Condotels don't pencil out
6 factors that negatively impact investments
By Steve Bergsman, Friday, June 12, 2009.
Flickr photo by Tomás Fano.Editor's note: Please welcome Steve Bergsman, an accomplished real estate author and journalist, as the latest addition to the Inman News columnist lineup. He aims to enlighten us with inside tips on real estate investment, for the first-time investors and seasoned pros alike.
Despite his oversized ego, I've been a big fan of Donald Trump. After all, how many real estate developers have created a "brand" out of a family name? Once, when I interviewed him, he told me putting "Trump" on a building created a huge premium as compared to, for example, an equivalent apartment unit built by someone else.
So it was with some dismay as I watched him over the past few years try to carve his way through the world of condo hotels, now often advertised as "condotels." This product has been on my watch list as one of the worst real estate investments ever created for the simple reason that it is really just a financing mechanism for the developer and for all practical purposes, caveat emptor, which in today's world means let the buyer be damned.
Basically, a condotel works like this: An investor buys a condominium in a hotel building and then allows the hotel to use the unit for guests when the owner is not in residence. The sales pitch suggests the buyer will recoup investment costs and fees through the daily rental of the condo unit by the hotel, which, by the way, rarely ever happens.
During what I refer to as the condominium pandemonium era, which lasted from 2002-06, condotels were a hot product. In that final year of pandemonium, Lodging Econometrics counted the opening of 32 condotel projects with 4,831 units. It was near the height of the market when Trump jacked up the business even further with flamboyant, high-end projects in Honolulu, Chicago and Las Vegas.
With the Trump name on the buildings, presales starting in 2006 and 2007 looked great. But, three years later, the closings on the presales haven't happened, and Trump has been stalled on the highway to riches -- including lawsuits with lenders on the Chicago project and reportedly turning the condotel units into straight apartment rentals in Las Vegas.
According to the local Las Vegas press, the Trump Tower here was 100 percent presold, but opened with less than 30 percent of sales closed. If buyers don't close their deals, they forfeit deposits. (Think 20 percent on a $1 million unit!)
Don't cry for "The Donald," since his condotel ventures were a bit of greed play, and although the Trump product was extremely high-end with many luxury amenities, this wasn't about creating a better product for the customer. Condotels get done because it favors the developer.
Borrowing from an investment book I authored, "Let's say, for example, a developer builds a hotel at a cost of $100,000 a unit. The developer owns it for seven to 10 years, then sells it at a tidy profit. However, if the same developer decides to build a condo hotel, he presells each unit for $150,000, in effect taking all the profits upfront that would have accumulated across the next 10 years."
One can't blame developers for trying to get more profit and cut risk at the same time, but let's see why condotels really haven't worked for investors:
1. Take the money and run. Developers made all kinds of promises, but after completion and sale of units, they just handed the building over to a manager, which tried, often without success, to fulfill all the exaggerated promises. ...CONTINUED
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Submitted by Joel Greene on June 12, 2009 - 4:21am.
You've said that "condohotels have not really worked for investors." Agreed. But the ethical developers and brokers out there never sold units as "investments." This would have been a violation of SEC rules and regulations. Condo hotels are sold as "real estate with a lifestyle." And in that respect, they deliver everything that was promised and more.
As a niche broker who has always enjoyed the #1 google ranking for anything related to a condo hotel search, I've had tremendous success selling these units over the past few years from Miami to Dubai and all points in between, but I'm quick to inform buyers that if they want an 8, 10, or 12% return on their "investment" that they are being unrealistic, and they should not buy a condo hotel. In reality, I tell them, that they would be lucky to see their units break even.
Having said that, our "investors" hear what they want to hear and buy with little desire to use their vacation home. Many of them probably who have purchased a unit or two in the past few years regret their decisions today. I've always said, "the right buyer for a condo hotel is a vacation home buyer who intends to get enough use out of his unit to justify its purchase."
Anyway, for those of you who have bought, seek me out at Joel@condohotelcenter.com. I do have a unique financing source for condo hotels and fractionals at very reasonable rates.
Submitted by David Podgursky on June 12, 2009 - 5:03am.
nice article - but I wish you had focused more on the consumer side - who cares about Trump? We should educate the consumer more about this property type.
As concerning Joel Greene's comment
http://therealdeal.com/newyork/articles/stock-backed-loan-arrangers-may-...
hmmm... first of all, what do Condotels have to do with the SEC? Timeshares are securities, not real estate. Condotels are real estate - so the SEC has nothing to do with it. Marcus Millichap is an INVESTMENT Real Estate Firm and everything they sell from land to condo buildings are INVESTMENTS... and no one is on their back since LAND is historically a terrible investment.
Backing your loan with your stock portfolio is a horrible idea - and unlike the Mortgage Brokers you quote in your interview, Joel, I do know what I'm talking about.
Given the economic climate and people having issues with property value decline, having a 2-7yr finance vehicle on a property with an insecure price that is collateralized by their stock portfolio is a horrible ideal. When their equity vaporizes and they're upside down due to the fact that condotels are essentially impossible to borrow against, it would seem that this proposition would also put in peril the security of the borrower's stock portfolio creating a double risk.
Condotels are a very specific niche property and would therefore require a very specific niche lender and it is good to see that there are 2-3 people willing to lend...but the niche BUYER for a condotel that does not have the cash to buy one outright is likely not going to have the comfort level or the risk tolerance based on standard financial risk modelling to actually get a stock-collateralized loan AND not lose their asses in them!
