Image: The Plaza Hotel in New York
Kathy Willens  /  AP file
The Plaza Hotel in New York is being converted so that it can sell some of its units as condominiums.
updated 6/7/2005 5:22:07 PM ET 2005-06-07T21:22:07

Denver attorney Jacques Machol loves the hotel amenities he gets when he stays at the Fontainebleau in Miami Beach: room service, housekeeping, linen service and a complementary breakfast.

Only Machol isn't a hotel guest. He recently paid $735,000 for his 1,100 square-foot suite.

The hybrid concept of a luxury hotel that sells some of it units as condominiums has become one of the most popular trends in the industry in recent years. Condo-hotels in the past two or three years have expanded beyond traditional markets in ski resorts or Hawaii and into other tourist destinations such as Orlando and Las Vegas. Projects also are under construction in urban centers like Atlanta, Chicago and New York, where the Plaza Hotel is being converted.

Hotel developers like the concept because they spread their financial risk among the future condo unit-owners. Individual condo owners like it because they enjoy the resort-style luxuries, and in many cases the hotel rents out their units when they're away.

"Anything is at your fingertips," said Machol, who gets 45 percent of the income when the Hilton-run Fontainebleau rents out his suite.

The condo-hotel units that are rented are not the same as traditional timeshares. A condo-hotel unit is purchased by its owner outright while someone who invests in a timeshare is only entitled to the time that he or she occupies a unit.

Hot topic
Smith Travel Research, the lodging industry's leading research firm, doesn't keep figures on the number of condo-hotels in the United States since the popularity of the concept is so recent. But the hybrid concept definitely is a hot topic, said Jan Freitag, director of client services for the Tennessee-based firm.

"Every major player, the major hotel owners in the country, are looking at hotel condos, hotel condo conversions, hotel condo construction to see if it fits their portfolios," he said.

The luxury hotel chains — including Hilton Hotels, Four Seasons Hotels and Resorts and The Ritz-Carlton Hotel Co. — have brought new credibility to a concept that was used as a tax shelter until the 1986 Tax Reform Act eliminated the benefits.

"People have a lot more confidence buying into a Hilton or a Four Seasons because they know the name. They know the quality. They know it must be reputable," said Joel Greene, president of the Condo Hotel Center in Miami, a brokerage that sells such units.

Ritz-Carlton, in fact, won't even manage a hotel without a residential component because of the lucrative nature of the condo-hotel concept, spokeswoman Vivian Deuschl said. The Chevy Chase, Md.-based luxury chain first became involved almost five years ago with the concept in Washington, Boston and New York. The company recently opened condo-hotels in Dubai and Berlin.

Major Market Indices

"This is an idea that has reached a lot of acceptance," Deuschl said.

Nationwide boom
Nowhere is the concept hotter than in Florida, where the Orlando and Miami-Fort Lauderdale area each could have as many as 10,000 units in the next few years, up from less than 1,000 units five years ago.

Several factors have led to the nationwide boom — the improving performance of hotel companies, the recent investment appeal of real estate over the stock market, low interest rates and baby boomers approaching retirement who want to invest in a second home, said Mark Lunt, a hospitality expert at Ernst & Young in Miami.

Hotel occupancy rates dropped after the 2001 terrorist attacks, limiting the amount of Wall Street money available for building new hotels, so developers went looking for another way to finance their projects. A developer typically has to come up with around 40 percent of the equity for a traditional hotel; a condo-hotel development requires much less investment.

"What's interesting is we're in a very favorable time for hotels," said Scott Berman, a partner in the hospitality and leisure consulting practice at PricewaterhouseCoopers in Miami. "It will be interesting, as traditional financing becomes more available, whether this growth continues."

But the concept has risks for both the developer and the condo buyer.

Financial risks
The Securities and Exchange Commission considers the condo offering a security if income and expenses from the rental units are pooled and if a condo unit is sold with the explicit expectation the buyer will earn money or derive tax benefits from it. If the development is structured as a security, it can only be sold by a securities broker and it is easier for an investor to sue the developer under the SEC's anti-fraud rules, according to Los Angeles attorney Jim Butler.

Most developers choose not to sell their projects as securities to avoid the SEC complications, so they are prohibited from discussing the economic or tax benefits from a rental arrangement or project on how much a condo unit can earn in rental income. Many buyers make decisions without all the facts.

"If you're not allowed to communicate revenue expectation, often times buyers are making a decision based on incorrect information or overly optimistic information," Lunt said.

James Walesa, a financial adviser for wealthy clients in suburban Chicago, put a deposit down two years ago for a one-bedroom condo-hotel unit at Canyon Ranch Living in Miami Beach, which is still under construction. Aided by his financial background, Walesa did extensive research to find out whether it made economic sense to purchase the $485,000 unit, an effort he doesn't think the average buyer will make.

"The way they sell these things, I don't think it's fair to the consumer," Walesa said. "Unless the investor gets somebody who knows what they're doing and how to analyze this stuff, he is buying on the sizzle rather than the steak. I bought the sizzle but I was able to at least guess on the steak."

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