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Condotel

Condotel - The New Real Estate in Town

Article written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers
Published in Condo Media, July 2010
 
Portland recently had some excitement with over 15 fire trucks and their crews trying to control a major fire on the east side of the city. Ironically, the fire started in the abandoned smokehouse of the old Jordan Meats building that was in the process of demolition. This complex covers almost an entire city block of prime property whose future may spark a new type of real estate investment in Maine, the Condotel.
 
Like it sounds, a condotel is a cross between a condominium and a hotel. Sometimes it is called a condo-hotel. In this case this $17 million project is a 122 room, six story Hampton Inn with twelve condo units. This concept is not new but it usually is seen in high end resort areas like Miami or the Caribbean not a short walk from Portland’s working fish piers.

Pros and Cons 

So a cautious Mainer’s first question is, why? From the developer’s point of view the answer is simple. Risk sharing. With the real estate market only tentatively climbing out of its recent troubles, banks are seeking more security and developers are looking for alternative funding. Without changing the size of the hotel, a developer can reduce the scope of his project by selling individual rooms as condo units and shift the development cost burden to real estate investors that are unit owners.
 
Though Portland may not be on the same destination plane as Palm Beach, it is becoming a very popular city living spot. The condotel concept allows an investor the opportunity to make a relatively low-cost investment in a potentially good real estate growth area while providing a second home without requiring personal maintenance and visits. In effect, condotels are a type of timeshare system where your unit is in a rental pool generating income when you are not there.
 
There are many differences between a condotel and a condo. A condotel is a turnkey type of property as it comes fully furnished and equipped. This often includes professionally decorated finishes and up-to-date kitchens. Like a condo, a condotel unit shares in the responsibilities of the common elements including the lobby, hallways, elevators, but in addition has access to hotel-quality amenities such as concierge services, room and maid services, massage and spa facilities, restaurant and lounge, pool, and workout rooms.

Income and Expenses

When developers market condotel units they are careful not to guarantee average daily rental rates, occupancy percentage, or projected cash flow as that would put them in jeopardy with the FTC. The onsite hotel management company serves the role of a condo property manager and, depending on the rental contract a condotel unit owner can rent the unit himself or have the hotel manage all of the rentals. This latter method is the one most typically employed to take advantage of the rental services’ broad marketing reach, professional record keeping, and check-in service.
  
An important part of a unit owner’s due diligence is understanding the uncertainties of room rental and method of renting one unit vs. another.  This is critical in creating an accurate investment cash flow estimate. Rental revenue sharing rates can vary from one condotel to another. 
 
As in any investment, knowing the variable and fixed costs is just as important. Like a typical condo, a condotel will have monthly maintenance fees usually based on a per square foot formula. Though utilities are often part of this maintenance fee, property taxes are not. Additional fees could include daily housekeeping, redecorating, front office, capital improvements, and various liabilities insurance to cover claims, damage, and other losses.
 
Financing may also present some differences from a primary residence loan. Often a second home loan requires higher down payments and increase financing points of 1 to 2%.
 
In addition, a condotel buyer’s due diligence efforts should include a review of the hospitality company’s reputation for marketing, brand identification, and standard of guest care as these factors will have a significant role in the success of the investment. Secondly, the buyer has to be certain the location is right for his personal needs.
 
Some owner’s agreements limit the amount of time an owner can stay in their own unit, the available seasons, the required notification time, and other considerations that may reduce the availability of the unit to the owner. As with all hybrids, condotels require compromises, however, with a good understanding of the issues it could be a sound investment choice without being burned.  
 

© CRITERIUM ENGINEERS 2010