Condo-hotels, as traditionally defined, started to pop up in the late ’50s and grew exponentially in the ’70s, especially along the Florida Panhandle, due primarily to a tax law that allowed condo buyers to write off expenses such as association fees and property taxes. However, in the ’80s, this tax loophole was eliminated and condo-hotel development fell dormant for more than a decade. The product didn’t resurface until after Sept. 11, 2001, when the hospitality real estate market tanked. The hybrid was a financial mechanism for hotel owners to recapitalize their projects by selling the units, Alexander says.
“The Western Whistler opened in Vancouver, British Columbia, in 2002 and was a tremendous success,” Alexander says. “It basically became the foundation for Wall Street to participate in condo-hotel developments.”
Today, the larger developers tend to build a mix of traditional condo-hotels and hotel and residences. New York City-based The Related Group is no exception. One of the firm’s latest projects, The Viceroy Hotel in Snowmass, Colo., features a mix of traditional condo-hotel rooms and branded residences. “We use condo-hotels as a vehicle to stimulate sales of the total development,” says Ron Wackrow, executive vice president of The Related Lodging Group, a division of The Related Group. “In Snowmass, we are doing a full range of development. It satisfies a much broader spectrum of the market.”
Yet, some developers avoid the traditional condo-hotel model due to a major securities risk, which stems from whether the units are classified as a financial security or as traditional real estate. The Securities and Exchange Commission classifies condo units in these projects as securities if the condo unit is sold to the buyer with the explicit expectation that the buyer will earn income or derive tax benefits through, for example, rental program participation. If that’s the case, then only a securities broker can sell the unit.
“What’s to [prevent] the MLS realtor from saying these units can make $300 a night, and you are going to get half of that?” Alexander says. “It’s the developer’s responsibility to make sure that is not going on, and too many of them don’t have the ability to control that.” To avoid these SEC regulations, the majority of developers sell their units as real estate, which means the seller cannot promote the potential economic or tax benefits from a rental arrangement, nor project how much rental income a unit can earn.
Gatehouse Capital has a few condo-hotel projects under its belt but would rather develop branded hotel and residences. More and more hotel brands are saying no, too, including Starwood Hotels & Resorts Worldwide, the parent company of the W brand. “It’s very cumbersome for a brand to deal with 300 owners. There are a lot of [financial] security issues you have to be careful of,” Collins says. “It’s a slippery slope, and brands tend to shy away from them.”
While the condo-hotel model has proved popular since 2001, some developers expect to see the development of more hotel and residences projects going forward. “I would say the pendulum has swung more to doing a hotel with residences on top,” says Jim Borders, CEO of Novare Group, the Atlanta-based developer of TWELVE Hotels & Residences in Atlanta. “There were some condo-hotel deals that proved to be difficult in terms of dealing with a lot of different owners of the individual rooms. Also, in 2005 [for example], it was more difficult to get traditional financing than in ’06 and ’07.”
FORWARD THINKING It’s too soon to predict the fate of either model as a large chunk of projects are still in the development stage. Real estate headlines, however, reveal a fair number of projects already biting the dust. Three condo-hotels in South Beach, Fla., declared bankruptcy or entered foreclosure in 2007. This included the 24-unit St. Augustine, a condo-hotel conversion project that went up for sale in an auction last year—no one even showed up.