Hotel Management for the Condo Hotel
By Nelson Migdal Shareholder & Co-Chair Hospitality Practice, Greenberg Traurig LLP | October 2008
Many of the new condo hotel projects that you have been hearing and reading about are nearing completion and preparing to open for business. The focus of our attention and analysis must now shift from the philosophical foundation of the condo hotel model to the more pressing concern of how to operate the asset in a manner that is consistent with the hopes and expectations of the parties.
The parties interested in this discussion are generally the owner of the hotel unit (the "Hotel Owner"). The hotel unit is the element of the building that is not owned by individual condominium unit owners. This is described and defined in the Declaration of Condominium, and might include things like the lobby, front desk, elevators, facade, roof, pool and health club, and even a "core hotel". At this stage in the life cycle of the majority of condo hotel projects, the Hotel Owner will be the developer or sponsor of the project. The next interested party is the individual condominium unit owner (the "Unit Owner"). These are the end users like you and me, and certainly some investors owning more than one condominium unit within the condo hotel. The expectation is that the universe of Unit Owners will be large and the expectations, demands, requirements and desires they bring to the operation and management of the project will vary by individual. To a certain extent, each Unit Owner is the developer's partner in the project. Next there is the manager or operator of the Hotel Unit, and in some situations, of the association of condominium unit owners (the "Operator"). There are a variety of structures for the contractual relationship by and among the Hotel Owner, Operator and Unit Owners.
Finally, and hopefully to a lesser extent, there may be a lender that financed the project and that remains present because the Hotel Unit continues to be owned by the Hotel Owner, and the Hotel Unit secures the Hotel Owner's loan, as the borrower, from the lender. The goal is to deal with the lender at the time of the closing of the loan, pay down or pay off the debt through the sale of individual condominium units, and have a positive cash flow from the project so there is no active involvement by the lender.
Heads in Beds
Some Unit Owners want their condominium unit to be their second or vacation home. A small minority of these Unit Owners will not want to be part of the rental program and will never be part of the hotel room inventory available to the Operator. The majority of Unit Owners are expected, and offered benefits and inducements to make the decision easier, to enter into a Unit Management Agreement ("UMA") and place the condominium into a rental program operated by the Operator. Even if the Unit Owner will use the condominium unit as permitted under the UMA, and this may include limitations as to the number of days of use each year, and certain "black-out" dates, the Unit Owner will want the unit to be rented as part of hotel room inventory to produce income for the Unit Owner. To make matters more interesting, there are plenty of condo hotel projects in which not all condominium units are owned by Unit Owners.
These projects have a hotel component that is owned by the Hotel Owner. This strategy provides the Operator with a "core hotel" and a minimum number of hotel rooms in inventory that are not subject to the variables of managing the condominium units owned by Unit Owners.