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Hot Properties: Condo-hotel Hybrids

Look for this booming trend to continue.

Reprinted from Real Profits newsletter.

Demand for condo-hotels continues to escalate as the performance of hotel companies keeps improving post 9-11, investors seek alternatives to the stock market, baby boomers approach retirement and seek second homes, and interest rates remain low.

A condo-hotel is a combination condominium and hotel. Individual buyers purchase the rooms or condos. They can use them when they want and place them into the hotel’s professionally-managed rental program when they’re not there. The rental income generated by their condo helps offset ownership costs. As real estate, the units offer the potential for appreciation.

Unlike time-shares, condo-hotel units are purchased, and the buyer receives deeded whole ownership. With time-shares, buyers purchase only a specific week at a property.

Upscale Properties in Desirable Locations

Typically, condo-hotels are located in high-rise luxury hotels and resorts in popular vacation destinations such as Miami, Orlando, Las Vegas and Chicago. They feature four- or five-star amenities such as full-service spas, fitness centers, concierge services, business centers, and fine dining restaurants.

Most condo-hotels are operated by big-brand management companies such as Hyatt, Hilton, Ritz-Carlton, Marriott, and Trump. Usually they are located on prime property overlooking an ocean or golf course, near tourist attractions, or in the heart of a booming downtown. Prices range from $250,000 to more than $1 million.

How They Work

According to Joel Greene, president of Condo Hotel Center, “The rental split varies among properties, but typically after a 10 percent management fee, the owner receives approximately 50 percent of the revenue generated while the balance goes to the hotel developer.”

As part of the rental agreement, the developer pays most operating expenses for the restaurant, lounge, spa, and other amenities, as well as staffing and property maintenance. The unit owner typically pays for real estate taxes, monthly maintenance, insurance, and the mortgage. The income the unit generates should help the owner cover these expenses.

The hotel operator doesn’t guarantee rent revenue, but by capitalizing on the hotel’s brand name, advertising, national affiliations, centralized reservation system, and management expertise, a unit owner typically receives a higher level of rental income than he would by renting it himself, Greene noted.

Financing and Contracts

Banks and mortgage companies have become familiar with the term “condo-hotel.” “They are more accommodating in expediting loans for such properties than they were just a few years ago,” Greene said.

To comply with rules made by the Securities and Exchange Commission, developers can’t discuss projected revenue of a condo-hotel unit. A buyer must therefore try to calculate future returns and the property’s potential appreciation on his own.

“For developers, the condo-hotel structure increases equity in a hotel up front, so lenders tend to be more flexible with their lending terms,” said Gregory Bohan, principal, Pinnacle Advisory Group. “Furthermore, the investment return for the developer can reach 25 to 30 percent compared to returns on conventional hotels of about half that amount.”

The Market

Most condo-hotels sell out in pre-construction. Currently, demand exceeds market supply. Condo-hotels in places like southern Florida sell quickly because of the limited availability of oceanfront property.

In the west, Las Vegas leads with many new condo-hotel developments. Cities like Orlando and Toronto are also seeing a surge. Some progressive foreign countries, such as Dubai, one of the United Arab Emirates, are also picking up on the trend.

Choosing a Condo-hotel Unit

When looking to purchase a condo-hotel, choose a destination that will attract visitors regardless of economic factors. One that is near skiing, the beach, a convention center, or casino will benefit from proximity to these high-traffic venues and be more likely to have high occupancy rates that will translate into higher returns for owners. Additionally, the more amenities a property has, the more guests it will attract.

Examine surrounding properties and area appreciation rates. Does the condo-hotel have significant competition? Is it different or better than area properties?

Compare management companies and rental programs. An established management company does worldwide marketing and should have a state-of-the-art reservation system that will ensure a unit is rented as much as possible.