Condo Hotels Give Developers Access to Capital

By Andrew Glincher Office Managing Partner, Nixon Peabody LLP | October 28, 2008

Once limited to resort properties, where unit owners valued the ability to have their own apartment, but were only going to use it a few times a year, these hybrids became popular because they generated immediate capital for the resort owner and gave the unit owner the possibility of some rental income to offset his ongoing costs.

Today, whether it's the Four Seasons in Boston or the Plaza in New York or countless others in urban markets around the United States, the condo hotel concept has definitely gained recognition as a way of raising equity and maximizing the value of a property. In fact, published reports estimate that there are currently more than 200 of these projects, including over 60,000 condo units, currently under development.

There are a number of market forces driving this trend. One important factor has been the continuing strong demand for housing in most parts of the country. In many cities, after the most desirable sites for new development were exhausted, former office and industrial buildings have been converted to housing and some are yielding extraordinary returns.

In the face of this demand, numerous new hotel properties have been and continue to include condos. And aging properties in need of renovations and upgrades have converted portions of their space into condos as a way of financing the cost of improvements and enabling their owners to recoup their investments more quickly.

Condos within hotels have proven extremely popular with buyers as well, holding their value relatively well in weak markets and selling at a premium during strong markets. One reason is the economics. If you buy an apartment in a traditional condominium, there may be restrictions on your ability to rent it out to short-term or transient tenants. If you live in another city, or travel for much of the year, you might have no choice but to let your apartment sit vacant while you're not there.

Within the hotel setting, that same apartment could be rented out by the hotel management - just as it rents its other hotel rooms - during times when the owner is not using it. The unit owner and hotel management share whatever rental income is generated according to a pre-determined formula. Clearly, that represents an economic value beyond most traditional condos.

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