To Market, To Market, To Buy: Condo Hotel Overview

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By Marion  Edward

While condo hotels and variations thereof in the fractional ownership market are expanding in brand affiliation, geographical offerings and emerging residence alternatives such as private residence clubs and deeded destination clubs, the plethora of choices has necessitated ongoing educational seminars to offer advice to developers, financiers, prospective owners and managers and service providers to this niche industry. Information Management Network ("IMN") offered its biannual symposium 2nd Annual Florida Symposium on Financing, Developing & Operating Condo Hotels at the Westin Diplomat Resort & Spa in Hollywood, Florida May 22-23. The two-day conference attracted more than 650 attendees from the national and international sectors and featured practical working sessions for participants attending the moderated panels and presentations. The Hollywood conference featured 28 sessions including specialized programming for New/Prospective Owners, Small Property Owners, In-Depth Regional Market Roundtables; Unit Rental Management, Sales Compliance.

Workshop Leader for the Condo 101 Panel and Session Chair for the Amenities agenda, David J. Schwartz, managing principal, The Management Consortium, Inc. Hospitality Advisory Services based right there in Hollywood comments: "I grew up in the business," Schwartz notes, "When I was 8, I handed out towels at the pool deck to people like Frank Sinatra and the Rat Pack. My family's background was resort hotels. This is the kind of business you love or hate because it's 24/7. My circle included many apartment and Condominium developers who never did hotels. It was only natural that I became an Advisor to them on Condo Hotel development."

Schwartz discusses some basic differences between condo hotels and hotels: "With condo hotels, you're dealing with guests and owners. Owners believe they can go any place, do whatever they want, and at no extra charge-They think they own it all.Thus the average hotel manager is not equipped to deal with this and often fail. In fact, in Florida you must have a CAM(Community Association Management license. Some will have separate buildings for the condo portion and the hotel."

Regarding branding, Schwartz continues: "Some areas like South Beach, Florida are considered brands unto themselves. Most of South Beach hotels are not branded and have their own cachet People from certain walks of life identify with that. In this case, the area becomes the brand. Adding a hotel brand on top of that may or may not give the hotel saleability. Banks believe hotel brands lend saleability and thus be a good loan candidate.

Schwartz recalls: "Back in the late 90s when I was part of a real estate and hospitality group based in NYC, I would see the same people flying down to Florida every Fri night and flying back up Monday morning. If I am coming down to Florida a lot and spending $250 a night on a hotel, while pulling in $.5 million on Wall Street, I can buy a condo (which can be the very same room) and not only have a place to stay but also own something that appreciates in value.The people who buy these things are not stupid.They know the management company will rent it out when you're not there."

On the subject of brands, Schwartz comments: "Brands have a large guest data base and sophisticated reservation systems. The brand is the flag- the identity of the project. Some won't give you the right to their brand without hiring their company to manage the site. (You can also hire a third party to manage your property or do it yourself.) Flags cost a lot of money, and therein lie some of the problems: PIP (property improvement program)-you have to be able to afford that flag. The paradox is: brands are going to cost you as a developer, and you have to determine if the brand will be profitable after you do your PIP to bring it up to brand standards. Most condo developers look to sell out a project and this is a way, they believe they can have an enhanced product and sell it faster. With hard contracts, the bank will give the funding. Speed is of the essence since you, as the developer, have your money tied up in stages. You want to work with OPMs (Other People's Money). The objective is to get the development 40-50% sold out."

On the subject of sales, Schwartz notes: " Most Condominium Developers only care about selling units.not about the running of the hotel condo. Hotels are most often apartments with hotel amenities." Schwartz adds that in Miami Beach owners did indeed sell hotel rooms as opposed to apartments in the 40s, following a pattern that still is in vogue in Latin America and Europe. SEC regulations in the USA changed that. Schwartz notes: "The successful hotel brand will always yield a bigger market for renting hotel rooms. . .it is chic to say you have an apartment at The Ritz Carlton. . . ." Schwartz points out, "Along with that, you have a definitive high level of FF&E and services."

When it comes to service, Schwartz is more guarded: "Five-star service: Everybody claims that's what they are presenting but nobody knows what that service involves. At the upper levels of service, there is a greater proportion of staff to guest ratio, and only at that high level do brands substantially invest in training."

Service is a part of branding, and Schwartz notes brands help drive sales. "Buyers don't know from standards. They invest in a name, e.g., the Trump brand draws. The Trump organization does its own standards enforcement." Schwartz explains, "That's when the brand is actually important: to make money."

There are different branding arrangements as well. Schwartz says: "In Florida and some other states, you can be a CHA (the highest designation of hotel training) but that doesn't mean you can manage a condo hotel. One of the necessary requirements in Florida is CAM (Community Association Manager's) license in Florida. Even if you were from The Pierre in NYC, it doesn't mean you are licensed to run a condo hotel." Schwartz notes requirements vary but that most training is through experience. "It's a matter of licensing more companies and practicing good managememt," Schwartz comments.

