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Condo Hotels: What to Check Out Before You Check In

 By Annika Mengisen
TheStreet.com Staff Reporter
7/24/2007

About 20 years ago on the high seas of south Florida’s real estate market, many dated condo hotels lacked quality and prestige. The scourge of changing tax laws made them less attractive investments and many conversion projects were sunk.

In the late 1990s came The Mutiny, an apartment building that took over the condo hotel concept, according to Joel Greene, president of Condo Hotel Center, an Internet real estate broker.

The owners of the apartment building in Miami gutted their property and turned it into a condo hotel or condotel, reintroducing the concept to the area and generating a pirate’s plunder for its buyers, with unit prices increasing 10 times from beginning to sell-out. Other developers began following suit, revamping old hotels or constructing them brand new. “Today there are approximately 60 or more condo hotels at various stages of development in Florida,” says Greene. “By 2008, there will be several hundred condo hotels, located throughout the U.S. and around the world.”

But before eager adventurers raid this ship, they must be aware of what they are getting into, says Greene, or be fooled by a treasure that falls short of the legend.

Condo Fever A condo hotel, as defined by Greene, is a large, usually high-rise property located on prime real estate and operated by some of the biggest hotel names like Trump (TRMP – Cramer’s Take – Stockpickr), Marriott’s (MAR – Cramer’s Take – Stockpickr) Ritz-Carlton, Starwood (HOT – Cramer’s Take – Stockpickr) and Hyatt. It is usually used as a second or vacation home.

Unlike a traditional hotel residence, however, the condo hotel unit allows individual owners to place their unit in the hotel’s rental program when not in residence. The revenue generated from the rental program is split — usually 50/50 — between the hotel operator and the owner.

Despite the slowing real estate market, condo hotels are continuing to thrive, largely because 74 million baby boomers are looking for places to spend their money. “Condo hotels are part of at least 10% of every hotel project currently being built,” Greene notes. Condo Hotel Center is contacted by at least three or four new developers each week.

It’s a win-win situation for all parties concerned,” says Greene. But beware if you believe you’ll reap a queen’s ransom, because you’re in for a disappointment.

Buyer Basics A condo hotel unit is a hassle-free investment on prime real estate. When in residence, five-star amenities are at the owner’s fingertips; when the owner is not around, the hotel maintains the property. Perhaps most enticing, however, is the ability to generate income through the hotel’s rental program, helping offset ownership expenses.

To maximize profits from appreciation, buy your unit in preconstruction stages, Greene advises. Early buyers of the Trump Chicago condo hotel, for example, saw a 95% increase in the selling price before the building was 75% sold out, he notes.

But if profit, not pleasure is your concern, consider becoming a landlord.

Condo hotels are not registered as securities and can’t be sold as investments, says Andrew Robins, partner in the lodging and gaming practice at Proskauer Rose. Buyers should view them as vacation spots with benefits, not buried treasure.

Generally, your unit will generate some revenue to offset ownership costs, but don’t expect sizeable annual returns. Under Securities and Exchange Commission regulations, developers can’t guarantee occupancy rates or revenues, so a premium brand name will generate higher rental income, but the accompanying pricey operating expenses can surprise and frustrate residents.

“Growth makes me cautious because not every hotel will work as a condo hotel,” says Howard Nussbaum, president and CEO of the American Resort Development Association. Appreciation depends on the destination, he says, so do your homework.

Developer’s Duel For the developer, condo hotels make good financial sense because they can recoup much of their construction costs up front, even breaking even upon completion of the property, says Greene.

The developer receives approximately 50% of the revenue form the condo hotel rental program and retains whole ownership of the property’s meeting facilities, spas, lounges and restaurants.

But despite the allure, hire a good attorney, Nussbaum cautions. “The recent proliferation [of condo hotels] has made for a level of popularity and desire that creates the opportunity for mistakes,” he says.

The biggest challenge for developers, says Robins, is how to reconcile the need of a branded hotel to control the guest experience with a unit purchaser’s typical rights.

The legal structure varies by state. In Florida, for example, the condo unit owner has very little input as to how the building is maintained and operated in order to assure that the hotel standard is upheld. The developer retains control over the look of the building in carpets, lobbies and hallways.

“The theory behind the [Florida] model is that the buyer of the unit doesn’t want to buy just any condo unit … but rather a brand [that meets] certain standards in terms of physical and operational qualities of the unit and building,” says Robins.

In the New York market, says Robins, the level of control a condo association retains over common areas can’t be altered in most cases, and unit owners have more control over operating expenses. “There is a lack of certainty of the brand’s ability to really control the standards,” says Robins, but New York is such an attractive market that developers and branded operators are willing to take that risk.

Most importantly, developers everywhere must avoid focusing on the economics of the rental program, lest they violate SEC regulations.

Prime Land and Hot Sand The risks involved for all parties aren’t stopping the wild crusade of condo hotels around the globe with condos in Mexico, Panama and Costa Rica leading the way because of their attractive price ranges. A Trump studio unit in Fort Lauderdale, Fla., for instance, costs about $700,000 but a similar sized Trump unit in Panama City may only cost around $300,000.

“Trump is the number one developer [in the business] ,” says Susan Greene, marketing director for Condo Hotel Center. “His stuff is just gold.” The 423 residences in Trump Tower Waikiki Honolulu sold out in one day.

Some of the best deals today are found in Dubai, says Joel Greene, “where theme parks that will total more than twice the size of Orlando’s Walt Disney World are currently under development.”

In the U.S., Greene recommends Las Vegas, specifically Vdara, a planned condo hotel in the MGM Mirage (MGM – Cramer’s Take – Stockpickr – Rating) CityCenter.

Koloa Landing, a residential resort community in Kauai, Hawaii, will complete its 323 resort condos by 2009. “We’re trying to raise the bar as far as luxury,” says sales director Jeff Skinner. The property will be a refreshing change from the dated hotels in the area, and Skinner predicts 80% of the residents will participate in the rental program.

And deeded fractional ownership residences, like The Ritz-Carlton Residences, combine residency with the legendary services of the Ritz Carlton Hotel Company, including personal chefs and concierge services.

“Instead of paying $5 million for a slope-side vacation home in Aspen, this new breed of buyer is purchasing a three-bedroom residence at the base of the mountain for approximately $300,000 and using it for four weeks or more a year,” says Ed Kinney, vice president of corporate affairs and brand awareness for the Ritz-Carlton Club.

In short, if you want a prime vacation spot without hassle or strain, a condo hotel is smooth sailing — just leave the treasure map at home.