Condo-hotels offer amenities to developers, owners

Real Estate Weekly, Dec 7, 2005 by Allan Starr

Manhattan's sizzling residential sales market has fueled a surge in a form of real estate ownership that had not previously taken hold in the city.

The "condo hotel" combines condominium residential living with a hotel or hotel services. It enables individual investors to buy into a condo hotel project, acquiring a room, apartment or suite that can be placed in a rental program run by property management when the owner is not occupying it.

Condo hotels take two basic forms--a condo project that includes a rental program or a hotel that offers rooms or suites for sale as condo units.

Most condo hotel projects also offer hotel-like services to unit owners. Condo hotels that lean more toward the condo end of the spectrum may or may not offer full hotel amenities and service offerings but only include limited perks.

Condo hotels that take after the hotel end of the business are more service oriented since there is a fully staffed hotel on the premises.

Those who invest in condo hotels gain the everyday comforts of apartment life with the added benefit of room service, maid service, access to a concierge and other aspects of luxury living.

Typically, investors are buying into a high-end property with long-term value since most condo hotel projects are developed at destination locations such as Manhattan or Florida.

The owners of condo hotel units can place their room, apartment or suite in a voluntary rental program in which the units are rented out in the same manner as hotel rooms. Securities and Exchange Commission regulations prevent developers from forcing participation in a rental program unless a formal filing is made with the SEC.

The rental revenue generated allows the investors to defray the various expenses associated with owning property. Rental income, minus a roughly 10 percent fee for the agent or agency that rented the unit, is divided between the unit owner and the condo hotel property owner, usually on a 50/50 or 60/40 basis. There is no pooling of revenue between owners.

While part of the rental program, the units are cleaned and maintained by the condo hotel staff in the same manner as a hotel room.

Rooms are rented to guests on a rotating basis to ensure that rental revenue is shared by all owners on an equal basis. Guests, of course, may still request specific units. Some condo hotel developers require that owners that join the rental program must also participate in a furniture, fixtures and equipment package to ensure the owned units match the rest of the property.

Developers have turned to condo hotels for a number of reasons. They can lower the cost of financing the construction of the property through the sale of individual units. Although private investors may own some of the rooms, apartments or suites, the developer has access to additional units to rent out without incurring the expense of actually owning the units and it can generate management fees for renting out the owned units.

Some real estate companies and hoteliers are converting existing hotels to condo hotels. They are taking hotel properties with a substantial number of unused rooms and converting the vacant rooms, apartments and suites into condo units.

This allows the owner to sell a portion of the asset to invest in other deals while still maintaining the money-generating sections of the hotel.

In addition, condos sold in a property owned or managed by brand-name hoteliers--i.e., The Ritz-Carlton Hotel Co., LLC, Starwood Hotels & Resorts Worldwide Inc. and Hilton Hotels Corp., among others--enable the developer to reap a significant premium on the sale of the condo units.

Hotel condo projects also allow real estate companies to develop residential real estate in areas that are not zoned for pure residential property. The rooms, apartments and suites available in a number of condo hotels typically do not have cooking facilities because the areas are not zoned for residential purposes.

Zoning regulations may also limit the number of days any one person can occupy a residence. In New York, long-term residents in property zoned for hotels may not reside in that unit more than 182 days out of the year.

Other real estate entrepreneurs are building condo hotels that have no rental component at all. The projects are located in areas of Manhattan that are zoned for mixed-use, which allows the developers to construct residential units that include kitchens.

The units in these condo hotels have no restrictions in terms of how many consecutive days they may be occupied by the owners. Each project includes a hotel component and the owners of the individual units may, for a fee, obtain hotel services.

The market for condo hotels, however, depends upon a hot residential market to drive buyers to invest in such property. In Manhattan, where apartment prices have skyrocketed, residential developers are looking to take advantage of the market.