and they come already furnished. Some, such as the Mutiny, allow the owner to lock-off a section of the unit and rent out the rest.

Enrique Soltanik, the developer of the Sunny Isles Beach condo-hotel Fantasy of the Ocean, on Collins Avenue, said it is crucial that the condo-hotel truly operate like a luxury hotel. Otherwise, "people won't want to stay in it," said Soltanik, whose company plans to break ground on the project by year-end. He is optimistic that the hotel, which will be managed by Hilton, will have an occupancy rate of 70 percent to 75 percent for much of the year.

Brian Collins a principal with Millennium Partners, the developer of the Four Seasons, believes that the condo-hotel concept "has really only worked in South Florida." That is because the area draws visitors year-round, keeping hotel rooms full for the most part.

A condo-hotel, he said, is particularly attractive to Latin Americans who often travel here for both business and pleasure and do so with greater frequency than, for example, Northeasterners, who may vacation here two or three weeks out of the year.

"For some, from an economic standpoint, there is not a lot of difference from having a condo-hotel unit and having a fractional or a time-share," Collins said. "Putting the unit in a rental program helps to defray the cost to the owner." He admits the outlay of cash to purchase the condo-hotel unit "is a lot more. But the ability to put it in the rental program should defray that to a large extent."

To be sure, at the Four Seasons, where unit prices start at $700,000, the rental program would have to be particularly robust to prove Collins right. Unlike most condo-hotel projects, the Four Seasons shares 80 percent of the rental income with the unit owner. He claims, however, that the generous sharing arrangement is not what drives unit sales.

"The economics just made sense," Collins said. "People aren't buying because of the 80 percent - it's driven by their desire to be in our building. So when buyers ask me whether they should buy a studio or a one-bedroom and which would generate the most income for them I say, 'I have no idea.' I tell them to buy whatever they will be the most comfortable living in when they visit Miami."

His approach seems to be yielding results. The Four Seasons is about 50 percent sold and this week it received a temporary occupancy license that will keep it on track to open Oct. 1.

North, on swank Palm Beach, buyers are spending even more on condo-hotel units within the historic Brazilian Court Hotel. Blocks from Worth Avenue and the beach, the units range from 500 to 1,500 square-feet and cost $1,100 to $1,500 per square-foot. With the hefty price tag comes on-premises access to a Frédéric Fekkai salon and a restaurant run by chef Daniel Boulud. [If you have to ask who they are, you can't afford living there.]

Martin O'Brien, president of New York-based condo-hotel management company The Page Group, said the Schlesinger family, the hotel owners, "backed into" the condo-hotel concept after receiving high demand for smaller units at another property they were renovating.

"These were people who wanted a Palm Beach address but would settle for 600 square feet for the two months out of the year that they spend here," O'Brien said.

The town of Palm Beach, too, influenced the decision by demanding that the Brazilian Court remain first and foremost a hotel, he said.

Municipalities may play a bigger role in the development of condo-hotels that by their nature need the same critical mass as a regular hotel in order to be successful.

In Fort Lauderdale, the modest-sized condo-hotel The Atlantic is only 15 stories high, for example. Its 124 units start at 570 square-feet and cost $380,000 up to $3.8 million. Construction on The Atlantic, which will be managed by Starwood Hotels & Resorts Worldwide, Inc., is under way and scheduled for completion by December.

Back in Miami-Dade County, the Ritz-Carlton Key Biscayne, which has been in operation since 2000, is sold out and also doing well, say those familiar with the property. The condo-hotel, however, took a different tack than most: the Ritz has no in-house rental program. Instead, residents are given access to the hotel's amenities and they are free to rent their property on their own if they wish.

Claudia Lewis, a broker with Coldwell Banker Premier Realty International, Miami, says the lack of a rental program has not slowed unit re-sales in the building, whose smallest units are 900 square-feet for a one bedroom, up to 5,000 square feet.

"We're selling in excess of $500 a square foot for waterfront in the residential tower," she said.

A second tower at the Ritz-Carlton is nearly sold out, she added, with a surprising number of buyers coming from the local area. "We thought that a large part of the buyers were going to be foreign buyers and what we got were a lot of local buyers that were scaling back and selling there larger homes in the Gables or in Coconut Grove. The core of the building is filled up with families."

On Brickell Avenue, marketing is focusing heavily on businesspeople who travel frequently to Miami. Along with the Four Seasons, the new Espirito Santo Bank office building will devote several floors to condo-hotel units. The hotel will be managed under the Hilton Conrad luxury hotel brand.

Broker and real estate consultant Greene said he thought more condo-hotel projects would be in the pipeline already if project financing had not been so expensive to obtain. At present, many banks are asking developers to put down 30 percent or more of their money.

"We are going to see more of these," Greene said. What could slow the pace? The same things that affect the components of condo-hotels could.

"If the economy goes down or if gasoline prices go up, or if you get a Sept. 11 and people get concerns about traveling, then you are going to be negatively impacted - all these things affect the market," he said, adding that these factors keep developers from guaranteeing buyers any particular return on their real estate investment.

For now, industry insiders concur that the spate of new building will continue unabated. Still, Flagler Holding Group's Dunin warns of another danger: "If you have excess hotel rooms you would have a problem. Condo-hotels go hand-in-hand with hotels and you may not overbuild condo-hotels, but you can certainly overbuild hotels. You cannot look at these projects individually, they are all interconnected."