Taking a Chance on Condo-Hotels?

Condo-hotels hotel and resort properties made up of individually owned condominiums have become a full-throttle trend. To wit: Hendersonville, Tenn.-based Smith Travel Research tallies a total of 95,000 “condotel” guest rooms now in the pipeline. While this movement certainly has its hotbeds (glitzy Las Vegas high-rises and the ritzy resorts of Southeastern Florida make up half of the total), condotel frenzy is catching fire in major cities and resort destinations all around the country.
    While the rash of condominium projects has spurred a record-breaking pace of development, it also poses a potential problem for planners namely, can quality be controlled? If each hotel is owned by hundreds of individual investors instead of the usual one or two, all aspects of the hotel experience might suffer, say some hospitality industry experts. Room quality could be spotty, for example, and securing a block of rooms well in advance might prove vexing. Even service could go down the tubes.
    “When you combine hotels and condos, that intersection creates this third dimension with an altogether different set of legal and operational problems,” says Jim Butler, a hospitality attorney whose Los Angeles-based firm, Jeffer, Mangels, Butler & Marmaro LLP, already has dealt with more than 350 different condo-hotel proposals.
    Or, in the less delicate words of Steven Rushmore, president and founder of Mineola, N.Y.-based consultancy HVS International, the condo-hotel boom could be “a disaster waiting to happen.”

Projects in Progress

Viceroy Icon Brickell

“Meeting space and condo-hotels generally do not go together,” says Patrick Ford, president of Lodging Econometrics, a hotel real-estate research firm based in Portsmouth, N.H. “The schema of the project is its success primarily as a transient facility.”
That said, a number of planned properties will be attractive to meeting planners. Among them:

The Plaza - New York City
Accommodations: 282 hotel rooms, including 152 condo-hotel units, plus 182 residences
Meeting space: TBA
Opening: 2007
Key feature: The penthouse residence reportedly is selling for a cool $33 million.

Hard Rock Hotel San Diego
Accommodations: 420 condo-hotel rooms
Meeting space: 40,000 square feet (includes outdoor space)
Opening: spring 2007
Key feature: Nobu will expand his successful restaurant empire into the hotel.

Fairmont Tamarack - Donnelly, Idaho
Accommodations: 225 condo-hotel units
Meeting space: A 15,500-square-foot conference center
Opening: 2008
Key feature: Tennis stars Andre Agassi and Steffie Graf are the developers.

Remington Las Montanas Resort Hotel & Spa - Indian Wells, Calif.
Accommodations: 530 condo-hotel rooms
Meeting space: 65,000 square feet
Opening: 2008
Key feature: This will be the first in a Remington brand of hotels.

W Las Vegas Hotel, Casino and Residences
Accommodations: 3,000 rooms, comprising a hotel, a condo-hotel and purely residential units
Meeting space: 300,000 square feet
Opening: 2008
Key feature: Some units will be poolside cabanas.

Grand Hyatt Las Vegas at the Cosmopolitan Resort and Casino
Accommodations: 3,000 rooms, including condo-hotel units
Meeting space: 150,000 square feet
Opening: mid-2008
Key feature: The spa spans a whopping 50,000 square feet.

Viceroy Icon Brickell - Miami
Accommodations: 135 condo-hotel units and 372 condominiums
Meeting space: minimal
Opening: late 2008
Key feature: 50th-floor “destination” rooftop pool

Fairmont Turks & Caicos - North Caicos
Accommodations: 150 rooms as well as 150 condo-hotel units
Meeting space: 7,500 square feet
Opening: 2009
Key feature: A decked-out Willow Stream Spa within the resort



Eden Springs Resort & Spa

Eden Springs Resort & Spa - Orlando
Accommodations: 1,139 condo-hotel rooms
Meeting space: 48,421 square feet
Opening: March 2009
Key feature: Guests reportedly will be able to drop a fishing line right from their balconies. --JV

