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Do condo-hotels make good investments?
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Owners have the same expenses as they would with a residential condo property -- mortgage, real estate taxes, insurance and condo association fees -- but the unit price is higher. "They sell at an average of $800 to $1,000 a square foot, as opposed to $400 for a residential condo," he says. "So the buyer has to reconcile his costs."

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The jury is still out on a number of legal issues, Kovac says. For example, how do you divvy up common operational costs when there are a number of components under one roof -- say, a restaurant, convention facility and shops, in addition to guestrooms under individual ownership?

"There's no boilerplate for how to allocate various common and operational costs," he says, "and that naturally becomes more complicated when it involves end users who are not business players."

What if an owner wants to keep some personal possessions on site? "In those situations," Kovac says, "there needs to be a locked storage area or an armoire stored elsewhere and moved in when the owners are in residence."

Fact-finding
The bottom line? Buyers need to do some homework before taking the plunge into the volatile hospitality business. "I don't know of a single property where renting the room out would cover all costs," Charre says.

Also, the hotel industry is among the most volatile around. "Hotels are the first to feel the repercussions of an economic downturn. If you're a condo-hotel owner in 2006, you may be enjoying the fruits of a rolling economy. But if there is a downturn, very shortly that room will be empty.

"The value of your condo-hotel could be negatively impacted, and it's too early in the market cycle to know whether there is a secondary resale market or how much condo-hotels are likely to appreciate over time."

If the hotel runs into financial difficulty, the condo association "could potentially be exposed to a cash call," Charre says.

For the would-be purchaser, one of the most frustrating aspects might be that the developer of a condo-hotel is prohibited by securities law from revealing the kinds of information buyers would most like to know -- such as how many nights they can expect the room to be rented out, what the forecast is on rental rates, and how a property's performance compares with others in its geographic area.

That's a dilemma the newly minted National Association of Condo-hotel Owners, or NACHO, hopes to resolve. The organization serves both buyers and sellers.

"Condo-hotels are in fact the best secondary vacation-home purchase available today," says Dante Alexander, NACHO president and CEO, and a former executive with Starwood Hotels & Resorts.

To help buyers make informed decisions, NACHO plans to publish "categorical ratings that can only be viewed by members," he says. Criteria include:

  • Complex and unit maintenance.
  • Ability of the development team to complete the project.
  • Likely profitability of the hotel.
  • The hotel's long-term competitive sustainability.
  • Unit economics -- what a buyer can expect to pay in insurance, taxes, homeowner association fees and other costs.

As is true of all new ventures, it takes time to work out kinks that may be difficult to foresee. Before delving into this market, prospective owners should be clear about what they're looking for. Condo-hotels don't make good investment properties. They do make relatively affordable second-home options in some very expensive locales -- with an opportunity to recoup some of the expenses.

Bankrate.com's corrections policy -- Posted: May 11, 2006
 
 
More stories by Marilyn Bowden
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