Why Developers Build Condo Hotels

Q: If condo hotel units offer the potential of steady cash flow and appreciation, why do developers sell them? Why not hold onto them and reap all the profits for themselves?

A. For a developer, his profit, and therefore, his success, has a lot to do with leveraging his money. If a developer goes to a bank and says I want to borrow $100 million to build a hotel, they may require him to put $30 million (or more) of his own equity into the project.

In return, they will give him the balance (70%) of the money that he needs, secure in the fact that he'll have 30% equity in the deal, and if they ever foreclosed on him, they'd be getting the project back at $.70 on the dollar.

However, if the developer can go to the bank and say, I need $100 million to build this condo hotel project, and I've already pre-sold 50% of my project and have those monies in escrow, it is now a low-risk loan for the bank to make. They can loan him 50% to get the project built instead of 70%.

The developer's equity needs to be far less and therefore, he can generate more profit from his development by not tying up all of his equity.

Okay, then why if the property is a success would he want to sell off his condo hotel units and not keep them?

Well, once he has sold off all of the condo hotel units, he has probably collected 100% of the equity he had into the deal. While technically he is out of the project, he still maintains 100% of the rental income from the restaurant, spa, valet, bars, meeting space, etc.

More importantly, he still receives half of the rental revenue that comes in from the rental of your condo hotel unit. And again, he gets this income stream indefinitely without having any of his revenue tied up in the property.

Now, he can take his equity and build his next project instead of having it tied up in his first project. And so on and so on.

The above question was 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.