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Homeowners Embrace a Unique Arrangement: Condo Hotels as Second Homes

Staff Reporter of The Wall Street Journal
Reprinted From The Wall Street Journal Online

NEW YORK — Vacation-hungry Americans, disillusioned by the time-share experience but desperate to escape to a second home, have begun turning toward luxury condominium-hotels for refuge.

And a growing number of big-name hotel companies, such as Hilton Hotels Corp., Marriott International’s Ritz Carlton, FelCor Lodging Trust and Four Seasons Hotels Inc., are eager to accommodate them.

“This is the most affluent generation to approach retirement, and these people are well-educated, well-traveled and demand comfort,” said Aubrey Ferrao, president of Gulf Bay Group of Cos., which is developing a luxury hotel-condo at Marco Island near Naples, Fla.

Condo-hotel units are sold as condominiums, but managed by the hotel. Different from time-shares, owners can turn the units over to the hotel operator to rent out when they’re not there and receive rent. Generally they would share the rent revenue on a 50-50 basis with the hotel – a feature that can help them pay off a mortgage sooner.

The rental option also allows owners to take in extra bucks rather than boarding up their apartments for six or more months a year and gives them access to many hotel perks – ranging from room service to saunas – while they’re living in their units.

But condo-hotel owners also face certain restrictions: Forget any personal touches or outrageous furnishings as owners must comply with hotel guidelines when installing furniture or other decor. And owners cannot fly off to their vacation home on a whim because most must sign contracts with the hotel operator stating precisely when the apartment will be available for rent each year.

Then there’s the risk that a Motley Crue-like rock band or partying teenagers on Spring Break could wind up renting and subsequently trashing that cherished room.

Appealing To The Homeowner in Us All

Still, for many buyers, the idea of owning rather than renting or buying an ownership share was the clincher.

“I like to own and you can’t control it if you don’t own,” said Jim Creech, who owns two condo-hotel units at Myrtle Beach and has no interest in timeshare, leasing or rentals. (The Myrtle Beach development is a joint venture project between FelCor and Hilton Hotels Corp. (HLT)).

Creech, who lives in Benson, N.C., and recently retired at the age of 50, said tax breaks associated with mortgages and depreciation, as well as the cash flow from renting out the unit have made condo-hotel units a profitable venture. Also, he said, the units have appreciated, offering him even bigger returns when he sells. A hotel-condo unit he purchased for $192,000 in 1994 is now selling for $300,000, said Creech.

And demand appears to be growing.

Creech said he wound up having to buy special lottery tickets at $5000 a pop just to get the chance to make a pre-construction bid for a condo-hotel unit being built in the newest development at Myrtle Beach. “There were 370 lottery tickets for 200 units,” with the units being sold about two years before construction would wrap up, he said. “I paid $262,000 for a 3-bedroom unit, and at closing, similar units were selling for $400,000, he said.

Steven Perricone, a restaurant owner in Miami, purchased a junior one bedroom at the Ritz Carlton, Key Biscayne in 1998 – more than two years before the development is slated to open. The idea of owning a vacation property that has all the chi-chi services of a high-quality hotel was too good to pass up, he said.

Condo Hotels Go Global

Smaller, less lush, condo-hotels cropped up in South Florida in the 1980s, but demand waned when the Tax Reform Act, which snatched away many of the lucrative tax breaks that had attracted buyers, was passed in 1986.

Louise Sunshine, president and chief executive of the Sunshine Group Inc., a marketing group, brags she was the first to begin peddling a five-star luxury condo-hotel with the rollout of Trump International Hotel & Tower at 1 Central Park West in Manhattan in January 1997.

Since then, Sunshine has been selling units in a Ritz Carlton condo-hotel in Key Biscayne, Fla., and “we have three or four others on the drawing boards all on a five-star luxury level.” Details on the latest developments, to be located in Palm Beach, Fla., Las Vegas, Los Angeles, London and New York, will be unveiled in the next six months, she said.