David Podgursky
david@themortgagegotoguy.com
www.themortgagegotoguy.com
Submitted by William Metzker on June 12, 2009 - 6:35am.
I have to say I'm struck by the ways you can replace the word "condotels" with "single family homes."
Submitted by Bruce Hiatt on June 12, 2009 - 8:24am.
I beg to differ about the comment of limited use of condohotels by the buyer. Some condohotel units can be purchased as a primary or secondary residence and the owner can live in it full-time. Owners are not required to place their condohotel units into the rental program in some condohotel properties. Overall, condohotels are another type of vacation home and not an investment property just like a timeshare or fractional share.
Regards,
Bruce Hiatt - Broker/Owner
Luxury Realty Group LLC
Las Vegas, NV
www.LuxuryRealtyGroup.com
www.LuxuryVegasForeclorues.com
www.LasVegasHighRiseBlog.com
Submitted by Joel Greene on June 12, 2009 - 8:45am.
David, you touched on so many points, it is hard to address them all. The article you cited was one that I was interviewed for, but I did not write.
As for stock collateralized loans, they are not right for everyone; but they do work well for many, especially for buyers that can't get traditional financing for properties like condo hotels or fractionals or because they have poor credit or can't show their income.
But one nice feature of stock collateralized loans is that they also allow borrowers to use funds for purposes other than buying real estate, such as paying for a wedding or putting a child through med school, or even buying a yacht. You can read more about them here:
http://www.condohotelcenter.com/articles/a135.html
I disagree with you that buying real estate using a stock collateralized loan is a "horrible idea." If a buyer uses his own stock to get the loan, and the value of the stock goes up, he gets all the upside. If it goes down, since this is a non-recourse loan with no margin calls he can simply walk away. The lender will have no further recourse. The buyer will not suffer any negative marks on his credit. AND, he still owns the real estate as that was never part of the collateral pledged for the purchase. This is a true win-win situation!
Your comments seem to indicate that you are against stock collateralized loans because you are expecting the real estate values to drop. If that's the case, an "investor" would want to steer clear of making that real estate purchase in the first place, right? So what difference does it make how he finances his purchase? Either way, he needs to repay the loan.
I've said it before. There are mortgage brokers out there that just don't understand asset loans, and they are the ones that tend to be most critical of them. But the borrowers who use these loans will never seek a traditional bank loan again.
Submitted by Eliese Pivarnik on June 12, 2009 - 11:12am.
In our resort market, almost every property is being classified as a condotel.
Lenders are looking up properties on the internet, and if a unit is offered on a nightly basis, they slap a "condotel" label on the development.
Steamboat Real Estate Blog
Submitted by Robert A. Hulme on June 12, 2009 - 12:04pm.
It sounds like any project similar to condotels would have a hard time being successful in our present market, no matter how it is presented.
Robert A. Hulme
Realtor, GRI, e-PRO
Utah Select Realty
Loan Officer
Mortgage Xpress
www.HeberCityRealEstate.us
www.MidwayRealEstate.ws
Submitted by Ashton Coleman on June 12, 2009 - 4:53pm.
It's always great to read a blog b/c you get "the word" from all angles.
I do agree with this post regarding condo hotels and management having the cards in favor of the house. Miami Beach had a nice development boom of condo hotels and finalizing it with a pricey ($1,500psf) W-Hotel South Beach due any month now.
Other condo hotels North of South Beach such as Trump Beach Resort Sunny Isles charges 62% (12% is hidden) off gross income which is enough to break even or cash flow just a bit even after their $4 night per room premium paid to Trump for the use of his name. If anyone would like an income statement for a Jr. Suite (2008 Statement) email me at CondoHotels@MiamiDreamRealty.com. The unit owner had a 2008 BTCF(before taxes) profit at $11k plus a hassle free vacation RESORT pad including everything from linens to coffee filters.
Timing was critical as the speculator bought into the cash cow investment and the speculation inventory has slowly dried(ing) up. My beef with the condo hotels are the typically high maintenance fees such as the Jr. Suite charging $990 month which cut into the owners net profit significantly.
There are a select few condos and condo hotels in South Beach with reasonable maintenance fees and I simply advise to secure your own management while paying no more than 15-25% as mgt. fees. My investor client tells me he had a 7% ROI in the Barbizon Beach Club (530 Ocean Drive) buying 6 units within the last 2 years. He uses his condos as a VIP pad for his friends and clients and a nest egg for his 3 children. The Mercury Condo Hotel (South Beach) is also very attractive with a killer REO deal. The challenge is securing reliable management.
Overall optimistic; for the hassle free lifestyle, there is still good opportunity in condo hotels. I also believe it's a local market which is heavily dependent on tourism..
@AshtonColeman
1.888.38.Dream
http://MiamiDreamRealty.com
http://JADECondosSunnyIsles.com
Keller Williams Miami Beach
Submitted by Todd Anderson on June 17, 2009 - 6:46am.
Our market here in Park City, UT is full of condotels and there is a constant battle among lenders in trying to get them to not be classified as condotels, but condominiums. In terms of an investment, even those that are considered to have the best rental numbers show less than 5% income versus asking price and that number is before HOA dues. The only way that any of them have ever "penciled" was due to great appreciation; with that gone, we have gone back to the idea of owning for use rather than investment
Todd Anderson
www.YouInParkCity.com
Keller Williams Park City Real Estate