christopher ostrowski

RANCHO MIRAGE, CA- The CONDOMINIUM HOTEL phenomenon that seems to be taking the hotel industry by storm has attained a whole new level of interest. That was evident here at Jeffer, Mangels, Butler & Marmaro LLP's Annual Hotel & Resort Conference in the Desert that focused on condo hotels, as nearly 500 executives attended the event, while others had to be turned away because of the lack of space.
For those that did fit in the door at the Rancho Las Palmas Marriott Resort & Spa, they were treated to a comprehensive examination of all facets of the rising condo-hotel trend, from operating issues and sales tactics to design trends and legal implications. Plus, there was no shortage of potential deals in the works, as developers of all sizes were sizing up their own condo-hotel opportunities with the many lenders, operators, architects and lawyers that were also in attendance.
"Condo-hotels can even out the vagaries of the hotel market," asserted the event's keynote speaker, Charles Reiss, who was formerly with the Trump organization when it developed two condo-hotels and is now the president and COO of the Sunshine Group. "But condo-hotels can only do that if the condo-hotel bubble become permanent. In order for that to happen, owners must be treated fairly and receive returns that are commensurate with the risk that they take."
Reiss opened up the event with his keynote address following a few introductory words by the chairman of JMBM's Global Hospitality Group, Jim Butler, who later noted that the condo-hotel topic will surely be revisited again in other JMBM-sponsored conferences.
Reiss' address initially touched upon his history with one of the country's first condo-hotel developers- Donald Trump. While with Trump, he was a part of the creation of condo-hotels in New York and Chicago. Now that he's with Sunshine, he revealed that the company is working on new condo-hotel projects in such cities as New York, Las Vegas and Montreal.
Reiss went on to note that he learned a lot about condo-hotels while working for Trump. "We learned how to get people to participate in the rental program," he said. "We learned not only how to run a good hotel, but how to keep up the sale product because it's both a hotel and a real estate investment. We learned the value of branding and governance. And we also learned the lesson that the buyer wants luxury and convenience and they'll pay for it if they know they're getting something back."
He added that the most crucial component of a condo-hotel is the hotel itself because it needs to be a great hotel on its own in order for the entire model to work in the long run. Additionally, he said that people are interested in owning condo-hotel units mostly because they are simply good real estate investments and second homes.
Following the keynote address, a panel of condo-hotel experts discussed why they are interested in condo-hotels and what type of condo-hotel regimes they have each established. Speaking during this session, which was entitled "Practical Advice From the Experts: Condo-Hotel Regimes," were Guy Maisnik, partner, real estate department, JMBM; David Lee, director of development, Golden Door; Bill Sipple, corporate vice president, development, full-service hotels, Carlson Hotels Worldwide; Steve Sorensen, vp/senior project manager, East Coast Towers Division, WCI Communities, Inc.; Frank Jansen, svp, special projects, Chicago Title Company; and John Alderson, president, JAVentures, Inc.
"A lot of people come to us with a renovation project that they want to turn into a condo-hotel, but if a property does not work as a hotel and doesn't have the right hotel features, then it won't work as a condo-hotel," Sipple explained. "It has to be a seamless experience for the guest, who can't think that it's a condo-hotel. Also, we as a brand need to have a minimum hotel inventory level in case owners are not participating in the rental program."
From the developer's point of view, Alderson pointed out that his company only does condo-hotel conversions and that it likes to wear both the "good" and "bad" developer hats. "We want to make a nice property, but we also want to maximize returns," he said.
Another developer, WCI Communities, which traditionally toils only within the residential real estate business, has illustrated the efficacy of condo-hotels by simply establishing one in Bal Harbor, FL. The company's senior project manager, Steve Sorensen, said that the firm entered the condo-hotel business simply because it recognized that it could add value to its traditional condo product. In fact, he said that WCI is able to add 20% to the value of its condos through an additional hotel component.
That value is created through proper operations, which was the subject of another session entitled "Building the Bridge Between a Condominium Financial Structure and a Working Hotel- Operating Issues Unique to Condo-Hotels." During this session, panelists revealed some of the issues that exist between condo-hotel operators, developers and owners.
