The Ritzy Route to Condo Ownership

By Julie Bennett

Reprinted from The Wall Street Journal, February 1, 2006

On Sunday evening, Jan. 22, a contingent of 50 celebrities and champion poker players attending the Sundance Film Festival in Park City, Utah, gathered in a tent to play poker. At the end of a game that lasted until 3 a.m., winner Phil Hellmuth was handed the grand prize: a fully furnished $700,000 studio in the W Las Vegas, a condo hotel that hasn’t been built yet.

Most baby boomers can’t play cards like Mr. Hellmuth — who has won the World Series of Poker 10 times — but they do aspire to a similar prize. Condo hotel units, or condotels — suites in high-end hotels and resorts you buy and rent out when you’re not using them — are the hottest segment of the vacation home market.

Joel Greene, president of Condo Hotel Center in Miami, a real estate brokerage firm, says, “Condo hotels began in Miami in the 1980s, went dormant, then resurfaced about six years ago. Since Miami’s built up, condo hotels are moving into Fort Lauderdale, Orlando, Tampa and other Florida towns, resort areas around the country and even into U.S. cities.”

Lodging Econometrics, a lodging industry research firm in Portsmouth, N.H., reports there are 105 condo hotel projects under development in the U.S., with 32 due to open this year and 27 to be completed in 2007.

Of these, 75% are new construction; the other 25% are conversions of traditional hotels into condo suites. Destination Development Co. of Los Angeles, an affiliate of the Lowe Hospitality Group, for example, recently converted the 404-room Resort at Squaw Creek in Lake Tahoe, Calif., into 236 condo hotel units.

For developers, condo hotels are a financing vehicle. Conventional financing for large hotel projects dried up during the industry’s post 9/11 slump. By preselling their rooms to individual investors, developers can again afford to build upscale resorts. And because individuals can obtain mortgages for condo apartments, and not hotel rooms, all new condo hotel units have kitchens and dining areas.

For baby boomers, like Sherri and Erin O’Boyle of Henderson, Nev., condo hotels are both vacation homes and investments, whose rental income may defray part of the cost.

In 2001, Mrs. O’Boyle says, she and her husband paid $235,000 for a studio unit in Viera, a condo hotel in Lake Las Vegas Resort, a community built around a 320-acre lake just 17 miles east of the Las Vegas strip.

Their unit was completed in 2003 and they’ve been enjoying it for weekend getaways ever since. Comparable units now sell for $400,000, Mrs. O’Boyle says. So far, revenue from renting out their unit hasn’t generated enough money to cover their expenses, such as homeowner association dues, taxes and insurance, but Mrs. O’Boyle says, “If our unit were rented out more, we wouldn’t be able to use it as much.”

Another appeal of condo hotels is the ease of ownership. Rob Lowe, president of Destination Development, says: “The baby boomer generation is at an age when building a custom vacation home is very complex, time-consuming and frustrating, especially if it’s in a remote location. They’d rather buy a turnkey unit, and let someone else take care of it.”

Condo hotel projects are so popular that many sell out long before they’re built. Chicago’s Trump International Hotel and Tower won’t be finished until 2008, but sales director Tere Proctor says that 72% of the project’s 286 condo hotel units are already sold, at prices that range from $815,000 for a studio with a small kitchen and bathroom to $3 million for a 2,200-square-foot two-bedroom unit with a large living room, dining room and two and a half bathrooms.

Buyers must also pay $45,000 to $90,000 for upscale furniture, plasma televisions, linens and china. This cost is contingent, however, on whether you want the hotel to rent the unit for you. If it’s just for your own occupancy, you can furnish it anyway you please.

A spokesman for Intrawest, a Vancouver, Canada-based developer of resorts in Canada and the U.S., says his company sold 170 preconstruction condo hotel units in Luna di Lusso, a Tuscany-inspired village in the Lake Las Vegas Resort, in just four hours. Mr. Greene of the Condo Hotel Center says his Web site listing condo hotel projects gets 50,000 visits each month. “I hear from more buyers than I can respond to,” he says.

Steve Taggart, vice president of sales and marketing for Red Leaves Resort in Muskoka, Ontario, says units are selling quickly in The Rousseau, a JW Marriott resort hotel that will open in the spring of 2008. Roman Talkowski, a Burlington, Ontario-based sales executive, says he purchased a unit because “Muskoka is only two hours north of Toronto and the area is beautiful. I’d love a cottage there, but I only get three weeks of vacation, so I may as well own a unit that can be rented out the rest of the year.”

Denver attorney Richard Robinson says he bought two preconstruction units in Paraiso del Mar, a residential resort community in La Paz, Baja California, Mexico. “My wife and I will use one,” he says, “and when our adult daughters can’t use the other one, I’ll put it into the rental pool. My goal is not to make a profit, but to cover the carrying costs on that unit.”

One downside of condo hotels is that no one can tell Mr. Robinson and other buyers if they’ll ever hit their financial goals. Jim Butler, a hospitality attorney with Jeffer, Mangels, Butler and Marmaro LLP in Los Angeles, says if developers sell units as income generating investments, the Securities and Exchange Commission could classify condo hotels as securities and subject them to stringent regulations. Condo hotel salespeople, therefore, can only mention that you “may have the opportunity to place your unit into a rental arrangement,” Mr. Butler says.

Since condo hotels are so new, that rental arrangement is not standardized, says Kim Richards, president of the Athens Group, a developer of luxury hotels and resorts in Phoenix.

Condo hotel unit owners, for example, receive anywhere from 30% to 60% of the proceeds whenever their unit is rented, depending on each resort’s policy and operating budget. And the allocation of rooms — deciding which unit will be rented out whenever a hotel guest arrives “could lead to problems down the road,” Mr. Richards warns.

Grant Sabroff, senior vice president of Boykin Management Company of Cleveland, manager of the Pink Shell Beach Resort & Spa in Ft. Meyers Beach and two other condo hotels in Florida, says Boykin uses a computer system “to make sure there’s an equal and fair rotation in how units are rented throughout each resort.”

If you’re thinking of becoming a condo hotel owner, industry insiders and unit owners suggest you consider the following:

• Buy a unit in a good franchise, with name recognition and a world-wide reservation system, says Mr. Greene of Condo Hotel Center. “The more bodies the hotel operator can bring in, the greater the likelihood that their rental dollars will cover the resort’s expenses.”
• If you’re buying in a beach area, buy an oceanfront unit, not a cheaper one a few blocks from the water, advises Mr. Greene.
• Your turnkey unit must look like all the other units in the hotel, which means you’ll have to vacation surrounded by impersonal hotel furnishings, says Mrs. O’Boyle, the Henderson, Nev., buyer.
• Units rented to hotel guests suffer wear and tear. Expect special assessments to replace the carpet, drapes, bedspreads and even the furniture every few years.
• If you buy a condotel in a popular resort area, be prepared for celebrity neighbors. While visiting the W Las Vegas tent at the Sundance Festival, Paris Hilton reserved a penthouse unit and the rapper Jadakiss was one of several musicians thinking about buying one, too, according to a spokeswoman.