Posts Tagged ‘condo hotel’

Condo Hotels – The Most Economical Choice in Secondary & Vacation Homes

July 6th, 2011

In a condo hotel, a buyer makes a fee simple purchase of a deeded condominium unit/guestroom. When not occupying the room, the owner may make the unit available to guests at the hotel through a rental management or leaseback program. Any room revenue generated through the program is shared between the unit owner and the developer/managing partner. This scenario provides a host of tangible benefits for the condominium owner, including a deed to a physical room, access to all hotel amenities and the ability to take advantage of a 1031 tax-deferred exchange. Condo hotels differ from other vacation home models in a variety of ways.

The condo hotel concept has numerous advantages over other vacation models, including greater product consistency, fewer ownership conflicts and hassle-free rental opportunities.

Seldom-used vacation homes take time and money to oversee and maintain. With a condo hotel, you get the services and flexibility without the time commitment. The on-site management company takes care of all maintenance, finds renters and takes care of renters’ needs on-site.

You have full ownership of your condo hotel unit and may sell it at any time.

When you’re not using your unit, you may place it in the hotel’s rental management program and share the revenue it generates.

A condo hotel unit is an asset that you may sell at any time, and, you keep 100% of the profits.

Standardized furniture packages are often incorporated into the price, or at minimum, your turnkey unit should look like all the other units in the hotel

Units rented to hotel guests suffer wear and tear. Expect special Furniture, Fixture, and Equipment (FF&E) assessments to replace worn carpet, drapes, furniture, etc.

The rental program allows condo hotel owners to earn rental income and provides access to hotel services and amenities

Potential for tax breaks associated with mortgages and depreciation.

Maintenance free ownership because property managers handle all maintenance.

Ability to take advantage of a 1031 tax-deferred exchange.

To assure room availability for visitors and tourism, local governments may limit the amount of time owners may use their unit.

Financing can be more costly than for a primary residence – usually +1%.

If the owner wants to use the unit, they should notify the hotel in advance.

Owner should pay additional fees if they want to utilize housekeeping and other services.
Income from rental may fluctuate if there is a decline in travel, desirability of the unit, or based on hotel rental rates.

Condo Hotel Owners may need to purchase additional insurance riders to protect against liability claims and damage or loss.

Condo Hotel Owners will pay monthly Condominium Association Fee’s

Should a condo hotel owner decide to participate in a rental agreement, they should determine if the property has a static “hotel room” inventory. Commercial unit “rental preferences” over privately owned units could affect rental opportunities, check rental agreement language to insure fair and equitable distribution of rooms among both commercial hotel rooms and participating privately owned condo hotel units.

Additional particulars pertaining to the successful operation of condo-hotels are highlighted as follows:

- Rental contract term is typically 6 months to one year.

- Check owner’s intent to occupy notification requirements, necessary to guarantee availability for

individual owners.

- Unit owners should receive quarterly statements showing a detailed breakdown of all unit and account

activity.

- A rotational booking program should be used to ensure that units in the rental program enjoy a fair and

equitable distribution of rooms sold.

- If there is an unusual or extraordinary event, the hotel guest may be charged for damage to the owner’s

unit. Normal wear and tear is anticipated and is the responsibility of the unit’s FF&E reserve account.

In order to place a unit in a rental program, a management and rental agreement is first signed between the unit owner and the hotel management company. This agreement provides for a number of variables, primarily:

- A portion of the revenues received from the nightly sales of rental program units flows through to the condo hotel owner. This is typically a 50-50 split after a 7-11% Marketing Fee and a 7-10% FF&E Capital Reserve are deducted. The hotel management company/operator retains the remaining portion of the rental revenue stream.

- A Usage Agreement is implemented between the condo hotel owner and the management

company/operator, providing for the implementation of an FF&E reserve.

- The FF&E furnishing packages should meet certain standards. Failure to comply with such standards may either require immediate refurbishment at the unit owners’ expense, or the expulsion of non-conforming condos from the rental program.

- Responsibility for the maintenance and repairs of common space is allocated among condominium hotel unit owners, based on their pro-rata shares. A Homeowners’ Association (HOA) is usually set up to retain ownership of such areas and oversee the collection of dues from condo hotel unit owners. These dues typically cover reserves, common area maintenance, property insurance and utilities expenses. Property taxes are usually paid for directly by each condo hotel owner, and the hotel manager pays for any operations costs including salaries and other direct hotel expenses.

