Condo-Hotels: A Niche Market for High Quality Deals

By Gavin Davis Director, Neptune Hospitality Advisors, Inc. | February 15, 2010

As an active advisor to clients in the hotel debt and equity capital markets, I find the above statement particularly troublesome. It is no secret that hotel capital, both debt and equity is abundant in part due to relatively healthy lodging fundamentals, drastically reduced hotel loan delinquencies, positive forecasted investment returns especially relative to other commercial real estate sectors and potentially a longer hotel investment cycle due to predicted lower supply growth. If creative financing or a lack of alternate financing is the impetus behind the condo-hotel craze, this is pause for concern in light of the superabundance of capital in the market. Before reading further, it should be noted that condo-hotels can and do work in certain circumstances. Such circumstances are few and far between to warrant the type of attention that has been droned on this niche within the lodging sector. Our firm is currently working on financing for condo-hotels that would be regarded as quality projects. Interestingly, these projects also underwrite as stand-alone hotels and do not use the condo-hotel structure as means for otherwise unattainable financing.

Condo-Hotels, the Basics

The term condo-hotel is used indiscriminately in reference to a variety of hybrid real estate projects containing both residential and hotel components. Two common types of condo-hotel projects are the traditional hotel (lower floors) with primary residences (upper floors) that are not rented to the public and a hotel where the guestrooms are sold to individuals as condominiums who then contribute their individually owned units into a hotel rental pool. The latter encompasses a wide spectrum of projects from those that offer a relatively small portion of total guestrooms as condominium interests to projects that are entirely comprised of condos. Variations on mandatory or voluntary condominium participation in the hotel rental pool, condominium owner usage of their individual units, condo-hotel brand affiliation, access to hotel amenities by condominium owners, parking privileges, housekeeping and room service are a few of the components of a condo-hotel project that create its seemingly endless permutations.

As the condo-hotel units are sold off individually, the financing risk in the form of a mortgage is passed from developer/hotel owner to individuals. Ultimately, this allows a project that traditionally might receive 65% senior debt as a hotel development to be financed at a much higher leverage level. In turn, the developer is able to defray both debt and equity capital costs onto presumably less sophisticated individual investors while drastically shortening the developer's time to recoup profits on a given project.

Why the Emergence?

Condo-hotels have emerged as a result of a confluence of prevailing market interests including but not limited to strong residential real estate returns over the past few years, attractive residential real estate financing, positive lodging fundamentals and developers desire for additional financial leverage and reduced risk. The importance and relation of residential housing markets to the condo-hotel equation can not be underscored enough. If interest rates were at levels closer to historic norms instead of near historic lows, residential asset pricing would not be as frothy.

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Social Media: Getting Personal

There Social media platforms have revolutionized the hotel industry. Popular sites such as Facebook, Twitter, Pinterest, Instagram, Snapchat, YouTube and Tumblr now account for 2.3 billion active users, and this phenomenon has forever transformed how businesses interact with consumers. Given that social media allows for two-way communication between businesses and consumers, the emphasis of any marketing strategy must be to positively and personally engage the customer, and there are innumerable ways to accomplish that goal. One popular strategy is to encourage hotel guests to create their own personal content - typically videos and photos -which can be shared via their personal social media networks, reaching a sizeable audience. In addition, geo-locational tags and brand hashtags can be embedded in such posts which allow them to be found via metadata searches, substantially enlarging their scope. Influencer marketing is another prevalent social media strategy. Some hotels are paying popular social media stars and bloggers to endorse their brand on social media platforms. These kinds of endorsements generally elicit a strong response because the influencers are perceived as being trustworthy by their followers, and because an influencer's followers are likely to share similar psychographic and demographic traits. Travel review sites have also become vitally important in reputation management. Travelers consistently use social media to express pleasure or frustration about their guest experiences, so it is essential that every review be attended to personally. Assuming the responsibility to address and correct customer service concerns quickly is a way to mitigate complaints and to build brand loyalty. Plus, whether reviews are favorable or unfavorable, they are a vital source of information to managers about a hotel's operational performance.  The February Hotel Business Review will document what some hotels are doing to effectively incorporate social media strategies into their businesses.