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Hotel News
Condotel.biz offers the latest condo hotel articles and real estate investor news to help potential investors research real estate investing and condo hotels. Find out what the media is saying about condo hotels.
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Condo Hotel Wave Hits U.S. - Again |
National Real Estate Investor, Oct 1, 2004 by Joe Gose
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Byline: Joe Gose In May 2003, Falor Cos. added a new twist to its tried-and-true strategy of acquiring, renovating and repositioning underperforming hotel assets.
The Chicago-based hospitality company and its partner, Jackson, Wyo.-based Johnson Resort Properties, had just plunked down $34 million for the 202-room Cheeca Lodge & Spa in Islamorada, Fla. But instead of repositioning Cheeca Lodge as a conventional hotel, the partners opted to transform the property into a condo hotel, a vacation-home ownership concept that allows consumers to buy individual hotel rooms, rent the rooms to hotel guests and split the revenue with the hotel owner.
Johnson Resort Properties and Falor Cos. put 96 rooms priced between $350,000 and $1.3 million up for sale. To date, the partners have sold more than 50% of the units as a $12 million renovation of the property continues.
For Falor Cos., the decision turned into a brand-new strategy. Since April, Falor Cos. has contracted to buy 13 additional properties comprising some 2,300 units in South Florida, Chicago, Boston and San Diego, among other markets, and intends to convert them into condo hotels.
"From our point of view, there's a lot of pent-up demand in various markets from people who are looking for a second, third or fourth home," says Robert Falor, president of Falor Cos., which has acquired and repositioned hotel properties since 1984. "But they don't want a conventional condominium because they aren't going to use it enough to justify the expense and hassle of maintaining it."
Leaving the Beachhead
The strategy makes Falor Cos. the first condo hotel developer to lead an aggressive advance out of Florida, where the concept has flourished for six years. During the last 18 months, other developers have proposed or broken ground on condo hotels in resort areas and major urban markets such as Las Vegas, San Francisco and Dallas. Up until recently, most condo hotel development focused on converting existing hotels, but now developers are increasingly pursuing new construction.
What's the attraction? Condo hotels can generate highly lucrative returns of 25% to 30% versus conventional hotels, which yield 10% to 12%. Pre-construction condo hotel room sales also raise 25% to 40% in equity that ground-up projects need to secure financing. (Developers who are converting conventional hotels into condo hotels can find financing for up to 90% of a project's value, Falor says.)
Not every developer is keen on spreading condo hotels from shore to shore, however. In October 2003, New York-based Millennium Partners opened the 70-story Four Seasons Hotel & Tower in Miami, a mixed-use project that includes 84 condo hotel units, conventional hotel rooms and condos, as well as office space.
The tower has sold all but 20 of the condo hotel units, but it's the first and last condo hotel for the company, according to Matthew Hall, a spokesman for Millennium Partners.
"We feel that it's the kind of product you don't see anywhere else except for Miami," Hall says. "We feel like we've captured and exhausted the markets where there's enough depth of wealth to absorb the size of building we have to build."
The company primarily develops conventional residential condominiums in conjunction with luxury hotels in markets such as San Francisco, New York and Washington, D.C.
Born of Necessity
Condo hotels are hardly new; the property type is prevalent in Latin America and Europe. Condo hotel units also became popular tax shelters in the U.S. in the 1980s until the 1986 Tax Reform Act stripped the investment of tax advantages. Then in the late 1990s, investors acquired the Mutiny Hotel in Miami and converted the property into a 120-room condo hotel.
Condo hotel activity expanded in Florida, and after the terrorist attacks on 9/11 interest in the concept grew even more when lenders required some 40% to 50% in equity to finance hospitality projects.
By selling rooms, hotel developers filled the equity gap. In fact, the number of existing and planned condo hotels in Florida has ballooned to more than 40 from a handful only six years ago, according to Joel Greene, president of Condo Hotel Center in North Miami, who represents condo hotel unit buyers.
Generally, condo hotels cost about 25% more to build than conventional hotels: The studios and one- and two-bedroom units developers frequently build are larger than a hotel room, though smaller than a conventional condo.
Plus, developers create more polished common areas. But because the rooms are generally in hotels that are increasingly being managed by the luxury flags of well-known brands such as Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide, the services and amenities allow condo hotel developers to price units at a premium on a per square foot basis compared with conventional condos.
Ideally, the condo sales pay off the construction loan and leave the developer with ownership of the hotel's commercial areas, such as restaurants and health clubs, says Mark Ellert, president of IAG Florida, a developer, advisor and broker of resort and leisure hospitality properties.
The condo hotel model also helps secure permanent financing for developers who intend to own and operate conventional hotel rooms alongside condo hotel units. That's because the developer still derives rental revenue from the condo hotel units, which adds an additional income stream to the conventional hotel, Ellert says.
In fact, IAG plans to break ground next spring on the 194-unit Regent Winter Park Hotel Spa & Residences in the Orlando, Fla., area. IAG is selling about 144 of the hotel's rooms and will retain ownership of the remainder.
"At the end of the day you have a hotel business, and the issue is to what degree does that business generate a stable source of cash flow," Ellert says. "To the extent that the cash flow has value, then you can put financing in place."
Loosening the Purse Strings
Some lenders certainly have become more comfortable with the concept. In August, Hypo Real Estate Capital Corp. provided a non-recourse construction loan of $110 million - or 85% of the project's value - to Costa Dorda Associates Ltd. The group is developing The Q Club, a 333-unit condo hotel project on Florida's Fort Lauderdale Beach.
"Through the pre-construction sale mechanism, condo hotels provide developers with a vehicle to secure a significant amount of senior debt financing," says Robert Kaplan, managing director of Holliday Fenoglio Fowler's Miami office, which arranged the loan.
The commercial mortgage broker expects the Miami office to arrange some $150 million in financing this year - triple the volume in 2003. "Once lenders get comfortable with evidence of the condo prices and sales, they're willing to commit because they're confident they're going to get paid."
Of course, developers are simply transferring that risk to buyers of condo hotel units. But for buyers of individual hotel condo units, part of the attraction centers on the pampering that comes with luxury hotels: plasma screen televisions, kitchens and marble bathrooms in the rooms, spas and restaurants in the common areas.
The other attraction stems from the potential money to be made. In addition to taking a cut of the income the room generates for the hotel, buyers may anticipate selling the unit and capturing its appreciated value down the road, say developers.
But Jim Walsea, a financial advisor in Chicago, says buyers who invest in condo units to make money - both as a rental unit and as a re-sale - may have unrealistic expectations. He suggests buyers should first focus on finding a condo in a vacation spot and a hotel that they'll enjoy.
Walsea, who has contracted to buy a condo hotel unit under construction at Canyon Ranch health resort on Miami Beach, says condo hotel sales teams often quote the highest rates the hotel charges when pitching potential buyers. That's about $500 to $600 a night in the area of Canyon Ranch, and indeed the hotel will fetch that rate, he says, but only for a few months out of the year.
As for re-sales? While some re-sales of condo hotel units have occurred in older projects, it's too early to say whether they'll achieve sustainability, Walsea says. Indeed, like Walsea's unit, most condo hotel rooms have yet to be built. He hopes to break even, but anticipates out-of-pocket costs.
That's OK, Walsea says; he intends to use the room four or five times a year. "A person has to buy one of these places because they like the property, and if the finances work out, great," he says. "But this is just another way to finance a vacation home."
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