| 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."
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.
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