Consistency of product
Most condo-hotels require owners to contribute to a general reserves fund, which is meant to cover all renovations as they become necessary. “This is one of the major problems that lurks behind this model,” says Steven Rushmore. “What happens when the reserves run out and the rooms need some new piece of technology to stay relevant? Not every owner will agree to finance more renovations.”
    Walter Hall, vice president, residences, for the Ritz-Carlton Hotel Co., based in Chevy Chase, Md., maintains his line’s reserve funds are calculated by experts and take changing social standards into account. Rushmore is wary, though, when it comes to the countless development companies hatching condo-hotels without the guidance of a chain. “There are always surprises,” he says. “Who would have thought, eight years ago, that in order to be up-to-date, you’d have to have a flat-screen TV in every room? That’s a $3,000 purchase not every owner will be willing to make.”
    Martin Balogh, director of the meetings and travel department of the American Bar Association in Chicago, predicts a rude awakening for investors new to hotel operations. “It will be interesting to watch these owners a few years from now,” he says, “once they’ve come to realize how hard people can be on hotel rooms.”
    Even Denny Edwards, vice president of the Fort Lauderdale (Fla.) Convention & Visitors Bureau and staunch supporter of the condo-hotel boom (at least in his own territory, where five big-name condotels are expected by 2009) admits the possibility of future troubles if owners are asked to fund unexpected renovations. “You could eventually run into some inconsistencies in the rooms, certainly,” he acknowledges. “But I wouldn’t worry about it for the first few years, at least.”
    Tom Santora, senior vice president, sales and marketing for the Kor Hotel Group, explains that at least at Kor, major renovations will be decided on by a homeowners’ association, and that if the association decides to invest in such a transformation, individuals will not be allowed to opt out.
    “About the only thing that’s different is, you are on a board of homeowners vs. being one of a bunch of investors,” says Santora.

Owner volatility
According to most spectators wary of the condotel trend, the greatest losses will fall to the rash of private owners who buy high-priced condo units in the hopes of turning a profit.
    “We’ve been taking a pretty cautious approach to the condo-hotel trend,” says Bill Fortier, senior vice president, franchise development, for the Beverly Hills, Calif.-based Hilton Hotels Corp. “In a lot of these properties, the pros are all on the developer side. You can call a standard hotel room a condo, charge a shockingly high rate and get it.”
    Fortier cites a general rule of thumb for mixed-use projects: A hotel should be able to charge at least $1 of average daily room rate for every $1,000 it charges for ownership. However, “people have thrown that rule out the window,” he says. “Some of these units are selling for $400,000 each, which would mean charging a $400 dollar average daily rate to make any kind of profit.”
    As HVS’ Steven Rushmore puts it, “The condo-hotel isn’t a bad structure, if the buyer of that unit is primarily looking to buy a vacation home in a resort location or a nice city and sees the rental program as a way to make a small amount of money to offset the cost. In a property, though, where the owner has no intention of even vacationing there and the unit is strictly an investment, there’s going to be serious tension.”
    And, in the trickle-down economy of condo hotels, unhappy owners can lead to equally unhappy planners. “Once these investors realize that they’ve been snookered by the developer, they have a pretty bad taste in their mouth about the whole project,” Rushmore says. “Now, if the hotel company comes to them saying now we need new beds in all the rooms, they’re not going to be happy campers, and not all those rooms are going to get their new beds. With tensions running high, these are litigations waiting to happen.” A hotel swamped with lawsuits, Rushmore points out, can be less than welcoming.

Condos, Time-Shares and Beyond

Howard Nusbaum

The proliferation of various nonhotel units linked to mixed-use resort projects often foments confusion. What really is the difference between a condo-hotel unit and a residence? Howard Nusbaum, president and CEO of the American Resort Development Association, explains the intricacies, with help from Joe McInerney, president and CEO of the American Hotel & Lodging Association (both based in Washington, D.C.).
Condominium. In the context of a resort, these are wholly owned homes within a property. Owners generally have the option of submitting the rooms to the hotel inventory, but they are not required to do so.
Condo-hotel. Buyers purchase one room as an investment; they can stay a number of days, and the rest of the time the unit goes into the hotel rental pool. Income on the room is split between the hotel and the unit’s owner.
Time-share. “You’re buying the deed to 1/52 of a unit, or the right to use that unit over a specified time for so many years,” says Nusbaum. It’s the catchall term for owning part of a vacation home.
Vacation club. A set of time-share resorts, usually owned by a major hotel chain. Owners get to stay at any of the resorts under the same brand.
Fractional. A time-share, but more luxurious. They usually require buying at least four weeks per year and are common in upscale resort areas without an abundance of second-home real estate, such as Aspen or Vail, Colo.
Residence club. An even higher-end time-share than a fractional. Usually, these are time-share developments offered by Ritz-Carlton or Four Seasons. The chance to try various residence clubs under the same brand is of less interest to buyers, since they often own many homes already.
Destination club. Owners buy into this nonequity club without an explicit right to use a single property. Instead, they are granted the opportunity to stay a few weeks per year in luxury homes around the world. The membership is cost-prohibitive for all but the ultra-rich. Examples are Dream Catcher and Exclusive Resorts. -- JV