"Brands such as Carlson and Hilton are looking for a minimum amount of inventory that they'll be able to rent out," stated Francis Wong, chairman and CEO of Genesis Hotel Development. "The challenge to developers is to ensure that the brand can get that minimum. They need assurance. So developers need to incentivize the individual owners in order for them to join the rental program."
But while it may make sense for developers to sell potential unit owners on the benefits of entering the rental program, there are actually Securities and Exchange Commission laws that prevent developers from forcing participation as well as forecasting certain returns during the unit sales process. This fact as well as other sales issues were tossed around during a later session entitled "The Secret Sauce- the Critical Consumer Sales Process." Robert Braun, a partner in JMBM's corporate department, began the session by explaining the SEC's laws regarding condo-hotel sales.
"The SEC says we can't tell buyers how much they can make on a deal," Sorensen noted. "We also can't have a broker saying it either. So, in order to protect ourselves from future lawsuits, we have owners eventually sign a document stating that they only bought the unit on the merits of the real estate." He added that when a down cycle hits condo-hotels, there will most definitely be lawsuits from owners.
Despite that negative prospect, the financing companies that will help fuel the condo-hotel fire are still supporting the trend wholeheartedly. And that message was handed down by a few members of the lending community during one session that was exclusively devoted to the condo-hotel financing environment. Appearing in that panel discussion were Robert Stiles, principal and managing director of Sonnenblick-Goldman Company; Timothy Doherty, vp of investment for iStar Financial; Lesley Love, vp/regional manager, Fremont Investment & Loan; and Joseph Vassallo, vp, real estate finance and securitization group, Credit Suisse First Boston.
"We're really bullish on condo-hotel financing," Love said. "We are pleased with the sophistication of the product type. Before it was a learn-as-you-go process in the segment, but now it's more sophisticated. There's going to be a lot more lending competition within the segment as it matures."
SIDEBAR
HED: Condo-Hotels Far From Perfect, With Legal, Political Issues Rising
BY CHRISTOPHER OSTROWSKI
RANCHO MIRAGE, CA- Despite the obvious success of Jeffer, Mangels, Butler & Marmaro LLP's Annual Hotel & Resort Conference in the Desert here that focused on condo-hotels, not all is perfect in the new world of condo-hotels. As outlined during the two final sessions of the event, there are multiple political, legal and liability issues inherent in condo-hotels that could dissuade some developers from entering the segment in the future.
The primary legal issue, according to one speaker, Neil Erickson, a partner with JMBM in its litigation department, is the fact that developers are not allowed to present potential condo-hotel unit owners with forecasted revenue returns. The Securities and Exchange Commission regulates this securities law, he said, and there is no way for a developer to completely ensure that they are protected from being sued by an owner under the terms of the law. "You cannot require owners to participate in the rental pool or show them investment expectations," he declared.
However, several attendees noted that if a developer can get a buyer to sign off on a document stating that they did not receive return forecasts during the sales process, the developer could be sufficiently protected.
In terms of insurance- and liability-related issues, Scott Allan, deputy practice leader in Marsh Risk & Insurance Services, Inc.'s real estate and hospitality group, noted that there is a veritably laundry list of items that both a condo-hotel developer and its corresponding condo-hotel owner's association can be sued for.
"If there is a fire in a unit, for example, there are three different people involved in the suit," he said. "There is the owner's association, the owner himself and the operator. So insuring condo-hotels is problematic. Owners can bring claims against you for design defects for up to 10 years in California, for example. Also, the owner's association can be caught between a rock and a hard place because its directors can be held liable for defects if the association doesn't in turn file a claim against the developer as protection. In San Diego, there hasn't been a single condo built in the past 20 years that hasn't ended up in litigation at some point."
Also using California as an example were the panelist that appeared in the session entitled "The Politics of Condo-Hotels- Managing the Entitlement Process." Two panelist in particular, Richard Ackerman, a principal with Apollo Real Estate Advisors, LP, and Kate Bartolo, svp of development for the Kor Group, mentioned that many political barriers exist for condo-hotel development and they are only becoming more pronounced as the segment becomes more popular. In fact, the panelists mentioned that as more and more hotel rooms are converted into condo-hotel units and, subsequently, tax revenue is being taken out of the picture with less rooms, municipalities are putting together legislation that blocks condo-hotel development and conversions.

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