Some hoteliers are selling some hotel rooms like one would sell a condominium—thus, the name: condo hotel. Some are being built brand new, and others are being converted from old hotels. They are generally located in expensive vacation destinations—for now, most of them are in Florida.
Condo hotels differ from times shares or fractional ownership in that the owner of the condo hotel doesn't have to rent out the room, nor is there an obligation to use the hotel management, although if you are going to rent, what other cost-effective option is there?
Because the buyer is actually buying real estate, there are real estate taxes, insurance, and a condo association fee, and condo hotels generally cost twice what an equivalent residential condo would cost. There is no common method for allocating other expenses of a hotel, such as a bar, convention facilities, or shops.
Buyers don't have to rent out their rooms, but if they do, then they will be bound by the rental agreement. If the rooms are rented, then they will have to match others in the hotel. The owner will not generally be able to use it during peak occupancy times, although an owner probably wouldn't want to do this, anyway, since that will be the most profitable time to rent. Local ordinances may restrict the amount of time that an owner may occupy his room.
In a typical arrangement, the hotel operator takes 10% of the rental for operating the hotel, renting out the rooms, and cleaning, then the rest is split 50/50 between the condo hotel owner and the hotel.
There are numerous drawbacks to the condo hotel:
- They can cost up to twice as much as comparable properties in the same area.
- Many hotels—to maximize their income—restrict the number of days that an owner can use the property to 30 days per year.
- Because of security laws, developers are reluctant to discuss occupancy and room rates, so it is difficult to evaluate a property's earning potential before owning it, especially considering that maintenance fees can be up to $1,000 per month.
- The owner may not be able to use the property when demand for rooms is high, which is when many owners will want to use it, especially in resort areas.
- Because they are a recent innovation, it is not known how well they will appreciate, especially compared to other real estate, nor how easy they will be to sell.
- The hotel business, and, thus, earnings, is very volatile. Earnings may drop significantly during downturns.
- And what if the hotel itself goes bankrupt?
Condo hotels are not actually considered investments, because they probably won't make money, but it is considered a means of owning some property in expensive locales with the rents helping to reduce the costs of ownership.
There is a new website specifically for both buyers and sellers of condo hotels: NACHO—National Association of Condo Hotel Owners.
Condo Hotels not such a Good Deal
Apr 8, 2008 - It seems that condo hotels are a lousy investment, at least for now, for those people who bought at the top of the real estate bubble. Hotels are a risky business because occupancy rates depends on the economy, weather, and competition. Condo hotels allowed developers to transfer some of their risk to investors of the condo units, which may have caused the developers to build more than they would have otherwise, adding too much capacity for an area.
Some investors are saying that the hotel keeps more of the rental money than they should. Other investors are arguing that since condo hotels were primarily an investment, they should have been registered with the SEC as securities, which would make it easier for investors to recoup some of their losses. If the investors could prove that the condo hotels should have been registered as securities, then they would be entitled to get their money back without having to prove fraud or misrepresentation. However, most developers did not promote the condo hotels as an investment, thereby obviating the need for SEC registration, and defeating those investors who are suing to assert otherwise. Some are complaining to the SEC, but the SEC won't take any action unless the developer enticed buyers with projected incomes or occupancy rates.
Condo-Hotel Buyers See Investments Sour