“We think this is a very good product type and one that has an unlimited future and broad market appeal,” said Sunshine. “There is a huge demand,” she said.

For hotel owners and operators, the benefits are three-fold:

  • It’s often easier to get financing for condo-hotels than pure-play hotels;
  • Marketing costs are significantly lower than for time-share units;
  • Condo-hotel units offer additional hotel room inventory.

Ritz-Carlton Hotel Co., a unit of Marriott International Inc. (MAR), is taking part in a condo-hotel development in Key Biscayne, Fla., which is slated to open in March 2001. Although Ritz-Carlton already runs several hotels that include a residential condominium component, the Key Biscayne resort will be the first that gives residents an option to turn over their units to Ritz Carlton to rent when they’re not there.

The resort will include 188 condominium units and 302 regular hotel rooms, with condo prices ranging from the low-$100,000s to more than $800,000. All units were sold by March 2000 – a year before the project’s official open.

The project’s developer, GB Hotel Partners, found financing easier for a condo-hotel than a traditional hotel because many lenders were worried about overbuilding hotels.

Also, said Doug Weiser, GB Hotel’s president, by including a residential component within the hotel, the company was able to sell the units and use the proceeds to lower the debt on the overall.

Weiser preferred a condo-hotel over a timeshare project. “The Key Biscayne market is so strong that we thought it would be easier just to sell the units once and be done with it than to sell them 40 or 50 times through time-share,” he said. ‘

Weiser estimates advertising and marketing costs eat away anywhere from 35% to 50% of the sale price of a time-share unit compared with only 10% to 13% of the price of a hotel-condo unit.

Foreign Owners Know the Concept

The condo-hotel concept has been a popular fixture in Europe and Latin America for many years, said Weiser. About 60% of the buyers in the Key Biscayne project are from outside the U.S., he noted.

Among the big hotel operators, Phil Kab, vice president of development at Ritz Carlton, doesn’t rule out further condo-hotels developments, although none are currently on the books. He said the company will likely monitor the Key Biscayne project to determine if the concept should be expanded.

Hilton Hotels (HLT) inherited its partnership with FelCor on the project in Myrtle Beach when it acquired Promus Hotels Corp. in 1999, and the company is not seeking other condo-hotels.

“We’re not in the real estate game,” said David A. Sherf, senior vice president of real estate and investment analysis at Hilton, “We’d rather own the project ourselves than sell it.”

By contrast, FelCor Chief Executive Thomas Corcoran is bullish on the condo-hotel concept and has little interest in time-share.

“We like dealing with one owner,” he said.

Bill Stuckeman, who heads up development for FelCor, said demographics are working in FelCor’s favor as aging babyboomers begin inheriting their parents’ wealth and more start seeking out a “high-end” second home.

At Myrtle Beach, all 200 units in the latest tower that opened in July were sold out by the Spring of 1999, noted Corcoran. Plans are in the works to begin selling units in a new 267-unit tower, which will open in the Fall of 2002.

Aside from the Myrtle Beach project, which includes an Embassy Suites hotel and more than 1,100 condo-hotel units located in high-rise towers, low-rise buildings and villas scattered across a 145-acre site, Corcoran is already scouting his next condo-hotel site.

Gulf Bay’s Ferrao, who has built 14 condominiums in the Naples, Fla., area, had originally planned to only construct a small 250-seat restaurant and beach club at Marco Island that residents from his nearby Fiddlers Creek development could access. But a nasty community fight that delayed the groundbreaking invoked Ferrao’s wrath, and when he won the legal battle, he decided to build not only restaurants, but a full-blown hotel-condominium and 350-car parking structure.

About 75% of the 103 units at the Marco Beach Ocean resort complex have been sold since marketing began in the fall of 1998, with prices ranging from $260,000 to $575,000. The project is expected to be complete next August.

Donald Trump describes his lone condo-hotel venture at Trump International “a great success” and said he’d consider similar developments if the “right opportunity in the right location” came along.

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