Suite reliability
Condotels often advertise their ability to offer unoccupied condo units to spillover attendees, but banking on the availability of those rooms can be a risky business. Because of the intricacies of property tax laws in major cities, most rental programs for condos have to remain voluntary. Therefore, even if a hotel promises 40 of its condo suites three years out, if a rapidly disillusioned set of condo owners pulls out of the program in the interim a fate insiders consider probable both hotel and planner will be left scrambling for rooms.
    “Unless it’s a straightforward hotel, there’s no real way to know what will be available in six months,” says Hilton’s Fortier. “When it comes to unit availability, meeting planners definitely have a right to be concerned.”
    Tom Santora of Kor Hotel Group disagrees. Booking rooms at a condo-hotel is no different from booking rooms at any hotel: Once you set aside the rooms, they’re yours.
    Still, Fort Lauderdale hotels generally refrain from renting their condo units out to groups, saving those options for the short-notice leisure market, according to Denny Edwards. At condotels that offer their private residences to groups, however, planners should make sure they clearly understand the makeup of a property before signing. 
    “If I were the planner,” says Ritz-Carlton’s Walter Hall, “I’d want to know the mix, to ask how many of the guest rooms are owned by the general owner and how many are condos in a rental program. That’s just common sense.”
    According to Convention Management Associates’ Terri Meyer, however, rare is the condotel that will volunteer a hotel room vs. condo breakdown. “Sometimes it’s tough to get a clear answer from them about where all the rooms are coming from, even once you’ve asked,” she says. If a property won’t clarify which rooms are coming from residences, take it as a danger sign and look elsewhere.

Everything else
The implications of multiple ownership run well beyond concerns about the guest rooms themselves, says Hal Etkin, CEO and founder of Pembroke Park, Fla.-based event company ME Productions.  “When hotels start selling their spaces off piece by piece to private investors who know nothing about the meetings industry, I’m not sure that we’re not selling control of our meetings by selling these rooms,” he notes.
    Attorney Jim Butler agrees that a heavily diverse and largely amateur ownership team could make necessary changes difficult to push through. “When a problem arises, and the consent of all or most owners is required, it can become very tough to get everyone to agree on one method of fixing it,” he warns.
    A hotel whose management team decides to expand its meeting space, for instance, could be left powerless in the face of an unhappy condo board that would much rather see its reserves go elsewhere. And as dismissive as some condo owners might be of the need for meeting space, most likely would be especially wary of adding more guest rooms, since it would increase their revenue competition.
    According to Meyer, some of the most fundamental aspects of hotel management and presentation can get overlooked while individual rooms soak up the spotlight, especially in condo-hotels whose every guest room is a distantly owned residence. 
    “We had one meeting at a property in Indianapolis,” Meyer remembers. “It was billed as this exquisite property, and our deadline was so immediate there was no time for a site inspection. The rooms themselves were beautiful, but accessing the facility was like Fort Knox. You had to enter through the garage, pick up a key, then head down a long, cold hallway, pick up another key, and then you ended up in the guest room corridor. It didn’t give you the feeling of a hotel at all.” 
    Meyer says the experience taught her to assume nothing when working with condo-hotels. Presumably unnecessary questions, such as whether there’s a lobby and front desk, now remain on her checklist.
    The ABA’s Martin Balogh questions the accountability factor at mixed-use hotels. “Working with a condo-hotel is similar to working with an independent hotel vs. a chain,” he says, “just taken one step further. At a chain, if something goes wrong, you have somewhere to go. At an independent, ultimate responsibility kind of stops at the general manager. But with a condo-hotel, it’s not always clear who the ultimate overseer is. Is it the condo board? Their management team? I wouldn’t go into a contract without clarifying those terms first.”
    Santora says that when dealing with a reputable company, none of these issues should matter. He explains it this way. “The Tides in South Beach has 45 rooms. After we sell these units, there will only be 45 people in the world that know it’s a condo-hotel. Its ownership should be completely transparent to the meeting planner.”
    Planners and analysts generally agree it’s not necessary to swear off condo-hotels completely, but to treat negotiations with care.
“I think that, as with any new, potentially risky trend, a lot of this is wait-and-see,” according to Balogh. “While we’re waiting to see what happens, however, what a planner needs to do now is ask questions.”