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Hotel-Condo Hybrid Growing Trend in Florida, Nationwide

By Mike Schnieder, Associated Press Writer

(Reprinted from USA Today)

ORLANDO – Denver attorney Jacques Machol loves the hotel amenities he gets when he stays at the Fountainbleau in Miami Beach: room service, housekeeping, linen service and a complimentary breakfast.

Only Machol isn’t a hotel guest. He recently paid $735,000 for his 1,100 square-foot suite.

Joel Greene, a condo hotel broker, gets behind a model of the W Hotel in
Fort Lauderdale, currently under construction. J. Pat Carter, AP

The hybrid concept of a luxury hotel that sells some of it units as condominiums has become one of the most popular trends in the industry in recent years. Condo-hotels in the past two or three years have expanded beyond traditional markets in ski resorts or Hawaii and into other tourist destinations such as Orlando and Las Vegas. Projects also are under construction in urban centers like Atlanta, Chicago and New York.

Hotel developers like the concept because they spread their financial risk among the future condo unit-owners. Individual condo owners like it because they enjoy the resort-style luxuries, and in many cases the hotel rents out their units when they’re away.

“Anything is at your fingertips,” said Machol, who gets 45% of the income when the Hilton-run Fountainbleau rents out his suite.

Smith Travel Research, the lodging industry’s leading research firm, doesn’t keep figures on the number of condo-hotels in the United States since the popularity of the concept is so recent. But the hybrid concept “definitely is the hot topic of today,” said Jan Freitag, director of client services for the Tennessee-based firm. “Every major player, the major hotel owners in the country, are looking at hotel condos, hotel condo conversions, hotel condo construction to see if it fits their portfolios,” he said.

The luxury hotel chains, including Hilton, Four Seasons, Marriott, Starwood and the Ritz-Carlton, have brought new credibility to a concept that in the 1970s was used as a tax shelter until the benefits ended in the 1980s.

“People have a lot more confidence buying into a Hilton or a Four Seasons because they know the name. They know the quality. They know it must be reputable,” said Joel Greene, president of the Condo Hotel Center in Miami, a brokerage that sells such units.

The Ritz-Carlton Hotel Co., in fact, won’t even manage a hotel anymore unless there is a residential component because of the lucrative nature of the condo-hotel concept, spokeswoman Vivian Deuschl said.

The Chevy Chase, Md.-based luxury chain first became involved almost five years ago with the concept in Washington, Boston and New York. The company recently opened condo-hotels in Dubai and Berlin.

“This is an idea that has reached a lot of acceptance,” Deuschl said.

Several factors have led to the current boom in condo-hotel projects – the improving performance of hotel companies, the recent investment appeal of real estate over the stock market, low interest rates and baby boomers approaching retirement who want to invest in a second home, said Mark Lunt, a hospitality expert at Ernst & Young in Miami.

Hotel occupancy rates dropped after the 2001 terrorist attacks, limiting the amount of Wall Street money available to developers for building new hotels. So the developers went looking for another way to finance their projects and arrived at the condo-hotel concept. For a traditional hotel project, a developer typically has to come up with around 40% of the equity; a condo-hotel development requires much less investment for the developer.

“This rage started when financing for traditional hotels dried up,” said Scott Berman, a partner in the hospitality and leisure consulting practice at Price Waterhouse Coopers in Miami.

“What’s interesting is we’re in a very favorable time for hotels. It will be interesting as traditional financing becomes more available whether this growth continues.” Nowhere has the condo-hotel concept been hotter than in Florida. An estimated 30 projects currently are under construction in South Florida. The Orlando area and the Miami-Fort Lauderdale area each could have as many as 10,000 units in the next few years. Each metro area had less than 1,000 units five years ago.

“Florida has been the market-leader in terms of supply growth,” Berman said. But the concept has risks for both the developer and the condo buyer.

The Securities and Exchange Commission considers the condo offering a “security” if income and expenses from the rental units are pooled and if a condo unit is sold to the buyer with the explicit expectation the buyer will earn money or derive tax benefits from it.

If the development is structured as a security, it can only be sold by a securities broker and it is easier for an investor to sue the developer under the SEC’s anti-fraud rules, according to Los Angeles attorney Jim Butler.

Because most current developers choose not to sell their projects as securities to avoid the SEC complications, they are prohibited from discussing with a prospective buyer the economic or tax benefits from a rental arrangement, and they can’t make projections on how much a condo unit can earn in rental income.

As a result, many buyers purchase a condo-hotel unit without all the facts. “If you’re not allowed to communicate revenue expectation, often times buyers are making a decision based on incorrect information or overly optimistic information,” Lunt said.

James Walesa, a financial adviser for wealthy clients in suburban Chicago, put a deposit down two years ago for a one-bedroom condo-hotel unit at Canyon Ranch Living in Miami Beach, which is still under construction.

Aided by his financial background, Walesa did extensive research to find out whether it made economic sense to purchase the $485,000 unit, an effort he doesn’t think the average buyer will make.

“The way they sell these things, I don’t think it’s fair to the consumer,” Walesa said. “Unless the investor gets somebody who knows what they’re doing and how to analyze this stuff, he is buying on the sizzle rather than the steak. I bought the sizzle but I was able to at least guess on the steak.”