Condo Hotels - Anyone Familiar?

[Porsche-O-Phile]

Anyone out there have experience with these? My company is acting as developer for a major new project including a five-star hotel (and yes, the hotel has already signed on). They're offering a 10% discount since I'm an employee - that's the upside. Downside is a "decent" unit would run about $700k but estimates are about a 15% annual return for someone renting it out (I would).

As I see it - plusses are building equity without having to put much money into it (I rent it out), someone else handles all the upkeep and other work, etc.

Downside is hotel revenues are tightly tied to the economy and with energy prices skyrocketing, the housing market (more on this in a minute) potentially on the brink of a collapse and the prospect of another war looming, is it really wise to bank on people travelling?

OTOH, it's five-star. People that either stay in five-star hotels or rent five-star units are typically better hedged against fluctuations in the economy.

OTOOH, the savings gained by getting a 10% discount (if I went in now) might be more than offset by an impending price correction in the RE market. How tightly this would be tied to HOUSING is uncertain, since it's kind of quasi-housing and quasi-commercial.



And then there's the problem of coming up with 10% down and another 10% at closing. That's a helluva lot of money I don't have, although if it's really a great idea I suppose I'd entertain creative offers (using other peoples' money) like financing the initial payments, etc.

[RickM]

These appear to be getting popular here in the Northeast. At least there's been alot of talk about them....namely in NYC.

FWIW, the hotel industry is doing very well. From the economy segment right through to luxury. From what I've seen the luxury segment suffers most when things get tough.

[VaSteve]

FWIW, I had a discussion with the Marketing VP (I think) of the Ritz Carlton when I was in MBA school. He said that the luxury segment suffers the least. Those people still have money. It's the tier under that that suffers. It was years ago and I didn't ask for data to back it up.

[RickM]

There are many dynamics at work here...perhaps too many to go into with little or no relevance to the question(s).
Unfortunately these hybrid, dual use properties don't have much history to draw upon. Does a flat economy, seasonality and location affect the hotel industry? Yes. Is the luxury segment immune to the negative effects? No. (most or least? depends)

Does this matter for this type of investment? IMO, partially.

Would the luxury housing and/or rental market be another "bellwether" to consider?

I'll see what industry info I can dig up.

[RallyJon]

He said that the luxury segment suffers the least. Those people still have money. It's the tier under that that suffers.

I guess where that breakpoint is matters a lot!

[turbo6bar]

In an environment with super low CAP rates, I'd be suspicious of an investment opportunity that offers 15% annual return. Private money would be all over 15% per annum like stink on ****.

[RickM]

There's quite a bit of info here: www.hotelbusiness.com A quick registration will bring up hundreds of entries. Many are for individual properties being built or converting.

While this article is a year old I found some interesting points worth researching.... (Here's the registered member link: http://www.hotelbusiness.com/links/archive/archive_view.asp?ID=26166&search_variable=condo)

"Industry Executives Show Support Of CONDO Hotel Move"

"RANCHO MIRAGE, CA— The CONDOminium hotel phenomenon that seems to be taking the hotel industry by storm has attained a whole new level of interest. ..."

"“CONDO-hotels can even out the vagaries of the hotel market,” asserted the event’s keynote speaker, Charles Reiss, who was formerly with the Trump organization...“But CONDO-hotels can only do that if the CONDO-hotel bubble become permanent. In order for that to happen, owners must be treated fairly and receive returns that are commensurate with the risk that they take.”"

"He added that the most crucial component of a CONDO-hotel is the hotel itself because it needs to be a great hotel on its own in order for the entire model to work in the long run. Additionally, he said that people are interested in owning CONDO-hotel units mostly because they are simply good real estate investments and second homes."

"But while it may make sense for developers to sell potential unit owners on the benefits of entering the rental program, there are actually Securities and Exchange Commission laws that prevent developers from forcing participation as well as forecasting certain returns during the unit sales process. This fact as well as other sales issues were tossed around during a later session entitled “The Secret Sauce— the Critical Consumer Sales Process.” Robert Braun, a partner in JMBM’s corporate department, began the session by explaining the SEC’s laws regarding CONDO-hotel sales.

“The SEC says we can’t tell buyers how much they can make on a deal,” Sorensen noted. “We also can’t have a broker saying it either. So, in order to protect ourselves from future lawsuits, we have owners eventually sign a document stating that they only bought the unit on the merits of the real estate.” He added that when a down cycle hits CONDO-hotels, there will most definitely be lawsuits from owners."

[1973911s]

I was in Pensacola, FL last week, where there are a few being built. The info junky I was with, said what a great deal for the hotel.

They don't own the unit, or hold the note, rent it out, make a fee. He said that he ran the numbers and didn't like it.

Michael

[Dingo Joe]

Hmmmmm, timeshare?...

[1973911s]

Porsche-O-Phile,

Since you are in Long Beach, so are we, if you want to talk to this guy let me know and I will set up lunch. We could meet at Georges on Pine.

Michael

[Porsche-O-Phile]

Can't hurt. Yea we should get together sometime. If nothing else it'd be cool just to meet another Pelicanite.

[berettafan]

Originally posted by turbo6bar
In an environment with super low CAP rates, I'd be suspicious of an investment opportunity that offers 15% annual return. Private money would be all over 15% per annum like stink on ****.

Bingo.

(i'm no Donald Trump but I am a CPA that sees a lot of this stuff)

[Porsche-O-Phile]

There are a lot of private investors (including international) already in on this. I think it's roughly 40% pre-sold. Construction started in February (piles going in right now).

[Mr Beau]

I read an article on this recently (in Business Week or perhaps the Economist). It's kind of like a timeshare but you split the take with the hotel. The basic conclusion of the article was that there are no guarantees for the occupancy rate, and if you're buying it to use occasionally, you're much better off just renting when you need it. No capital tied up and no risk...

This particular situation could be different but that's a lot of money to scrounge up with the 'promise' of 15% returns from people with a vested interest in raising capital.