Proceed with Caution: If Condo Hotel Market Cools, Litigation Could Heat Up

By William A. Brewer III Managing Partner, Bickel & Brewer | 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.

The Good

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.

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.