Checking Out -- and Into -- Condo Hotels


By Christopher Palmeri

SPECIAL REPORTCONDO-HOTEL LIVING

Checking Out -- and Into -- Condo Hotels

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No Business Like Snow Business

The Right Design for Condo Marketing

Slide Show: Rooms with a View -- and Lots More

When Keith and Kimberly Hartke heard that the Fontainebleau Resort in Miami Beach was building a new condominium tower, they were ready to buy, quickly plunking down $600,000 for a 1,000-square-foot one-bedroom unit. Keith had vacationed at the hotel as a child and returned as a newlywed with Kimberly years later. But what sold the Hartkes on investing in a property wasn't their history with the resort. It was the fact that they could rent the unit out like a hotel room when they weren't using it. "It's not just a condo at the beach," Kimberly says. "We're getting in the hotel business."

The Hartkes are charter members of the latest trend to hit the hospitality industry: the condo hotel. By uniting the public's desire to invest in real estate with the travel industry's quest for new properties, the condo hotel has reinvigorated the hotel construction business and begun altering the skyline of cities such as Miami and Las Vegas.

BOOMING BUSINESS. Grand old hotels such as the Plaza in New York and the Hotel Del Coronado in San Diego are carving out pieces for small investors. Donald Trump now has six condo-hotel projects in the works in Chicago, Fort Lauderdale, Miami, Phoenix, Las Vegas, and Dubai. "Other than that we're not so busy," Trump says.

All the building and converting has longtime hotel-industry watchers baffled. Is it a sign that baby boomers are once again influencing market trends, in this case seeking second "homes" that provide a vacation spot with few of the hassles of real estate ownership? Or is it another manifestation of a real estate bubble that people are willing to pay top dollar to own something as impersonal as a hotel room?

"It's all the rage," says Robert Mandelbaum, director of research at hotel consultants PKF Consulting. "Everyone's asking, 'Is it a flash in the pan or something that's here to stay.'"

Unlike time shares, where owners have the right to visit a property for a few weeks a year, or traditional condominiums, where individuals own the units and can do what they want with them, condo hotels are a hybrid. Investors own a specific condo and pay property taxes, insurance, and maintenance fees. Hotel management companies rent out the rooms, rotating reservations among the various units and splitting the revenue fifty-fifty with the owners.

Units often come furnished and owners can't make changes to the decor or add personal items such as photos. "You wouldn't know the room is owned by somebody else," says Rick Davis, a Los Angeles attorney specializing in condo-hotel projects.

CHECKING IN. At the Fontainebleau, hotel management asks owners for notification at least 60 days in advance if the owners want to use their unit. When they do stay, owners are charged housekeeping fees that begin at $30 a day. They are also subject to 3 p.m. check-ins and 11 a.m. check-outs, just like any hotel.

"You need somebody with the right mindset," says Bruce Weiner, president of Turnberry Associates, which is developing the Fontainebleau condos and others in Las Vegas and the Bahamas. "If it's somebody looking for a retirement home and socialization this is not the right product. Your next door neighbor could change every day."

Developers love the concept because they can recoup much of their construction cost up front and still retain ownership of meeting facilities, restaurants, spas, and some traditional hotel rooms. Of the roughly 377,000 hotel rooms under development in the U.S., 30,500 are condo-hotel units. An additional 70,000 are private residences within hotels that are not designed to be rented out on a nightly basis, according to Lodging Econometrics, a research firm that collects hotel construction data.

At the high end -- where construction costs are greater -- condo hotels are an even larger slice of the market. "There's not a luxury hotel under consideration that doesn't have a condo piece with it," says Jan Freitag, who follows the industry at Smith Travel Research.

"BUYING A LIFESTYLE." The condo-hotel concept isn't all that new, really. There was a wave of buying in the 1970s when developers sold units more like investments, often structuring them as partnerships and registering them with the U.S. Securities & Exchange Commission. Lawsuits followed when returns didn't live up to the promises. Today condo-hotel salespeople are instructed not to make specific references to room rates or occupancy levels.

"Most of these deals are not priced in a way that they'll provide an immediate return on investment," says James Butler, a real estate attorney in Los Angeles. "You're buying a lifestyle and a long-term capital gain."

Indeed, a condo-hotel room at the J.W. Marriott Camelback Inn in Scottsdale, Ariz., that sold for $55,000 in 1972 traded hands recently for $195,000. It's projected to generate income of $9,500 this year, after maintenance, taxes, and insurance expenses. That's not enough to cover the mortgage payments on a conventional loan, though -- and that's in a year when room rates have been robust. Last year's income was just $6,300.

IN TOO DEEP? Some major hotel operators still harbor doubts about the concept, fearing that the money pouring in from individual investors is causing projects to be launched that would not be built otherwise. Hilton Hotels (HLT) has a handful of condo-hotel projects, mostly under its Conrad luxury brand, but the company is treading with care.

"We're very selective," says Matthew Hart, Hilton's president. "You have to be very careful that the project is viable as a hotel."

Already, some condo-hotel projects in the red-hot Las Vegas market have been scuttled. "Make sure the developer has a track record in the business and is not just looking to make a quick buck," advises John Burnett, president of Kor Hotel Group, which is building a $175 million condo hotel in Anguilla.

ROOM WITH A VIEW. Kimberly Hartke admits that the income from their Fontainebleau unit hasn't covered expenses, a fact she attributes to a change in management at the hotel and continued construction on the property. Still, the Washington (D.C.)-area couple has used the condo three times since taking ownership in February. They have lent the unit out to family and are using it as an employee perk for Keith's commercial real estate business.

Recently they enjoyed the twinkling lights of a nighttime regatta from their 17th-floor perch. "It's just the perfect second home," Kimberly says. But smart buyers will remember that it's also getting them into the hotel business.

Palmeri is a correspondent in BusinessWeek's Los Angeles bureau


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