Developers create projects by building or converting resorts and sell units through sales and marketing programs. Marketing costs can run as much as 11% – 15% of the unit selling price, and are rolled into the price of the unit.

Much of the actual law governing the sale of condo hotels is established by the property’s municipality and state. State laws cover most aspects of condo hotel documentation, but there are important federal laws that should be considered. The sale of a condo hotel unit, coupled with certain other elements, classifies the offering as a security.

In 1973, the Securities and Exchange Commission (SEC) determined that selling resort condominiums through a sales effort that emphasized economic benefits (such as rent-programming, mandatory rental program participation and use restriction) made the sale an investment contract and not a real estate contract. This section outlines the key differences between these two transactions.

Security offerings should be registered with the United States Federal Security and Exchange Commission (SEC) and should also meet state level securities registration requirements.

The SEC states that:

- The sale can be marketed as an investment as long as it includes information about anticipated rates of

return.

- A seller can represent a condominium hotel unit as an investment (including mandatory participation in

the rental program and potential appreciation in the value of the unit) and can program rents and

expenses among unit owners.

- All sales materials should have the necessary warnings and disclaimers typical of a prospectus.

- Large projects should file periodic disclosure reports with the SEC, similar to publicly traded companies.

If the securities are not registered and not publicly traded, then there are the following limits on resale:
- Sale is limited to accredited investors (who should have certain income/asset levels)
- General advertisement is prohibited
- Sale or resale requires the use of registered securities broker dealers

This first model is the most prevalent type of fee simple real estate transaction. It separately deeds the commercial area of the operating hotel from the guest room areas. It then turns the guest rooms into condominium units which are sold. The hotel’s remaining commercial units are retained and operated separately from the Condominium Association. The hotel offers rental agreements to individual condo unit owners; enabling them to take advantage of rental income while at the same time supporting ongoing hotel operations.

In order to place a unit in a rental program, a management and rental agreement is first signed between the unit owner and the hotel management company. This agreement provides for a number of variables, primarily:

A portion of the revenues received from the nightly sales of rental program units flows through to the condo owner. This is typically a 50-50 split after a 7-11% Management Fee and a 5-10% FF&E Capital Reserve are deducted. The hotel management company/operator retains the remaining portion of the rental revenue stream.

A Usage Agreement is implemented between the condo owner and the management company/operator, providing for the implementation of an FF&E reserve.

The FF&E furnishing packages should meet certain standards. Failure to comply with such standards may either require immediate refurbishment at the unit owners’ expense, or the suspension or expulsion of non-conforming condos from the rental program.

Responsibility for the maintenance and repairs of common space is allocated among condominium unit owners, based on their pro-rata shares. A Homeowners’ Association (HOA) is usually set up to retain ownership of such areas and oversee the collection of dues from unit owners.

This second model deeds the guest rooms into individual condominium units including ownership of the hotel’s operating components such as public areas, meeting facilities, and services.

The unit buyers are automatically part of a Condominium Association and hire a third-party to manage operations and assets. The condominium association shares 100% of the economics of the operating hotel.

This second model is less prevalent because Home Owner and Condominium Associations are typically not allowed to execute contracts for periods in excess of a year. While some credible hotel management companies are willing to operate property’s on a year to year basis, it is more difficult to negotiate these terms with hotel brand companies.

A fee simple real estate transaction is not considered a security offering (investment) and does not require SEC registration. In order for a property/development to be considered a fee simple real estate transaction, and therefore exempt from SEC registration, it should meet the following criteria as described in the SEC’s series of “no-action” letters:

- No emphasis on economic benefits from the efforts of a third party.

- There is a record and timeline of the sales process and the subsequent sale of the rental program.

- No representations may be made regarding economic or tax benefits of ownership.

- Rental services may not be advertised in the materials offering the unit for sale.

*The rental program is not used as an inducement to purchase.

- Prospective purchasers are provided with materials containing publicly available information regarding

*comparable developments. These may not include forward looking estimates or projections or

speculative information.

- No contract for rental or management of the purchased unit may be entered into before a commitment to purchase the unit (non-refundable deposit should be received and the contract should have no unsatisfied contingencies).

- No rental income pooling, accounts must be maintained separately by unit.

- No limits on occupancy by the owner in the sale documents other than those established by generally applicable zoning laws (can have limitations later under the rental program agreement).
- Fairly access all owners, participating or not participating in rental program

*The use and disclosure of such materials (in advance) of purchase may require registration as a

security, check with your counsel.

