You could not have lived in South Florida in the last few years without hearing all of the condo hotel mania. Rent your room when you are not in town and vacation cost free. There is a shortage of hotel rooms. Miami Beach and Fort Lauderdale are going upscale, don’t be left out. You can break even and enjoy the appreciation.
Sounds like an investment to me. That is until you look at the numbers. Large studios or junior one bedrooms (with a kitchenette) were hyped at $1M or more in “luxury” developments. For the same locations, these units were much more expensive on a square footage basis than comparable traditional condos. Developers touted amenities such as restaurants, meeting spaces, ballrooms and spas. But, the developer retained full ownership of the amenities. The hotel condo owner got their unit and that was it, no participation in the common area revenue.
The developers signed long term contracts with hotel management companies and used prestige brands in their marketing. The hotel management companies often insisted that owners make their units available for rental most of the year if they wanted to participate in the rental pool. By the end of the boom, the prestige brands would not even enter into a management contract unless they could totally control the room inventory. Local governments even limited the number of continuous days that owners of condo hotel units could occupy their units. Cities wanted to promote hotel rooms. This provides no support for the second home argument.
The operating cost side of the picture shows just how bad an investment hotel condos are. First, the unit owners pay their normal association monthly or quarterly maintenance and any special assessments. Then there’s the periodic redecorating fee to keep up with the prestige brand’s standards. And don’t forget real estate taxes and insurance. All rooms must be furnished and accessorized the same. The rentals must be booked through the hotel management company, which can get up to 60% of the take. In addition, the owner might be charged a cleaning fee for each rental day.
The management company has complete discretion over room rental rates. Some condo hotels associations specify a “fair” distribution of rentals to the owners of like units, but again the management company has a great deal of discretion. I found the developers’ disclosure documents quite entertaining. Basically, they sound like the first two minutes of every conference call. Only, it’s impossible for any analyst to tell the unit owners, “Great Quarter, Guys!”
When the owner uses his own unit, he might be charged occupancy, recreation or cleanup fees for each day. Management might even be able to charge owners to make up for the hotel’s low occupancy. Now that’s a tough way to make a living.
The Wall Street Journal’s “Rooms With a Bubble View” tells us that it really does matter whether condo hotel units were sold as investments. I wrote previously that the New York Attorney General is allowing New York residents to rescind their contracts on two Miami developments because they were sold as investments. The developer, Related Group (FL), was not registered to sell securities in New York State.
The WSJ focused primarily on Las Vegas, but the issue is the same. Unhappy investors want to rescind their contracts, even after they closed. Investors claim that rental income did not come close to matching the developer’s projections. The developers deny they made any projections and buyers were actually purchasing second homes.
There are a few positives to condo hotel developments for those who have ample income to enjoy living in them, especially the mixed use developments that contain full size traditional residential units. Your common areas will not be destroyed by an overzealous association decorating committee. Plastic flowers will not be “growing” in your lobby and hallways. I have personally lived through this in my previous high rise incarnation. After all, the prestige brand does have its standard. The units won’t be rental restricted, and of course there is room service.
The two condo hotels that exemplify the residential hotel lifestyle are the Ritz-Carlton Coconut Grove (MAR) and the Acqualina Resort and Spa in Sunny Isles Beach (just north of Miami Beach). The Ritz consists of separate residential and hotel towers. The Acqualina contains 188 large residential condos on top of 97 condo hotel units in one 51 story oceanfront building. The Acqualina started life as a Rosewood Hotel not long ago, but for some reason the Rosewood parted company recently.
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Sounds like an investment to me. That is until you look at the numbers. Large studios or junior one bedrooms (with a kitchenette) were hyped at $1M or more in “luxury” developments. For the same locations, these units were much more expensive on a square footage basis than comparable traditional condos. Developers touted amenities such as restaurants, meeting spaces, ballrooms and spas. But, the developer retained full ownership of the amenities. The hotel condo owner got their unit and that was it, no participation in the common area revenue.
The developers signed long term contracts with hotel management companies and used prestige brands in their marketing. The hotel management companies often insisted that owners make their units available for rental most of the year if they wanted to participate in the rental pool. By the end of the boom, the prestige brands would not even enter into a management contract unless they could totally control the room inventory. Local governments even limited the number of continuous days that owners of condo hotel units could occupy their units. Cities wanted to promote hotel rooms. This provides no support for the second home argument.
The operating cost side of the picture shows just how bad an investment hotel condos are. First, the unit owners pay their normal association monthly or quarterly maintenance and any special assessments. Then there’s the periodic redecorating fee to keep up with the prestige brand’s standards. And don’t forget real estate taxes and insurance. All rooms must be furnished and accessorized the same. The rentals must be booked through the hotel management company, which can get up to 60% of the take. In addition, the owner might be charged a cleaning fee for each rental day.
The management company has complete discretion over room rental rates. Some condo hotels associations specify a “fair” distribution of rentals to the owners of like units, but again the management company has a great deal of discretion. I found the developers’ disclosure documents quite entertaining. Basically, they sound like the first two minutes of every conference call. Only, it’s impossible for any analyst to tell the unit owners, “Great Quarter, Guys!”
When the owner uses his own unit, he might be charged occupancy, recreation or cleanup fees for each day. Management might even be able to charge owners to make up for the hotel’s low occupancy. Now that’s a tough way to make a living.
The Wall Street Journal’s “Rooms With a Bubble View” tells us that it really does matter whether condo hotel units were sold as investments. I wrote previously that the New York Attorney General is allowing New York residents to rescind their contracts on two Miami developments because they were sold as investments. The developer, Related Group (FL), was not registered to sell securities in New York State.
The WSJ focused primarily on Las Vegas, but the issue is the same. Unhappy investors want to rescind their contracts, even after they closed. Investors claim that rental income did not come close to matching the developer’s projections. The developers deny they made any projections and buyers were actually purchasing second homes.
There are a few positives to condo hotel developments for those who have ample income to enjoy living in them, especially the mixed use developments that contain full size traditional residential units. Your common areas will not be destroyed by an overzealous association decorating committee. Plastic flowers will not be “growing” in your lobby and hallways. I have personally lived through this in my previous high rise incarnation. After all, the prestige brand does have its standard. The units won’t be rental restricted, and of course there is room service.
The two condo hotels that exemplify the residential hotel lifestyle are the Ritz-Carlton Coconut Grove (MAR) and the Acqualina Resort and Spa in Sunny Isles Beach (just north of Miami Beach). The Ritz consists of separate residential and hotel towers. The Acqualina contains 188 large residential condos on top of 97 condo hotel units in one 51 story oceanfront building. The Acqualina started life as a Rosewood Hotel not long ago, but for some reason the Rosewood parted company recently.
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