Turning Empty Rooms
Into Profitable Condos
When real-estate developer Richard Schlesinger bought the Brazilian Court Hotel in Palm Beach, Fla., last year, he decided to give a facelift to the 76-year-old landmark, where Judy Garland and Cary Grant often retreated.
Even then, the 103-room Brazilian Court "wasn't a glorious, top-of-the-line hotel," he says, and it couldn't compete with the area's high-end accommodations. That's why Mr. Schlesinger decided to sell it off as an 80-unit condo hotel, a plan under which individuals or investors own the rooms but can let the management rent them out when they aren't there.
"Making it condominiums really provides a vehicle for a developer to have the best of both possible worlds: an income-producing property with minimal debt," says Mr. Schlesinger, a partner in Ceebraid Signal Corp., a real-estate development firm in West Palm Beach, Fla. Profit from the sale of the condos is used to pay down whatever debt was incurred in buying the property, and the developers also typically get a portion of the room-rental charges.
While the condo-hotel idea has been around for several years, chiefly in vacation areas and major cities, it is showing a resurgence due to the declining hotel industry and rising condo prices. The hotel and travel industries have been hit by the depressed economy and fears of terrorism and SARS. Revenue per available room, an industry benchmark that measures hotel-room prices and occupancy, was down nearly 3% in March compared with a year ago, according to Smith Travel Research.
Condo-hotels offer at least a partial exit strategy for pressured hotel owners or a means to finance construction of new properties. There is a "huge amount of underutilized hotel portfolio around the country," says Louise Sunshine, president of Sunshine Group Ltd., a New York-based luxury condominium sales and marketing firm owned by a Cendant Corp. unit. She says her firm is working with numerous hotel owners interested in converting part or all of their properties to condo-hotels, including Blackstone Group, which is considering the move for its Westin St. Francis in San Francisco.
For buyers of these condos, it can be a sweet deal. Individual owners usually can put their units in the hotel-room rental pool while they're not using them and get a portion of the proceeds. Better yet, they get access to the same amenities and services as hotel guests.
That is what Richard and Sue Wollack like about the three-bedroom condominium at the Four Seasons Hotel & Residences in San Francisco that they bought for $2.8 million shortly after selling their four-bedroom home in the city's Presidio Heights neighborhood for $4.3 million. "We like the idea of having the type of services that the Four Seasons has to offer," from the concierge staff making a reservation at a New York restaurant to getting a missing button sewn onto a jacket, says Mr. Wollack, a real-estate investment executive. Then there's the access to the hotel kitchen: Upon the Wollacks' return to their condo late one night recently, Mrs. Wollack had a craving for a hot-fudge sundae. "I told her, 'Just call down to room service for one,'" says Mr. Wollack.
Those kinds of services allow hotel-affiliated condominiums to command a premium. Buyers typically pay 40% to 60% more for a condo that has access to hotel amenities than those that don't, "even though they have to pay more [additional charges] for those services," says Greg Leisch, chief executive of Delta Associates, the Alexandria, Va., research unit of real-estate brokerage firm Transwestern Commercial Services. What's more, hotel-served condos "appreciated faster in value than nonhotel-served condos," he says.
Gerald Moore, a lawyer in Miami, purchased a condo at the Brazilian Court -- where units are selling for $450,000 to $2.5 million -- in large part because he felt it would appreciate. "I saw this as a neat investment opportunity where I can make money and also enjoy it" during the four to five times a year he says he heads to Palm Beach for a getaway. He expects the condo "will pay for itself" through the revenue it will generate as a hotel room. But there is one possible downside for condo-hotel owners: They must agree to keep their units furnished according to guidelines put out by the hotel management.
Real-estate developer Donald Trump, who in 1997 opened the condo-hotel Trump International Hotel & Tower in New York, is planning to recreate the concept in Chicago at the former home of the Sun-Times newspaper. It will offer both a hotel, where each of the 174 rooms will be sold as a condo and rented out when the owners aren't there, as well as 360 condominium units that won't be put in the rental pool but will have access to hotel services. Similar projects are planned in Toronto, Las Vegas and Phoenix, says Charlie Reiss of Trump Organization.
Among other projects, New York-based Setai Group LLC is transforming an old hotel in the South Beach section of Miami Beach, Fla., into an 88-unit luxury condo hotel. "It's so expensive to build a new five-star hotel today," says Jonathan Breene, a partner at Setai.
Starwood Hotels & Resorts Inc., owner of the Westin and Sheraton brands, is building its first condominium-and-hotel project. When it opens next year, the St. Regis Museum Towers in San Francisco will offer 269 hotel rooms and 100 luxury condos on the upper floors that will be served by the hotel.
In Chicago's Gold Coast district, Elysian Development Group LLC plans to break ground next year on a 38-story luxury hotel that will feature 126 hotel suites -- 80 of which will be available for sale -- and 28 condominium apartments. "It's extremely difficult to get hotel financing," says David Pisor, Elysian's chief executive. Other than putting up a significant amount of equity, "the only way to get hotels financed and built these days is by selling condos," he says. With the $120 million Elysian Hotel, "we'll be running a luxury hotel property with no debt on it," he adds.
A two-hour drive from Chicago, in Wisconsin Dells, Wis., Wilderness Inc. is building a 108-unit condominium project overlooking Lake Delton to add to its current offerings of 443 hotel rooms and 138 villa and cabin condominiums. The project, which is opening in two months, is 80% sold, says Joe Eck, Wilderness's sales and marketing director. The units, which run from 1,600 to 1,800 square feet, sell for $359,000 to $449,000. Owners get free housekeeping services 20 times a year, access to the resort's golf course, three indoor and two outdoor water parks, and the choice of having Wilderness rent out their condo when they're not using it.
Todd Nelson, the developer and owner of the nearby Kalahari Resort & Convention Center, which boasts the largest indoor waterpark in the U.S. and a 45,000-square-foot convention center, is putting the finishing touches on a 120-unit condominium complex, slated to open by summer next year. Priced between $349,000 and $389,000, the units will augment the 378 hotel rooms at the resort.
"Any market you can drive to is heating up," says Anwar Elgonemy of Jones Lang LaSalle Hotels, a real-estate investment advisory unit of Jones Lang LaSalle Inc., who says hotel investors are looking closely at the Wisconsin Dells market. Condominium prices in the area in the last three years have risen more than 30% annually, and most of these hotel-served condominiums are sold before they open, he says.
The Wollacks put down a deposit to purchase their condo in San Francisco nearly two years before construction on the Four Seasons Residences project was complete. In addition to the hotel services, they were drawn by the security of living in a hotel. "When we lock up [the condo], we know it's safe and secure and we don't worry about it," says Mr. Wollack. The empty-nester couple often live at their second home in Napa, Calif.
A side benefit for the Wollacks: star gazing. A few weeks ago, Mr. Wollack saw Oprah Winfrey walking through the Four Seasons. He has also spotted Laura Bush, members of the rock band Aerosmith and Sarah Ferguson, the Duchess of York and Weight Watchers pitchwoman. "That's always a kick," he says.
Email your comments to rjeditor@dowjones.com.