See the Intrawest No Action Letter

Utilization of The National Association of Condo Hotel Owners, NACHO http://www.nacho.us> advisory, rating & evaluation services to accomplish the by the National Association of Condo Hotel Owners, through the utilization of association guidance into the overall forging of the condo hotel program warranting resulting approval.

No representations made that infer that the purchase represents an investment and instead purely as real-estate and extension of lifestyle.

The rental program may be listed as one of many privileges of ownership.
Response to inquiry during sales process: The rental program does not pay a mortgage but depending on participation, can compensate for a portion of the annual cost of ownership. We are proud members of the National Association of Condo Hotel Owners, we have been “approved” by our evaluation, the results of the evaluation can be found at http://www.nacho.us

With continued buyer questioning on rental program…I apologize but current guidelines require that this sale be made as real-estate and prohibit me from providing any information that may be interrupted as an investment. In advance of your decision to purchase, you are welcome to log onto http://www.nacho.us become a member and see the results of the independent evaluation including resources and tools to help you understand our property and this purchase.

Sharing the details of the rental program in advance of the purchase decision could be interpreted as an inducement to purchase and require refunds and SEC registration.

No contract for rental or management of the purchased unit may be entered into before a commitment to purchase the unit (non-refundable deposit should be received and the contract should have no unsatisfied contingencies)

There is a record and timeline of the sales process and the subsequent sale of the rental program.

The rental program and management agreement is provided following the execution of a purchase and sale agreement and non-refundable deposit.

No rental income pooling, accounts must be maintained separately by unit.

No limits on occupancy by the owner in the sale documents other than those established by generally applicable zoning laws (can have limitations later under the rental program agreement).

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Things To Consider Before Buying a Condo Hotel or Resort Residence

June 8th, 2011

Resort home ownership, such as condo hotels and fractional shares is different from typical home ownership. So it is important to ask certain questions before signing the purchase agreement on a resort property. The following list of questions typically applies to most types of resort property ownership unless otherwise noted.

Pricing and Initial Purchase

-Is the price negotiable and do you need to purchase through a certain company or representative? Who gets a commission off the sale?
Some properties have a small percentage of flexibility in price while others are basically set in stone. This will usually be determined by demand, as well as overall policy of the developer or management company. Also, if you know who stands to profit from the sale and how much, it could help you in your negotiations.

-Is the property already completed or is it in pre-construction?

This question is important because the answer will likely affect the price of the unit. Many properties in the beginning stages of development will be sold at a discount to attract buyers, but as it becomes a more certain investment or units increase in demand, the price will go up.

-If the property is in pre-construction, when will it be completed and what will the overall property look like?

You may be anxious to get into your unit or have a certain occasion in mind. If completion is two years out, you may not want to wait. Also, a property in the early stages may look great to someone who wants a small facility with a low-key, less populated atmosphere. But there may be plans for hundreds or even thousands of additional units and large clubhouses, retail areas or other features that will draw many people. If you plan to keep your property for many years, you want to be sure it will fit your needs when it is finished.

-How many other owners are there?

This question is important for those considering purchases of fractionals. The price and amount of time available each year will depend on the number of other ownership opportunities offered in the particular unit. More than eight or ten other owners will make competition for primetime more difficult.

-What type of financing is available for this type of property in general and for this specific development?

Both condo hotels and fractionals are considered timeshare properties. Even if they are viewed as a second home, the bank considers all three types of properties discussed here as a secondary obligation – one that is less important than your primary home mortgage. As a result, you may have to pay 10 or 20 % down and the rate may be higher than a traditional home loan.

Some developers offer financing, which can be helpful, but be sure you understand the details. Some may require a smaller amount down, but will ask for a large payment upon taking possession of the unit. This arrangement may be fine with you, but you don’t want any surprises.

Another financing option is to take out a second mortgage on the equity in your existing home. If you choose this route, be sure the interest rate does not make it much more expensive in the long run. Also, you need to be aware that if you use a home equity loan to finance your purchase, you have only 90 days to refinance to a regular mortgage.

Information About the Management

-Who are the developers? Who will manage the property?

The first question will be important in determining the quality and reputation of the property. The second question will help determine if the management organization is well-known, professional, and likely to increase your rental income or resale value. These two questions are critical from an investment perspective.

Costs Associated With Ongoing Ownership

-What are the ongoing costs and who pays for them? Is there an annual membership fee?

