Proceed with Caution: If Condo Hotel Market Cools, Litigation Could Heat Up
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | October 28, 2008
Beyond the Big Apple
In August 2004, Elad Properties Ad Group Ltd. bought the Plaza Hotel for $675 million, a staggering $838,000 per room. Elad, a U.S.-based subsidiary of an Israeli company, is in the business of luxury condominium development, so it was no surprise that the company would plan to convert the Plaza.
In fact, condo hotels have attracted so much attention that the New York City Council recently introduced a bill to prevent hotel owners from converting more than 20 percent of a given hotel to condominium apartments. Meanwhile, extensive condo hotel development is happening all across the country. There are many companies providing hotel condo space in major markets throughout the United States. In fact, it was recently reported that more than 11 percent of all current hotel projects are condo hotels. At the end of first quarter 2005, there were more than 100 condo hotels moving through the industry's development pipeline.
What's behind this hot new market? For condo hotel developers, the answer is simple - a quick return on their investment. Capital is gained from the sale of condominium units, which often sell at prices that command attractive premiums when compared to traditional condominium residences. Due to this structure, these projects are advantageous in that they limit the amount of debt developers typically hold. For unit buyers, condo hotels can represent attractive real estate investments with attendant benefits that come with ownership. Demand is driven by the fact that most condo hotel properties tend to be upscale, such as the Fontainebleau Hotel in Miami Beach, Florida and the MGM Mirage in Las Vegas.
Of course, the key to success of a condo hotel project is the hotel component. The hotel operation must be efficient, attractive and profitable for the concept to work. The good news for many major developers is that this business model is relatively easy to identify, based on past experience and a good understanding of the local market.