Condo-Hotel Concept

16 12 2005

The concept of a luxury hotel that sells some of its units as condominiums has become one of the most popular trends in the real estate industry in recent years. Condo-hotels have expanded into destinations such as Orlando. Hotel developers like them because they spread their financial risk among the future condo unit-owners. Individual condo owners like them for the resort-style luxuries, and in many cases the hotel rents out their units when they’re away.

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.

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.

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.

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.

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

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.

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.

Source: PlanetRealtor.com


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