Condo-hotel investments offer ownership, rental income -- and risk
By Tom Stieghorst
Business Writer
Posted April 4 2005
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Operational blueprint for condo-hotels
Apr 4, 2005
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When Henry Moy first reserved a Fort Lauderdale condo-hotel unit in late 1999, the idea was just getting off the ground in South Florida. Few people knew what it was. "When I first bought, all my relatives said, `You're crazy,'" he recalled.
Now condo-hotels are hot. And Moy hopes to take his early faith in the idea to the bank. His one-bedroom suite, available at preconstruction prices for less than $400,000, is now on the market for $645,000.
"It has appreciated greatly," Moy said.
Stories like that are fueling demand for condo-hotels, which are popping up from Fort Lauderdale to Palm Beach. Buyers get the ownership of a condominium unit with the services of a hotel, plus the ability to rent the units as hotel rooms when they are absent.
Typically, high-end chains like St. Regis, Four Seasons or Luxury Collection run the projects, bringing their service expertise, top-notch restaurants and concierge talents to the mix. The hotel's designer usually furnishes the units. Those factors appeal to buyers like Moy, successful businesspeople in their 40s and 50s, real estate brokers say. "They're well-to-do professionals that have a very nice primary residence somewhere else," said Matt Bobby, an agent at Esslinger-Wooten-Maxwell in Fort Lauderdale.
But owning this new real estate hybrid comes with some risks, brokers add. Prospective buyers need to have their eyes on more than how much the unit may appreciate in value before they write a check for tens of thousands of dollars down.
For one thing, calculating appreciation is guesswork, partly because securities laws limit what brokers can tell you about it. Ditto for potential rental income. Prices tend to be about 25 percent higher than comparable units in standard condominiums. Often, zoning rules limit the number of days you can occupy your unit, even though you own it.
Expenses, including mortgage, taxes, insurance and maintenance fees, typically outrun income from the units, which gets split with the developer of the project. Hotel income streams are less dependable than those from other kinds of real estate.
And many of the best projects are on oceanfront parcels that offer spectacular views, but also spectacular exposure to hurricane damage.
"It's not for everyone," Bobby said.
Crunching the numbers
A major difficulty in evaluating the purchase of a condo-hotel unit is the scarcity of official financial information.
Since 1973 the Securities and Exchange Commission has restricted agents from pitching resort condominiums as investments.
That means that any projection of rental income can get sales agents in hot water. "The SEC has made it very, very strict with real estate brokers that you cannot or will not make projections about what returns will be," said Paul McRae of Galleria Realty, which is marketing the 298-unit Trump International Hotel & Tower on Fort Lauderdale beach.
The regulation leaves buyers to glean what they can from average occupancy and rate data published by local convention bureaus or firms such as Smith Travel Research.
Countywide, hotels in Broward last year averaged 73.4 percent full at daily rates of $91.37, while in Palm Beach County occupancy averaged 74.9 percent at rates of $133.50. But the new crop of seaside condo-hotels, chock full of luxury touches, should get rates well above that.
Gauging potential capital gains or losses is also tough. On Fort Lauderdale beach, many condo-hotel projects are in the pipeline, but only The Atlantic, a 124-unit property, has opened. That means few comparable sales are available in real estate databases.
"There's not a real secondary market to appreciate what the prices are doing," said Scott Podvin, condo-hotel legal specialist at the Stearns, Miller law firm in Miami.
Another thorny aspect of sales is establishing the legal use of the condo-hotel unit. Although it is bought and sold like a condominium, in areas zoned for hotel use the unit can't be occupied in the same way.
In Fort Lauderdale, for example, a 10-block stretch of State Road A1A north of Castillo Street is zoned for non-residential use, to promote tourism in that area. Public lodging uses are defined in a state law, but the section on resort condominiums only says they should be rented more than three times a year for less than 30 days at a time. It doesn't address owners who don't rent their units at all.
Fort Lauderdale city attorney Harry Stewart said the city is developing an ordinance to better define the permitted use. "We don't believe the state statute is sufficiently clear," he said.
Not a sure moneymaker
Proponents of condo-hotels say they offer fewer responsibilities and higher services than standard condo projects. At the Brazilian Court, in Palm Beach, owners of the 80 units have access to room service from Café Boulud, a top-rate French restaurant in the hotel. At The Atlantic, residents can use a 7,000-square-foot health spa.
They also say condo-hotels units are easier to rent than regular condos, where leasing is often discouraged.
But even with posted rates at some condo-hotels of more than $500 a night, owners shouldn't count on rental income even to cover the expenses of ownership.
In addition to debt service on units that typically start at $300,000, there are monthly maintenance fees that run 50 cents to $1 per square foot. Most utilities are covered, but property taxes and condo unit owner insurance are not. A small charge for furniture and fixture replacement also comes out of rental income at many projects.
Tax breaks can ease the bite. Owners can deduct either mortgage interest on a second home, or rental expenses if they treat the unit as an income property for tax purposes,
But the bottom line doesn't encourage people to buy units for income. "I haven't seen any yet that make money on operations," said Scott Brush, a Miami hotel consultant.
`Vanishing commodity'
Rosalia Picot, sales director at the Q Club Fort Lauderdale, a 333-unit condo-hotel outpost of Hilton Hotels & Resorts, said most buyers aren't landlords. She said units appeal to second-home buyers who use the rental income to partly offset their expenses.
In resort areas, Picot said owners use their condos on average less than a month a year. Most can afford to carry the cost.
"They just want it for those couple of weeks during the season they come down," said Adam Schlesinger, president of Ceebraid-Signal Corp., which is redeveloping the Brazilian Court as a condo-hotel.
South Florida buyers are far more focused on a fat return on investment when they sell, brokers said. Some units in hotels as yet unbuilt have already been sold by original owners to secondary buyers, real estate agents say.
That kind of activity may give pause to cautious types. But proponents argue that choice condo-hotels won't be available forever. With rules for beachfront developments tightening and land already scarce, an oceanfront residence seems a good bet to hold its value.
"There aren't many remaining pieces of property," said McRea, of the Trump International Hotel & Towers. "It's a vanishing commodity."
Tom Stieghorst can be reached at tstieghorst@sun-sentinel.com or at 305-810-5008.
Balance of payments
Here is how a statement of annual pretax expenses and income might look for a one-bedroom South Florida condo-hotel unit purchased for $375,000. The example assumes the buyer put 20 percent down ($75,000) and will use the unit personally for 60 days.
Experts caution that income varies depending on changes in occupancy and daily rate, although few if any units make money on operations. Rates and occupancies are based on informed estimates. They are an average of high winter levels and lower levels in off months, typically in the spring and fall.
EXPENSES
Mortgage: $20,436
($300,000 at 5.5% for 30 years)
Property taxes (2.6% of value): $9,750
Insurance: $900
Maintenance ($642 monthly): $7,860
Total: $38,946
INCOME
Available rental days: 305
Average annual occupancy: 61%
Average daily rate: $285
Subtotal: $53,024
Less operator 10% fee ($5,302): $47,722
Less 50% split with developer: $23,861
Total: $23,861
ANNUAL SHORTFALL
$15,085
Source: Sun-Sentinel research |
