Hotel Condominium Resurgence- Is it Smoke and Mirrors?

By Marc Stephen Shuster Partner, Berger Singerman | October 04, 2015

Co-authored by Barry D. Lapides, Partner, Berger Singerman

The crux of the hotel condominium concept is hassle-free ownership—condo owners have both a vacation home when onsite and an investment property that can generate an income stream when not in use by the owners. Hotel condominiums are also attractive to developers, lenders, and investors.

Developing a hotel is expensive especially with respect to rising land costs and the amenities that are required for high-end hotels or hotels that cater to Millennials such as room service, housekeeping, spas, health and fitness centers, fine dining, concierge services and more. Financing the development of a hotel with the use of traditional financing (e.g., low rates and reasonable covenants and restrictions) is still challenging; however, if a developer builds a hotel with a residential component, then that developer can finance the hospitality component from sales of the residential units, essentially outsourcing a sizable share of construction costs before breaking ground.

Developers are also lured to the hotel-condominium-hybrid real estate model because the hotel-amenity element has the capacity to generate anywhere from a 15 to 40 percent premium value over the per-foot sales price of similar units. Investors, especially baby boomers nearing retirement who are or will become enticed with the idea of amenity rich living in premier locations without the hassle of maintenance, will provide developers through condominium presales with the extra “equity” in their capital stack; this equity incentivizes the institutional lenders to provide traditional financing due to the transfer of some of the lending risk off of the institutional lenders and onto the mortgagees of the until owners.

A prudent analysis requires developers, lenders, and investors be mindful of the history of condominium hotels. Under the Securities Act of 1933, “securities” include not only stocks, bonds, and other easily recognizable instruments, but also “investment contracts”, which the U.S. Supreme Court has interpreted to mean (1) an investment of money (2) in a common enterprise (3) with the expectation of profits solely (or “substantially”) from the efforts of the promoter or third party. Prior to 2013, developers had to be extremely careful in marketing hotel condominium units because if the marketing and sales process was done incorrectly, the units could be considered a “security” thus bringing the Securities and Exchange Commission and its legal requirements into the equation and opening the door to potential liability that could kill a developer’s chance of realizing profits.

Essentially, hotel condominium units are securities if they are marketed as such. The idea is pretty narrow—if one focuses on the return on the investment (“ROI”), which typically in the hotel condominium context is a byproduct of the rental program (whereby a developer or an affiliate hotel operator rents the condominium unit out for the owner when the owner is not using it, helping to defray investment and operating costs), the condominium is a security. The buyer is no longer simply purchasing real estate but rather is investing in a business enterprise where the expectation of ROI is tied to the developer or affiliate’s managerial efforts. Ignore ROI and focus on selling the unit for ownership purposes so that the unit is not a security.

Coming up in January 2018...

Mobile Technology: Relentless Innovation

Technology has become a crucial component in attracting and retaining hotel guests, and the need to enhance a guest’s technology experience is driving a relentless pace of innovation. To meet and exceed guest expectations, 54% of hotels will spend more on technology in 2018, and mobile solutions in particular will top the list of capital investments. Many hotels are integrating mobile booking, mobile keys, mobile payments and mobile check-in into their operations. Other hotels are emphasizing the in-room experience, boosting bandwidth and upgrading flat screen TVs to more easily interface with guest mobile devices. And though not yet mainstream, there are many exciting technology developments on the near horizon. The Internet of Things (loT) is taking form in some places, and can be found in guest room control systems, voice activation systems, and in wearable sensors that can be used for access and payment options. Virtual reality headsets are available at some hotels so guests can enjoy virtual trips to exotic locations or if off-property, preview conference facilities and guest rooms. How long will it be before a hotel employs a fleet of robots for room service, or utilizes a hologram as a concierge, or installs gesture-controlled walls that feature interactive digital displays? Some hotels are already using augmented reality for translation services, or interactive wall maps, or even virtual décor. This pace of innovation is challenging property owners and brands to stay on top of the latest technology trends while still addressing current projects. The January Hotel Business Review will explore what some hotels are doing to maximize their opportunities in the mobile technology space.