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by Scott Podvin and Brad Pearsal
The success of the condo-hotel product in resort locales in South Florida is well-documented. The Ritz-Carlton on Key Biscayne, the Setai on Miami Beach, and the Atlantic in Fort Lauderdale are just three of many projects that are succeeding with the leisure condo-hotel product.
But, where do condo-hotels fit in the redevelopment plans of urban areas in South Florida? Do condo-hotels add anything to the mix in the revitalization of such urban areas? To answer these questions, we must understand the rise of the condo-hotel in the current real estate lending landscape.
The condo-hotel concept has grown in response to the increasing reluctance of lenders to fund development of four- and five-star hotels. With the average four-to-five star hotel costing up to $400,000 per room key to build, lenders have become hesitant to make these loans, regardless of development sponsorship.
This lending drought was only exacerbated by the damaging effects of the September 11, 2001 terrorist attacks on the hospitality industry. Thus, developers were forced to adopt the concept of selling off some of a hotel’s inventory as condominiums to obtain financing to build the luxury hotel product.
Lenders embraced the condo-hotel component, as the infusion of pre-sale capital helped pay down the construction loan. Additionally, this pre-sale condominium cash flow gave lenders enough comfort to increase the loan-to-value ratio from 60 percent on a traditional newly constructed hotel to the more-aggressive 75 percent loan-to-value ratio when the condo component was added. Today, the condo component is most likely a pre-requisite to obtaining financing for a luxury hotel project.
Developers, and their investors, also have found the condo-hotel model to produce significant and more rapidly generated returns over the standard hotel development model. Leveraged returns in the condo-hotel hybrid can sometimes double the typical 15 percent return on a standard hotel development.
But, the question remains, where can these products thrive? While the market has shown them to be viable in resort locales, when we explore purchaser demographics, we can easily see that condo-hotels can be and are viable in urban areas being revitalized in South Florida, and Miami, in particular.
The Latin American buyer, who is familiar with the Latin American condo-hotel product as an “apartotel,” is the key to this equation, according to Frank Nardozza, chairman of REH Capital Partners, a hotel investment company headquartered in Fort Lauderdale.
“Miami seems to make the most sense because of the transient population from South America coming for business or pleasure,” he says. Nardozza indicated that, besides the Brickell area, which is already home to condo-hotel projects, a great deal of interest exists in rolling out condo-hotels in Coral Gables and Coconut Grove.
Joel Greene, President of CondoHotelCenter.com, underscores the attraction of the urban Miami condo-hotel to the Latin business traveler. He says, “The Latin businessman, coming to do business on Brickell, finds it more attractive to buy a condo-hotel, than to shell out hundreds of dollars for every night’s stay in a hotel.”
While Nardozza does not rule out the feasibility of the condo-hotel product in the downtown Fort Lauderdale market, he indicates that proposed regulations, if adopted, could limit condo-hotel unit owners from occupying their units for greater than 60 consecutive days. However, in Weston, Nardozza points out, developer Tom Ireland is in the process of re-developing the Bonaventure resort as a condo-hotel, which will be marketed to South Americans.
In Miami, the Espirito Santo Plaza appears to be hitting a home-run in the urban condo-hotel game with 105 fully-furnished condo-hotel units averaging 1,000 square feet being marketed almost exclusively in Latin America. With the hotel flying the luxury Conrad flag, and slated to open in the coming weeks, Bill Ross, President of Estoril, Inc., the developer of Espirito Santo Plaza, is enthusiastic about the condo-hotel component in this mixed-use building.
“The whole purpose of a mixed-use building, with an office, condo and hotel component, was to diversify risk with each side helping out the other,” he says. Ross explained that, in a symbiotic way, the condo component helps the hotel, which in turn helps the office.
With one-third of Espirito Santo Plaza boasting office tenants such as international banks and law firms, along with the French consulate, many of these office tenants have purchased condo-hotel units to use as “corporate apartments.”
The condominium documents for this project do not limit the number of times an owner may rent or allow his or her unit to be rented. Ross concluded by explaining that many companies in the building find it convenient to have clients or visiting executives stay in their condo-hotel unit to keep them close at hand for maximum efficiency in working on a project.
Another success in the urban condo-hotel market is the Four Seasons Hotel and Tower on Brickell Avenue in Miami. Rich Baumert, Vice President of Millennium Partners, developer of the Four Seasons, relates that, with the strong pairing with the Four Seasons flag, the project’s condo-hotel component should be “sold out by year’s end.”
Baumert explains that the 84 condo-hotel units ranging from 625-square-foot studios to 2,100-square-foot 2-bedroom/2.5-bath condominium hotel units have generated “a lot of Latin American interest, including from corporations.” Finally, Baumert reiterates that the Four Seasons condo-hotel purchaser has recognized the value in the Four Seasons flag, such that “70 to 75 percent are investors.”
Knowing that the condo-hotel product can work in the urban, non-resort setting, purchasers have other concerns to face. First, condo-hotel units tend to be expensive for their size, with most units averaging only 600 to 700 square feet.
However, the pricing premium is tied to the on-site “hotel-like” amenities the condo purchaser enjoys, such as first-class restaurants, spas, and retail outlets. Additionally, the condo-hotel purchaser is paying for the qualified, full-time real estate/hotel management staff dedicated to pushing for a substantial rate of return for investors.
The second concern that purchasers may have is that, if they wish to have a unit placed in the project’s rental program, the purchaser must be aware that different sizes and views may affect the rental income revenue stream.
Finally, the prospective condo-hotel developer or purchaser may face a myriad of state and federal securities law regulations, and a whole host of other potential liabilities.
Therefore, one of the most important steps a developer should take before launching its sales and marketing efforts and a prospective purchaser should take before acquiring a condo-hotel unit is to consult with an attorney experienced in condo-hotels to discuss their options.
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Scott Podvin is a real estate attorney at the law firm of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. with extensive experience in drafting full project documentation for condominiums, condo-hotels, private residence clubs, single- and multi-site timeshare projects, and golf and vacation. He can be reached at (305) 789-3363 or spodvin@swmwas.com.
Brad Pearsall is an attorney and realtor in Miami who currently is studying for a Master’s in Real Estate Development Law at the University of Miami Law School.
