New 'Condotel' Concept May Ease Hotel Financing Crunch

By Lewis, Connie
Publication: San Diego Business Journal
Date: Monday, November 22 2004

Condotels, a trend that could make it easier to finance hotel construction and purchases and turn average individuals into hoteliers - or at least hotel room owners - appears to be making its way to San Diego.

It's nothing new, according to lodging industry analysts, who say they are common

Ads by Google

Hospitality Management
Hotel / Restaurant / Food Service Management Degree. Apply today!
www.breyerstate.com

Gold Coast Accommodations
Budget luxury resort & apartments. Cheap holiday hotel deals
www.accommodationonline.net.au

Hotel Project Leads
Hotel Construction/Renovation Leads & Hotel Vendor Directory
HotelProjectLeads.com

in Europe and Latin America and sprang up in Florida in the 1980s before the 1986 Tax Reform Act reduced the tax advantages on such investments.

But tax laws were loosened and the concept resurfaced and spread to New York City and Chicago following the tourism downturn that came in the wake of the Sept. 11, 2001, terrorist attacks. when lending for hotel projects all but dried up.

Lenders have begun to look more favorably at hotel projects within the past year or so. But they still want developers to come up with as much as 50 percent or the cost of traditional projects, analysts say.

So condotels are a way to fill the equity gap, since construction loans for condominiums involving a pool of buyers are typically a much higher portion of the project's value. Downtown's residential condo boom attests to that.

At least half a dozen developers apparently are looking for places to build condotels in San Diego, according to tourism industry insiders. But only one, Sandor Shapery, who owns the extended-stay, five-story Staybridge Suites in Downtown, says he will sell some units of a proposed 44-story adjacent addition to separate corporations or individuals.

Plans have not been finalized for the property on 11th Avenue near Balboa Park, and the cost of construction has not been estimated. Shapery, who developed the Wyndam San Diego at Emerald Plaza hotel, said the majority of the Staybridge addition's units will belong to the hotel.

He expects, however, that one-bedroom units with kitchens would be attractive to corporations for extended stays for their staffers. And he also thinks companies would welcome 'the opportunity to make revenue from the units in between time when they don't need them.

Another incentive to condotel ownership, Shapery said, is that beyond a revenue stream, individual owners can anticipate they'll appreciate in value.

A Hot Topic

Jim Butler, the chairman of the Global Hospitality Group of the Los Angeles-based law firm of Jeffer, Mangels, Butler & Marmaro, said condotels are in demand by "aging boomers as alternative investments."

"The stock market is perceived to not be as attractive as in 1999 or 2000," he said. "But a condotel is real estate. So you can live in it or visit it and there's great interest and great demand."

The topic is so hot that Butler said he began conducting regular seminars on it in March.

But condotels, which differ from timeshares in that they are individually owned real estate properties. are not a panacea to the volatile stock market, he said, explaining that securities laws could come into play if the sale involves rental pool agreements.

Condotel projects may be structured a variety of ways, but in the purest sense, all of the rooms are individually owned.

Using the example of the Silverado Resort

in Napa as a pure condotel, he said all of the hotel's rooms have individual owners and all "are in varying states of repair."

Other properties have a mix of "dedicated" rooms belonging to a hotel company and others that are owned by individuals. But usually the hotel company maintains ownership and control of common areas, such as restaurants and bars.

"So there can be mixed regimes, with operating the business and then a homeowners association and sometimes you have a lot of complex agreements that aren't worth the brain damage.

"I'm not against condo hotels. They serve a role and offer a distinct opportunity. But they're not for everybody. People need to understand how they work."

Costs, Locations Vary

From an investment standpoint, individual buyers need to study the market when they start to consider different hotel brands. A high-end establishment might work well in one area, while a lower-end one would work better in another, Butler said.

Building costs and selling prices vary depending on the size of the condotel units, where they're built and whether they are luxury, low-end, or something in between. But the cost to convert standard hotel rooms to condotels would be less than building new ones.

"This is a product that works in vacation or resort-type destinations and it's also proving to work in urban centers, and San Diego is the best of all of those," he added.

Bob Rauch, director of San Diego State University's Center for Hospitality and Tourism Research, said individual condotel investors also need to consider what they'll have to spend to upgrade their rooms or units as the hotel's brand demands.

But those expenses would probably be no greater than one might pay to freshen up a standard residential rental each time a new renter comes in, he said.