There will typically be costs for insurance, real estate taxes, and improvement of the facilities. Although owners generally pay for these items, especially in a condo hotel setting, it is still important to ask. Other expenses to verify include housekeeping, marketing, administrative and general maintenance of the property. These are usually paid by the facility but one shouldn’t assume this is the case.

Rental Plan & Income Generated

-Is there a rental program and is it voluntary?

You will want to know if you can choose whether or not to participate in a rental program. This is true for all properties as some hotel residences and fractionals also offer this option as a means of generating income.

-How is the property marketed and does it have a history of success or features that will make it competitive in the vacation rental market?
If you plan on receiving rental income from your property when you are not there, it is important to find out what the management’s experience and approach is. Somebody like Hilton or Four Seasons has a reputation for luxury and good service and will likely attract more renters than an unknown management company. In addition, if the property has a popular restaurant, is located near a convention center, shopping area or other facility that will draw people in, you are more likely to find interested renters on a regular basis.

It is important to note that due to the unknowns involved in marketing and renting vacation properties, you should not count on rental income to cover the costs of ownership. Instead, experts recommend that you view this income as a bonus, if and when it is paid to you. The main consideration should be finding a property that you enjoy and will use.

-How is rental income distributed?

Gain a clear understanding of the percentage of rental income that will come to you, as well as any fees or charges that will come out first, such as furniture and decorating charges, and savings accounts for replacement of items. Some properties offer a better ratio than others.

Availability and Usage

-How often can you use the property? How long can you stay? How do you reserve time and how far in advance do you need to notify someone?
These will be important questions for condo hotel and fractional owners. But even in a hotel residence, you may need to call ahead to let someone know you are coming. Otherwise, your place may not be cleaned and stocked with supplies.

-What if you want to cancel your time or reschedule? How far in advance do you need to let someone know? Is there a penalty? Can your friends and family use your allotted time if you’re not able to?

For condo hotel and fractionals owners, the guidelines that dictate what happens when you can’t be at the property are as important as those for when you are using the unit. Be sure there is plenty of flexibility so that you can easily make adjustments and get the most out of your property without being penalized unnecessarily.

-Are there other properties in the same management group that you can use?
Some properties are managed by companies that have other properties available for you to use as an alternative. This can be an ideal feature, especially if you like to travel or want to share your available property time with family and friends.

Amenities and Services

-What amenities and services are available for residents and what do they cost?

As was mentioned in the previous chapter, it is important to have a full understanding of the services and amenities offered and the charge, if any. Some properties seem less expensive at first, but if you find that you will have to pay for things such as laundry, maid service, and furniture, appliance and decorating upgrades, the price doesn’t seem so great anymore.

Be sure you know the actual price it will cost you to get the unit with the furnishing you want and the services you use on a regular basis. These expenses are all part of the overall cost of a property.

If You No Longer Want the Property

-What if you change your mind about the purchase?

In response to high pressure sell tactics of some standard timeshare properties, the State of Florida enacted a rescission law that allows you to change your mind about your purchase within a certain timeframe. If purchasing a new property, you have 15 days to change your mind and receive your deposit back. On a resale unit, the timeframe is 3 days.

-Can I sell or transfer ownership of my property, and if so, are there restrictions or penalties?

There may come a time when you want to sell your property or give it to your children. It is important to know the rules about this before you purchase. Some properties may say that you can only transfer ownership to family members. Others may require you to list the unit through the management company. You may also be required to own the property for a certain amount of time before you can sell. It is important to ask these questions before purchasing.

-What is the resale value of the property?

In general, the types of ownership we have described have good resale value and are typically much better than that of standard timeshares. Of the three, fractionals are the most questionable when it comes to resale, but the risk can be greatly minimized if you pick an exclusive property with a well-known management company.

The resale value of your particular property will depend on several factors, including the reputation of the management company, the number of other similar properties available in your area, the condition of the property at the time of sale, the overall real estate market, and the popularity of your location. Some of these things can’t be predicted, but if you do your research it will help you to select a property with high resale value.

This list of questions covers many of the different aspects and issues associated with these innovative forms of resort property ownership. There likely will be other questions you want to ask as you become involved in the process. It is a good idea to enlist the services of a reputable real estate attorney or agent who is familiar with the specifics of condo hotels, fractionals, and hotel residence purchases. It may cost you a bit more, but could end up saving you thousands in the end and can provide you with the peace of mind and freedom to enjoy the experience and to feel satisfied with the process and the terms of the final purchase.

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