It’s A Hotel. It’s A Condo. No, It’s Both!

By Marilyn Adams
Reprinted from USA Today, Sept. 27, 2005

SUNNY ISLES BEACH, Fla. – Just north of Miami, rising 26 floors over the shimmering Atlantic Ocean, Le Meridien looks like an oceanfront resort hotel. The internationally-known restaurant Bice beckons in the lobby. The pool, fitness center and spa round out the amenities of an upscale hotel.

But it’s not a hotel. Like a growing number of projects in South Florida and across the country, Le Meridien is a “condominium hotel,” in which each unit is a condominium owned by buyers who live there full or part time.

In South Florida, Le Meridien is one of about 30 condominium-hotel projects that are proposed, under construction or sold. At a time when traditional hotel financing can be hard to get, developers like the upfront capital from buyers’ deposits and the higher per-square-foot prices.

For buyers, the projects offer prime locations in popular destinations and hotel amenities including full-time staff. Buyers also stand to gain financially if values appreciate. And buyers have the potential for rental income.

When owners are not using the units, the hotel company can rent them to outside guests and split the rental income with owners.

Like a traditional condominium, there’s a condo association, property taxes and a monthly condo fee. In the Miami area, that monthly fee generally runs about $800 for a 1,000-square-foot unit.

PROS AND CONS OF CONDO HOTELS

If owning your hotel room at a frequent destination has some appeal, consider these issues:

Pros

• Ownership of a condo in a four- or five-star hotel.
• Income from renting the room to other guests.
• Hassle-free real estate ownership.
• The unit may appreciate in value.
• Interest payments on a mortgage may be deductible.
• Repair and routine replacement are handled by the hotel.
• No hotel taxes when you stay in your own unit.

Cons

• Numbers are increasing, but condo hotels aren’t available everywhere.
• The unit may lose value over time.
• Local governments typically limit the time the owners may use them, to assure room availability for visitors.
• Financing may be costlier than for a primary residence.
• You will need to give notice that you’ll be staying in the hotel.
• You may not be able to use your room if it has been reserved by another guest.
• You’re likely to pay fees for housekeeping and other services.
• There will be a monthly condo fee.
• Income from guests is vulnerable to decline in travel.
• You usually have to buy insurance to protect against liability claims and some types of damage or loss.

Source: Joel Greene of CondoHotelCenter.com

Condo projects cropping up

The boom is not isolated to South Florida. Hotel condominium projects are sprouting up in other major destinations, including New York, Chicago, Las Vegas, Toronto and the Bahamas.

“This type of project has great appeal for foreigners or out-of-towners because they can use it when they are in town and give it to the hotel when they are not,” says Le Meridien developer Edgardo Defortuna of Miami. “They get all the services of a four-star or a five-star hotel and have nothing to worry about.”

Le Meridien, for example, has 210 one- and two-bedroom units, including four penthouse suites with rooftop terraces. All have full kitchens, balconies and high-speed Internet access.

Like traditional hotel rooms, units belonging to owners participating in Le Meridien’s rental program are all furnished and equipped the same and have the same color scheme. One-bedroom units have a king-size bed in the bedroom, a queen-size sofa bed in the living room, marble baths, washer/dryer, a plasma TV and a minibar.

The building sold out before opening earlier this year. One-bedroom units started in the $400,000 range, says Barbara Piagari, Le Meridien’s director of sales and marketing. Owners can occupy their units for up to 60 days a year if they are in the rental program. Le Meridien markets the units in the rental program through British Airways Vacations, American Express, Travelocity and others.

Defortuna, who has three condo-hotel projects in South Florida, says he interviewed many hotel companies before choosing Le Meridien, the London-based international chain, to run the Sunny Isles project.

Elsewhere in South Florida, he’s working with Ritz-Carlton on a proposed 250-unit condominium hotel on South Beach, not far from Ritz-Carlton’s hotel there. On Key Biscayne near Miami, Defortuna’s company spent $120 million earlier this year to acquire the oceanfront Sonesta Beach Resort, where he plans a five-star condominium hotel and condominium project with 350 total units.

Hotels are not the only hospitality companies getting into this business. On Miami Beach, Canyon Ranch, the Arizona-based spa operator, is partnering with local developers to build Canyon Ranch Living. The oceanfront development will have 151 condominium-hotel units, 451 condominiums and 150 hotel suites with a full spa, pool and restaurant. The development recently landed a $386 million construction loan from Dublin-based Hypo Real Estate Capital. It’s South Florida’s biggest residential construction loan ever, says Canyon Ranch developer Eric Sheppard.

What will future hold?

Although the ocean views are alluring, Miami real estate analyst Michael Cannon warns it’s too soon to tell whether hotel condominiums will be good investments for buyers. If these projects are to succeed, he says, they must have top-flight, internationally-known hospitality companies managing them.

Other real estate experts agree. Greg Hartman of HVS International in Boulder, Colo., says the common wisdom in the industry suggests a condominium-hotel property must work as a hotel if it has any chance of working as a condominium hotel. It needs the same strengths: good location and brand, strong management and staff, essential services, attractive amenities.

Cannon says these projects are so new that nobody knows if there’s a good resale market. No matter what real estate brokers and developers promise, prospective buyers should not assume hotel-condominium units will appreciate over time or rental income will cover expenses, Cannon says.

Real estate analysts aren’t the only skeptics. Local government officials who are grappling with developer applications for hotel-condominium projects say they are dealing with a whole new breed of animal.

Some local officials also worry that too many of their destination hotels will be transformed into condominium hotels.

Because condominium hotels aren’t designed just for temporary visitors, the projects have major implications for local services and infrastructure, including schools, roads, water and sanitation, even hurricane evacuation.

“It’s such a new form of development,” says Hollywood, Fla., planning director Jaye Epstein. “How do you protect the public’s best interests?”

Hollywood officials are currently reviewing applications for several hotel-condominium projects totaling 2,500 units. With the exception of one traditional hotel application from Marriott, all the hotel-related applications before Hollywood officials are for hotel condominiums.

Hollywood has just adopted new rules for hotel condominiums that limit owner occupancy to 90 days a year, and require hotel amenities, including a lobby and maid service.

Epstein says his biggest worry is the “long-term viability” of this relatively untested real estate model.

Says Cannon: “It’s unique. But the jury’s still out.”