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Developer Plans How to Best Establish Rental Program for His Condo Hotel

Question

 I'm a developer in Gaum and I am currently deciding on an operator for my to-be-built condo hotel. With regard to the distribution of rental income in the condo hotel's rental program, is it possible for the operator to divide the revenue evenly among unit renters given equal conditions of rooms? Would there be any legal liabilities involved with this?

Joel's Response


What you are talking about is pooling revenues. In the U.S., this is not allowed by SEC regulations. Outside of the U.S., however, this is not an uncommon practice. Of course, I know nothing about the Guam market, and I am not qualified to give any legal information. We are not lawyers, and you will definitely need one more than you need the opinion of a Florida real estate broker.

 

Question

 Let me give you a specific example. If I had three units and two units rooms were not rented out, wouldn't the two unrented rooms be bearing all of the risk of the investment, although the conditions of the units are the same?

Joel's Response


Yes, and that is the logic for pooling revenues. The flip side is this. Let’s say that you have two identical studio units for sale. They are on the same floor, and they are the same size. However, due to the property' s layout, one unit is the closest to the ocean and gives panoramic views of the ocean. The other unit is furthest from the ocean, and you can only see the ocean if you step out on your balcony and twist your neck at a 105 degree left angle. And because of this one difference, the first unit will sell for $720,000 and the other will sell for $565,000.

If you pooled revenues, the smart investor would buy the $565,000 unit, assuming he will get the same rental income as the most expensive unit, because it is based strictly on the square footage of the unit, or the unit type, (studio, in this case).

However, if you did not pool revenue, then the buyer would want to get the best unit available, price notwithstanding, because he will only get rental revenue if his specific unit is rented out. The rent revenue that is achievable will have a lot to do with the quality views of the unit. What I mean by that is, logically, the unit with the better view unit can command a higher rate than the other room with the poorer view.

Having said all that, in order to be fair to those people considering the purchase of the cheaper units, the developer may institute a rental program based on a strict rotational basis, such that every studio, no matter where it is located, will be rented out as much as every other studio unit that is available to be rented and that is managed by the hotel.

Rental programs are complex. You will definitely want to work with professionals and consult with an attorney before establishing your program's specific parameters.



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

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