Mary Godleski for The New York Times Brian Greenberg in his hotel room at the Watson’s Regency Suites in Ocean City, N.J. He bought the unit in 1996 for $112,000.
Don’t Want to Leave the Hotel? Buy the Room
By Jennifer Alsever
IMAGINE loving a hotel room so much that you buy it, mortgage and all.
That is what Tony Garcia and an investment partner will do this month when they close on the sale of Room 309 at the Hotel Telluride in Telluride, Colo. The price is $279,000, complete with maid, concierge and room service.
The definition of a second home continues to stretch, as buyers increasingly invest in rooms in what are called condo hotels. Unlike traditional time shares, which give owners access to properties for defined periods, condo hotel units are fully owned and deeded properties that are rented by a hotel when the owner isn’t using them.
At Hotel Telluride, Room 309 looks like any other upscale hotel room, with a king-sized bed with leather headboard and a bathroom with granite countertops. The room has also been renovated to include a kitchenette with microwave, sink and mini-refrigerator.
As part of the purchase, Mr. Garcia, a photographer in Los Angeles, or the investment partner, Justin Page, an architect in Phoenix, can use the room at any time – up to a total of 60 days a year. During the remainder of the year, the hotel management can rent it out to guests for up to $395 a night. Mr. Garcia and Mr. Page get 40 percent of the revenue from room rentals; the hotel gets 60 percent.
Mr. Garcia acknowledges that he is paying a hefty price for one small room, but he says it’s worth it.
“I love the town of Telluride, and there’s nothing left really for that price, not a lot of new construction,” said Mr. Garcia, 49. “And I think people will enjoy coming for the amenities of the hotel. It’s a popular hotel.”
The condo hotel concept has been around for more than a decade, but chains like Marriott, Remington, Westin and W Hotels are promoting them more than ever as a way to raise cash for expansion without going to investors or banks. For hotels, construction costs have climbed and financing can be hard to get, primarily because the industry has yet to return to the kind of operating profits it registered before Sept. 11, 2001.
“Condo hotels are an explosive part of the lodging industry,” said James R. Butler Jr., who leads the global hospitality group at the law firm Jeffer, Mangels, Butler & Marmaro in Los Angeles. “Baby boomers are looking for second homes. A lot of money has come out of the stock market and into condo hotels.”
Up to 105 condo hotel projects are planned or under construction nationwide, and will eventually produce 29,042 hotel rooms for sale in vacation spots like Las Vegas and Miami and Orlando, Fla., according to Lodging Econometrics in Portsmouth, N.H., which tracks real estate deals in the hotel industry. Those units range from small, traditional hotel rooms like Mr. Garcia’s to three-bedroom quarters that can be separated and rented out as separate rooms.
But are hotel rooms really a good buy? It’s difficult to say.
The payoff can depend on factors like occupancy rates and the split of rental income. So a buyer must consider the location’s popularity and growth potential as well as the hotel’s general quality and reputation – and have enough cash to cover expenses that could arise if the room is too often vacant.
Owners typically get 30 percent to 60 percent of proceeds from room rentals. At Hotel Telluride, a $279,000 unit might cost an owner $16,570 in annual mortgage payments if he or she put down 20 percent on a 30-year loan at 6.3 percent interest. But that owner could realize $24,000 in rental income if he or she received a 40 percent share on a room that rents for $300 a night 200 days a year. That income must be reported for tax purposes. Any day an owner stays, there is one less day that rental income can be collected.
What owners may gain in convenience in a condo hotel, however, they can give up in control. Individuals own the room, but the hotels typically wield most of the power. While some developers sell all the units to individuals, who as a group can then hire and fire management, a number of hotels do not give owners much say in operations, whether the concerns are poor food, shoddy service or ugly drapes. Nor do they always provide access to the resort’s finances and overall occupancy rates.
“That would stop me,” said Jim Miller, an investment adviser in Columbiana, Ohio. “That’s like buying a stock where you’re not allowed to see a chart of the last five years.”
Hotel owners argue that they cannot deal with hundreds of owners telling them how to run their business. Yet to Mr. Miller, the condo hotel concept appears to carry the same risks as time shares did in the late 1980’s, when some owners would ultimately lose their investments after a number of resorts fell into disrepair or went bankrupt.
For maintenance and services like utilities and cable television, some buyers may pay monthly homeowners’ association fees. A typical fee may be $350 a month, though it can be lower or much higher. Other resorts take 1 or 2 percent of rental sales for a reserve account for upgrades, like new carpeting or bedding.
The money put into the reserve account cannot be deducted on income taxes until management actually spends the money on specific upgrades. Some hotels charge extra for daily housekeeping, for instance, or for breakfast in the hotel’s restaurant when the owners are in residence.
Some buyers have watched the value of their condo hotel units surge in recent years. Brian Greenberg bought his one-bedroom unit at the Watson’s Regency Suites in Ocean City, N.J., for $112,000 in 1996. He estimates that it is now worth $400,000. But he did not buy it as an investment. Rather, the payoff is a summer home for his family.
“Ultimately, it costs me a couple of thousand dollars a year for having a property on the Jersey Shore,” he said. “The concept is nice. When I go there, the room is clean, and when I leave, they clean up after me.”
That kind of appreciation in value is not guaranteed, because buyers may be getting in at the top of a housing bubble. Condo hotel units tend to sell at a premium, costing $250,000 to $3 million, depending on location and size, while their appreciation tends to stay equivalent to that of traditional condominiums, said Karen Johnson, a vice president in Los Angeles for Jones Lang LaSalle Hotels, a consulting firm. “You won’t get rich on condo hotels,” she said.
STILL, condo hotels have been popular for many companies, including Great Wolf Resorts in Madison, Wis. Great Wolf is to build its third resort, in Traverse City, Mich., with rooms at $369,000, after it sold out of similar units at two other hotels, in Blue Harbor, Mich., and in Wisconsin Dells, Wis., before they even opened. The resorts feature large indoor water parks.
Rich Rosko of Lake Villa, Ill., will put his money on a unit in the Traverse City resort. He already owns property at the other two Great Wolf resorts, and at condo hotels in Myrtle Beach, S.C., and Lake Geneva, Wis.
“I like the rental income,” Mr. Rosko, 48, said. “The management takes care of marketing, bringing in the customers. They take a credit card. With a rental house, you can get bad tenants who can destroy your house, or you can’t get them out.”
Mr. Rosko makes his living providing coffee supplies to corporate offices. But eventually, when he retires, he hopes to own a condo hotel unit in every major United States travel destination. “My job when I retire is to go check each of them out,” he said.