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PO Box 1212 Tampa, FL 33601 Pinellas Updated March 2006
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Buying a dream, then renting it out
St. Petersburg - Ed Droste's ideal getaway home includes fancy frills like maid service, a spa and beach club. He also wants it to generate rental income but not if that means dealing personally with checking in guests and fixing overflowing toilets.
A founder of the Hooters restaurant chain, Droste made an increasingly popular choice among baby boomers looking for a second home: buying a room or suite in a luxury hotel.
"It's the best of both worlds," said Droste, who put down a hefty deposit last week on a $676,000 one-bedroom condo in a four-star Hyatt hotel that will be built on Clearwater Beach. "I get personal use, income to offset my costs and the tourists get a first-class, well-run property."
Developers have been selling condominiums as combination vacation homes and resort rentals since the 1970s. But selling hotel rooms to individuals only caught fire within the past five years or so, with Florida among the hottest spots. And it's getting hotter.
Condo hotels make up 3 percent of U.S. hotel room inventory. But they accounted for nearly 13 percent of the 100,452 hotel rooms under construction nationwide in December 2005, according to Smith Travel Research.
Florida ranks behind only Nevada with nearly 25,000 rooms in condo hotels, most in Miami and Orlando. The Tampa Bay area has just more than 3,000 and hundreds more in the pipeline.
Clearwater Beach is ground zero. Five major hotels are expected to open by 2008, all with rooms owned by individuals and amenities such as fine dining restaurants, room service, fitness centers and spas.
The condo hotel label covers a variety of hybrids. They include older hotels rooms or condos that are refurbished and sold to investors.
But the fastest growing type are new, fully furnished, high-end hotels in popular resort areas, like Clearwater Beach. Developers typically build suites for two different types of buyers within the same project.
The biggest, most expensive units are for ultrarich customers who want a second home but don't need to rent it out. A prime five-bedroom, gulf front condo at the Hyatt hotel project tops out at $5.5-million.
But most condo hotels rooms are aimed at buyers like Droste, a partner in a company working as an adviser to Hyatt's developer.
They want a vacation home they can use for a month or two each year and rent out the rest of the time. While owners are free to lease the suite themselves, most sign up with a management firm that markets, books and runs the hotel.
Typically, the hotel management company takes 10 percent of room revenue and the rest is split between the unit owner and developer. Owners hope to recoup some of their expenses: real estate taxes, mortgage payments and monthly fees for running and maintaining "shared facilities" like the front desk, pool and hallways.
The condo hotel boom is driven not just by what the buyers want but by what the banks demand. Selling rooms has become a critical piece of the economics of building high-end hotels.
Presales reduce how much developers must borrow for construction. With rising land prices on the beach and escalating building material costs, premium prices that condo hotels fetch can make the difference in whether the numbers work.
"Without two floors of condos . . . the hotel would cost more than (room rates) would support," says Dilip Kanji, developer of a 180-room Westin hotel on Tampa's Rocky Point with 20 residential condos on top. "We'll use profits from condo sales to reduce the cost of the hotel."
Nearly all 4- and 5-star hotels being built today have "a considerable residential piece as part of the economics of the deal," says Daniel Peek, managing director of Regent Street, a hospitality investment consultancy in Tampa.
It's not so clear if condo hotels are a good deal for buyers.
How much money they make depends on how often their rooms are rented and at what rates. If travel takes a hit from a weak economy, hurricane or some other event, owners' income could plummet. After the Sept. 11 attacks, occupancy rates at Pinellas hotels fell for a year - as much as 10 percent in some months.
Another uncertainty for buyers is resale value.
With so little history on condo hotels, Peek wonders if owners will keep older and smaller units. "It's an unknown long-term if people will want a hotel room once the asset gets a little tired . . . and the walls start to close in on you," he says.
Owners also need to keep an eye on what expenses are included in the monthly fee that developers charge, says Mark Lunt, a hospitality analyst with Ernst & Young in Miami.
"What about the number of pencils at the front desk or the bellman's time - who pays?" he says. "You split so many expenses and how many accrue to all owners or just those in the (rental) program? It's like a Rubik's Cube."
Although condo hotels are vastly outnumbered by standard hotels, they've become a fixture of the hotel landscape, Lunt says.
They've taken off in recent years as baby boomers approaching 60 search for investments with better returns than stocks, he says. The hot real estate market, low interest rates and stronger hotel occupancy and rates fueled the boom.
Aqualea, the Hyatt-branded hotel on Clearwater Beach, booked reservations for its first 68 units over 17 days in December, said developer Neil Rauenhorst. Preconstruction prices from $500,000 to $2-million will "go up and up again" as additional phases go on sale, he said.
Rauenhorst and other condo hotel developers carefully avoid talking about the rooms as investments.
They worry that would invite the Securities and Exchange Commission to regulate sales of their condo hotels as if they were securities. The agency has suggested they can avoid that by not giving customers projections of rental income and occupancy rates.
That leaves buyers to do that research. Whether formally considering it an investment or not, they buy units without enough information to back up their expections, says Andrew Robins, an Boca Raton lawyer who represents hotel and resort owners.
"The most important thing is you really do make a mistake if you are looking at these as investments," he says. "They were invented for people who want to use the unit and stick it in a rental program to offset some of their costs."
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