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Trend: Hotels Offering Condo Options

BY John Handley
May 22, 2005 (Reprinted from The Chicago Tribune)

CHICAGO — The hotel room of your choice always will be waiting for you — if you buy it.

The latest real estate wrinkle imported to Chicago is the hotel-condo. Five downtown properties have announced they are going the hotel-condo route. Or, some call them condo-hotels. The product is the same either way.

Basically, you buy a room in a hotel, stay there when you’re in town and receive payments when others use it.

Popular in New York, Miami and some other vacation destinations, the concept allows buyers to own a second home without worrying about upkeep.

Of course, eliminating those maintenance problems is not free. Hotel-condos tend to be more expensive than regular condos, daily fees are charged when you stay in your own unit, mortgages could be slightly higher and you have nothing to say about the decorating.

While downtown Chicago does not radiate the vacation image of Miami, it has blossomed in recent years as a dynamic place to live and play. Suburbanites and out-of-towners who want a downtown pad for limited use might see this as an alternative to buying a regular condo.

The hotel-condo newcomers in downtown Chicago are:

  • The Hotel Blake
  • Aldens Hotel
  • Hotel 71
  • Trump International Hotel & Tower
  • The Elysian

The Blake, Aldens and Hotel 71 are existing properties being converted for hotel-condos, while the Trump and Elysian have yet to be built.

“Chicago is our all-time favorite city,” said Dennis Winkleman, explaining why he and his wife, Judy, bought a hotel-condo at the Elysian, a 60-story building that will have 53 condos and 183 hotel-condos when completed in late 2007.

“We had thought of buying a condo, but it would have no hotel amenities and no off-setting income to defray costs. The idea of a hotel-condo sounded intriguing because it might generate enough income to pay the property taxes,” said Winkleman, a 54-year-old executive vice president at a mining equipment manufacturer.

He said they will use the hotel-condo one or two weekends a month. “We come for the Chicago Marathon every year and to festivals on the lakefront,” he said.

He added that the unit could be “a great weekend house when we retire, probably to the Southeast.” The Winklemans now live in Menomonee Falls, Wis.

“We went into it as a break-even investment. If we sell it after 10 years and it appreciates, so be it,” Winkleman said.

David Pisor, president and CEO of the Elysian Development Group in Chicago said “Hotel-condos represent an evolution of time sharing and fractional ownership.”

“With time sharing, you buy time, not property. Fractional ownership means you own just part of the property. But hotel-condos are whole ownership,” Pisor explained.

“A hotel-condo is the third or fourth home of many buyers. They can be used for both vacations and for business. Basically, it’s a lifestyle decision because of all the hotel amenities, including restaurants, housekeeping and room service,” Pisor said.

He said contracts have been signed for 95 of the 183 hotel-condos. Called hotel suites, the units on floors 17 through 27 will range from 608 to 1,264 square feet and are priced from $460,000 to $810,000.

Buyers will be charged a daily use fee of $75. They have the option of using their unit 14, 35 or 90 nights a year. The percentage of rental compensation decreases with the amount of use, from 42 percent to 18 percent.

Noting that Baby Boomers are the prime market for these units, Pisor predicted success for the concept because “Chicago is a destination, a dynamic city where people want to spend time.”

In South Florida, a hotbed of hotel-condos, Joel Greene is an expert in this type of real estate.

“Condo-hotels aren’t sold as a real estate investment,” said Greene, president of the Condo Hotel Center, a North Miami-based brokerage firm specializing in the sale of hotel-condos. “It would violate SEC rules for salespeople to give estimates on the return.”

Even so, he said many people buy units as investments.

“About 90 percent of all buyers plan to use them no more than two to three weeks a year,” Greene said.

He said one of the advantages of hotel-condos is that “they are decorator ready. No furnishing is necessary. Most units are equipped with a kitchenette or full kitchen, but most people don’t want to cook on vacation.”

Greene said the average hotel room is 300 to 350 square feet, but hotel-condos are larger.

“Financing is readily available with 20 percent down. Mortgage rates, though, may be 1 point higher because of slightly more risk,” Greene said.

In Chicago, the three existing hotel-condo buildings are owned by Falor Cos. and will be managed by Kor Hotel Group in Los Angeles.

Eighty percent of hotel-condos are bought as second homes and 20 percent for appreciation and tax benefits, according to Robert Falor, president and CEO of his Chicago-based firm.

“This is the way to own a second home without the hassles. But it’s not for everyone,” said Falor, who also has seven projects in South Florida and plans to expand to Boston, Los Angeles, New York, San Francisco and Washington, D.C.

Policies vary from project to project, with some developments limiting the number of days an owner may use the unit, while others don’t require the units to be rented at all.

Falor said 97 percent of buyers have put their units in the hotel rental management program. These buyers are limited to using their units a maximum of 45 days a year. The rest of the time it goes into the rental pool. The buyer receives 45 percent of the income and the developer, 55 percent.