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Converting Existing Hotels Into Condo Hotels

Question

Why are so many pre-existing hotels converting to condo hotels? What are the benefits for the developer and the hotel property itself?

Joel's Response


Many developers are converting their existing hotel or resort to condo hotel as a way to improve their property and to generate revenue.

If a hotel is converted to a condo hotel, typically this decision involves adding in new elements that would make the units attractive to end buyers. These would include spas, restaurants, bars, gyms, concierge services, etc. A property with all these amenities will command higher average daily rates and higher occupancy rates than ones lacking these amenities and services, thereby increasing revenue. If a developer has an older hotel that is losing ground to its competitors, he may need to update the hotel or bring in a franchise to stay competitive. This could cost significant dollars. Selling off units as condos to individual buyers allows him to finance the upgrade without increasing his debt or putting up more of his own money. A conversion could also be a potential exit strategy for the developer. A hotel may be sold off unit by unit for more than an outright sale of the whole property, and the developer can still retain his 50% income stream and hire a professional management company to operate it for him. In addition, if he chooses, he could sell that income stream to another investor now or in the future. Finally, another reason why we're seeing conversions of existing hotels and resorts to condo hotels is simply that there is limited desirable land on which to build new structures. For example, a developer wanting to create an oceanfront condo hotel in say Miami Beach, must buy an existing hotel. He is then faced with the decision of demolishing the old building and starting fresh or simply renovating and upgrading the existing structure. The latter strategy is a less costly and much quicker option.

Question

Is there any benefit to the individual buyer when it comes to buying into a conversion property versus a newly constructed condo hotel?

Joel's Response


There are some benefits to the buyer. For one, the buyer gets to see what he's buying. Even if the existing hotel or resort will undergo a major renovation or upgrade, the buyer still can get a sense of what the basic structure will look like.

With new construction, because most sales take place in the pre-construction phase, the buyer must depend on renderings and the developer's description of his plans to make their buying decision.

Another benefit is the speed with which a conversion can be done. Most conversions take six to nine months to complete. A new construction condo hotel could take up to two years. Someone who wants a vacation home NOW, or who has a 1031 Exchange deadline to meet, will find conversions to be an appealing option.

The above questions were submitted via e-mail by a visitor to www.condohotelcenter.com. The answers were prepared by Joel Greene, a licensed real estate broker with Condo Hotel Center which specializes in the sale of condo hotel units and fractional ownerships in private residence clubs.

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