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Developing A Condo Hotel? Consider These Six Critical Issues

Consider these six critical issues to ensure its success.

By Joel Greene

Condo hotels are hybrid properties that have begun materializing in recent years everywhere from prime vacation destinations to mid-size cities across the U.S. and the world.

Why the sudden proliferation of condo hotels? The main reason is that they make good financial sense for the developer in a variety of ways. Construction loans for condo hotels are often cheaper and easier to obtain than hotel construction loans. Also, condo hotels allow the risks inherent in property development to be spread to the individual condo unit owners. The developer of a condo hotel can recoup much of his construction costs up front, in some cases breaking even upon completion. Plus he still retains ownership of meeting facilities, restaurants, spas, and possibly some traditional hotel rooms. Finally, if the condo hotel is operated by a major branded manager, the developer will be able to sell the units at a premium and receive a higher rate of return than he likely would have if developing a traditional hotel or condominium. Whether you’re considering developing a new condo hotel or converting an existing hotel or apartment property, step one should be a feasibility study. This detailed report will take a comprehensive look at the market, the competition, and all the elements that combined can accurately forecast a project’s potential for success or failure.

Remember: if a property won’t succeed as a hotel, then it won’t succeed as a condo hotel either. Once the feasibility of the project has been determined, you’ll have many other decisions to render with regard to making the property appeal to potential buyers and future hotel guests. Here are the six key factors to consider in the development process:

1) Location – Everyone knows location is key in the success of any real estate project. The locations that work best for condo hotels are those on prime land – oceanfront, overlooking a golf course, near theme parks, convention centers or casinos, or in the heart of a busy city.

That’s why cities like Miami Beach, Fort Lauderdale, Myrtle Beach, Orlando, Las Vegas and Chicago lead the country in condo hotel development. Properties in these areas tend to do a healthy business trade even in adverse economic times.

2) Franchise – The condo hotel operator is critical to the success of the property. A condo hotel with a name brand like Ritz-Carlton, Hilton, Starwood, Hyatt or Trump is likely to generate more revenue than a non-brand because it can charge higher room rates, benefit from worldwide advertising and operate a centralized reservation system.

Additionally, having a well-known named franchise will give your condo hotel sales a boost, as buyers get the pride of ownership that comes with “owning a piece of a Trump or a Ritz .”

3) Amenities – Choosing the right amenity mix for a condo hotel is important in attracting potential owners and renters. Which amenities are worth the expense to develop and operate? Upscale condo hotels need to offer several dining options, a full-service spa, fitness center, concierge service and more.

Some properties even use their most outstanding amenity as the means to differentiate themselves in the market. It becomes their unique selling proposition. That amenity may be an indoor water park, a golf course, an onsite casino, a brand-name spa, a celebrity endorsement, or a well-known restaurant or night club.

4) Unit Features – Most condo hotel units look more like condos than hotel rooms. Owners will evaluate the rooms by asking the following questions: Does it have enough square footage? Does it have a bedroom separate from the living area? Does it have kitchen facilities? Does it offer an appealing view? Is it designer furnished? Does it offer any owner storage? Is the price competitive? Can I get financing for it?

5) Annual Returns – Today most buyers understand that condo hotels should not be considered investment vehicles. Nonetheless, they want their unit to generate at least enough revenue to cover their maintenance and real estate taxes as well as some or all of their mortgage payment.

Most buyers will want to feel confident that the hotel, its management, location, amenities, niche, etc. are capable of drawing enough business that the property will achieve sufficient occupancy rates and be able to charge an average daily rate that allows it to be successful.

6) Appreciation – Will the condo hotel units increase in value? While condo hotels can only be sold as real estate and a lifestyle in accordance with SEC regulations, buyers want to know that they’re investing in an appreciating asset. Even if the revenue they make from placing their unit into the rental program will only serve to offset their costs, they hope to make a profit when they sell.

Developing a condo hotel is no get-rich-quick scheme. The properties that succeed are those with carefully thought-out plans that appeal to buyers and then over-deliver on their promises. Condo hotel developers who “do it right” create a win-win situation in which they, the unit owners and the community in which the property is located all benefit.

Joel Greene is the CEO of Condo Hotel Center located in Pembroke Pines, Florida, which specializes in the sale of condo hotels. If you are considering developing a condo hotel, Joel can provide expert advice and industry contacts to assist with feasibility studies, brand selection, financing and marketing of condo hotel units. Contact Joel (no cost, no obligation) at info@CondoHotelCenter.com or call (954) 450-1929 .

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