You can brand your own management; buy the brand and have a third party use their company management or use the brand's management company. The brand's property management company often puts investment rights of its brand and a percentage of ownership into the management contract. Schwartz believes management companies today should share some of the risk as well as the rewards.

Additionally, owners need to find something unique to sell. The typical condo hotel needs to have at least a kitchenette "even to make a cup of coffee in AM or nuke a corn muffin," says Schwartz as he adds,

The condo hotel industry segment as we know it today is still experimental in many ways. "History is still being written in all these things.all the answers are not there yet but will unfold as more and more hotel properties come aboard."

Session Chair for the Private Residences, David M. Disick, Esq., president of David M. Disick & Associates capital raising and business planning for development, explained the difference between condo hotels and private residence clubs (PRCs):

"The PRC is a higher, upscale form of fractional ownership and usually single site.I've spent time researching city clubs and the club industry in America at the high end resort development. PRCs offer the same real use of home ownership at a fraction of the price. Options are non equity; indirect equity."

Disick points out: "Non-equity and indirect equity are generally multi-site clubs of single family homes, but there is no individual fractional fee simple real estate interest."

Disick has created an alternative ownership structure with Elysian Deeded Destination Club. Owner-Members own a fractional fee, simple real estate interest in the vacation home of their choice with priority use rights in that home plus use rights throughout the network. Thus, Owner-Members can have all the advantages of individual real estate ownership such as mortgage financing leverage, ability to sell their interest on the open market through real estate brokers whenever and to whomever they wish and benefits of potential real estate appreciation without feeling tied down to only one vacation property.

Moreover, under Disick's structure where acquisition of homes is phased according to membership sales, investors have secure hard asset values in the cost of the real estate."

Disick says, "There are interesting synergies between Private Residence Clubs and Deeded Destination Clubs on the one hand and the hotel condo upscale products as they appear to investment motivation." Disick notes with regard to the PRC and Deeded Destination Clubs: "While people want it to appreciate, it's really a personal use product." All options to residential alternatives are quickly becoming a mega segment which Disick believes "if you market them together, there will be economies of scale and management."

Disick illustrates the phenomenon of a return to urban sites as competitive purchase options for suburbanites and/or business clients. "DC and NY.are a reflection of the current lifestyle buzz," he says. "They're good for business or suburbanites' desire to eat drink and be merry on the weekends."

As a Panel participant on the financing involved in the condo marketplace, Disick notes: "We need to demystify the business of raising money. Everyone asks, "How do you raise money?" I reply: "Hotels sell rooms, airlines sell travel; banks sell money. Rather than genuflect before the authority figure, the developer is responsible for generating the confidence of the capital sources in his commitment to the project and his business plan."

Disick refers to his recent publication, "The Art and Science of Raising Capital for Developers" and recommends: "As an art, commit your passion for your deal. With the science, anticipate every possible thing that might go wrong. Show this to investor. Lay out the plan in detail." Attendees' interests centered around the exploration of financing options, development alternatives, security concerns and sales and marketing recommendations.

Disick illustrates that versus the 50% traditional costs of sales and marketing for the timeshare segment, the Deeded Destination Club varies between approximately 10% for a club of single-family residences or up to 15-20% for a multi-unit project..

Disick also illustrates the importance of the Relationship sales. Disick advises: When you learn the ins and outs of the client's psyche, you discover what they are looking for.there's a dynamic established that can be cultivated." Disick has many strategies for creating a sense of urgency after establishing the client bond, and he advises those interested in this aspect of hospitality services to keep themselves apprised of opportunities by attending and conducting seminars such as the May Florida event.

Disick also believes the subject of service is the distinguishing characteristic that complements upscale properties. "Generate a feeling of belonging" for the owner. This can vary from airport pickup to specific family celebrations and commemorative Tiffany personalized gifts or monogrammed skis/golf bags, or choosing to devote a portion of profits to charity...

The segue to out of the box thinking was actually a programmed topic to conclude IMN's two-day seminar, and Steven Ferry, Founder and Chairman of the International Institute of Modern Butlers was one of the panelists. Commenting on the panel, and previous presentations, Ferry notes that everyone is trying to articulate the concept of "home" for this niche of the hospitality industry. Ferry says, "It should be a slam dunk!" Of course, the butler concept is not a top-of-mind awareness in the USA, and seems to be somewhat alien to the pragmatic outlook of Americans. However, for those who regard this aspect of service conducive to the cultivation of the wow factor and the sizzle in service, the butler concept seems consistent with the fact that investors in this aspect of hospitality are investing, often, in second "homes" as well as in a security/investment.

For Ferry, marble baths and luxurious appointments are not the essence of the upscale sector; they're expected. "Service is private," and such amenities as spa, personal treatments and skills a butler brings occur within the personal space, "en suite". "Butlers have what it takes for the wow factor," quips Ferry. "They create the home within the hospitality environment." At the international level, butler service is a traditional part of cultures; it's only in the USA it needs to be cultivated as a non-intrusive component to the upscale residential sector.

As residential alternatives expand and investor expectations become more defined, the emergence of more sophisticated product and service offerings will guarantee a better quality of life as well as a more clearly defined differentiation of the client experience.