DISPATCHES: BUYING THE HOTEL ROOM
When I stayed at the Four Seasons Resort Whistler in Canada’s British Columbia last year, a hotel employee casually mentioned that all the rooms were privately owned. "You mean they’re fractionals?" I asked. (A fractional is a popular style of vacation ownership in which the owner typically buys the right to use a luxury resort property for four to six weeks each year.)
Not at all, she explained. Individual investors owned each one of the 273 rooms, which were managed and rented out by Four Seasons. Welcome to the world of condo hotels. In the ensuing year, I watched this phenomenon take off, fueled by the real estate fever that had gripped so many investors. (Admittedly, a fever that has cooled, as inventories and interest rates have risen and buyers have become choosier.)
As of August 2006, 10% of all new hotel rooms in the U.S. were in condo hotels, according to Smith Travel Research, a firm that analyzes trends in the lodging industry. There are 244 such projects in various stages of development, including hotels like the Hard Rock in San Diego and the Fontainebleau in Miami Beach. Offshore, examples include The Residences at The Ritz-Carlton, Grand Cayman, with two restaurants overseen by chef Eric Ripert of New York’s Le Bernardin restaurant.
Developers love condo hotels. They get your money up front, and your monthly fees help offset their overhead. But what’s in it for you? Is it a sound investment?
The establishments look like any other luxury hotel, but individual owners have purchased each room. And "luxury" is the operative word, since the properties that do this well are a marriage between a real estate developer and a high-end brand: Think Intrawest, St. Regis and Four Seasons. As an owner you can use the specific unit that you buy for a set period of days within the year. You also get a share of the income when the hotel rents it out.
While you’re not buying from, say, Four Seasons or Starwood or Fairmont (they only manage the properties), it’s their management and the promise that the hotel will be seamlessly run that adds a powerful incentive to invest. The choice of location is also critical. Greg Doman, vice president of residential ownership for Fairmont, notes that among his company’s newest condo hotel projects are the Fairmont Pacific Rim in Vancouver, an increasingly popular city and site of the 2010 Olympic Winter Games. "If a property doesn’t work as a hotel, it won’t work as a condo hotel," Doman says.
Proponents of condo hotels like to point out that an owner can use the unit far more often than someone who has bought a time-share or fractional ownership property. A classic time-share, for example, is for a seven-day period, while many fractionals allow at least 28 days of usage that can’t be taken all at once. In contrast, owners at The Resort at Singer Island in Florida, which is part of The Luxury Collection from Starwood, can occupy their units for up to 56 days a year.
And when the room is rented, you receive rental income. Typically, the hotel management company rents out the rooms, rotating guest reservations among the various units and sharing the revenue with the owners. The amount of rental income that goes to the owner varies from property to property. A 50/50 split is not uncommon, though The Resort at Singer Island is giving 100% of the revenue to owners.
The Singer Island property has 239 units, and as of this writing, 225 are part of the hotel’s rental program. The owners of the other units may or may not join; they are not obligated to do so. They can essentially live in the hotel without renting out their properties. Rental policies depend on the project and are determined by the management company.
If you’re looking for a property that offers community, condo hotels are not a good choice, since you’ll be surrounded by transients. Then there’s the room decor. Many properties do not allow you to decorate your unit at all; you must conform to the hotel standard. As an owner, you will receive income only if your room is rented. If the bookings at the hotel drop and your room isn’t rented, you will derive no income. But you still have to cover real estate taxes, monthly maintenance fees and perhaps a mortgage payment. And if the hotel loses money, you can’t use the losses to reduce your income taxes.
Deciding when to use your room is critical. If you occupy it during a peak vacation time like Christmas, you’re taking it out of the rental pool during what is often the highest-grossing period of the year. Note too that you can’t just show up tomorrow and move into your condo. Most hotels require that you provide advance notice of between 30 and 90 days. When you’re in residence, you’ll be paying a daily housekeeping fee and you’ll be subject to the same check-in and checkout times as the other hotel guests.
If you want to buy, start by searching for a property that’s a standout because of the view, the golf course or the ski resort it overlooks. You can also consider venerable properties such as The Plaza in New York City, a hotel that has a good history and a strong developer and hotel company behind it. And always look for a solid brand-name hotel as management, whether it’s Starwood, Four Seasons or Marriott. To get the most for your dollar, consider a location that’s strong year-round, not seasonal. In other words, a city like New York or San Francisco, or a resort such as Orlando or Las Vegas.
While $250,000 is the entry-level price at some projects, the better brand names are often considerably more expensive. (If you buy preconstruction, you can often get a price break.) But there are some lower-cost properties available: At Emerald Shores in Daytona Beach, Florida, for example, prices start at $170,000. Among the higher-end developments is the Hard Rock Hotel in San Diego, where studios with kitchens start at $400,000 and prices go up to $2 million for two bedrooms.
The units at the Singer Island property, all suites, began at $450,000 and ran up to $1.2 million. I say "ran" because they sold out before construction began in late 2003.
How much can you make? It varies widely. Say the hotel rents your unit on average for $300 a night and manages to have it occupied 200 nights a year. With a 50/50 split, you get $30,000 of the rental income, which must be declared to the IRS.
When you’re calculating your costs, it’s important to figure out what a night at the hotel would run you. At $300 per night, with eight weeks or 56 days of usage a year, it comes out to $16,800 a year that you would otherwise have to spend to stay at a similar vacation spot.
Of course, the most important numbers to keep in mind when you’re calculating the potential income are your expenses, which include real estate taxes, monthly maintenance fees and perhaps a mortgage. These vary depending on the property and its location.
Will you make money? This is the $64,000 question, yet it’s one that no developer seems capable of answering. There are two reasons. The first is that the business is new, and projecting hotel occupancy rates, running costs and room rates amounts to an educated guess.
But another factor is the U.S. Securities and Exchange Commission, which has been watching the industry closely. In order for condos not to be considered securities, the agency requires that developers not emphasize the economic benefits of a rental program managed by either the developer or a third party. Nor can the developer speak directly about the tax benefits of ownership. The rental program can’t be advertised or marketed. And the SEC effectively ties the developers’ hands when it comes to making performance projections. Some developers set up a rental office to supply as much information as possible without annoying the folks at the SEC.
Ultimately, is a condo hotel a good buy? No one will come out and tell you, but the sage advice is to invest in a condo hotel as a lifestyle choice first and a long-term investment second. Buy one only if you plan to use it. If it works out as an investment, you’re ahead of the game.
COMING TO TERMS
Buyers purchase an actual hotel room and enjoy all the amenities. They use it for a set number of days a year and get a share of the income when it is rented out.
Members get to use luxury properties around the world. They pay a membership deposit often $250,000 to $300,000 and annual dues from $10,000 to $35,000. Clubs typically allow eight weeks of usage but often limit time at a single property.
You buy the right to use a property, often for four to six weeks. Most fractionals are deeded, so you can get a mortgage. Usage time can often be traded between member locations.
Purchasers buy the right to occupy a property, usually in increments of one week, which can often be traded from one locale to another. You derive no income.
This story originally appeared in Diversion.