Condominium Hotels and Condominium Residences at a Hotel

There are two categories of condo hotel product offerings in today's marketplace: a condominium hotel residence and a condominium residence at a hotel. These are two very different products that, despite their similar wording, have very few characteristics in common.

“Condo hotels” represent an evolving breed of offering to residents. A condominium hotel residence exists when individual hotel units (either in new construction or in a conversion of an existing building - - and for all types of units, whether single or multiple bedroom) are offered for sale to individuals. The purchaser is then given the opportunity to participate in a rental program. Instead of the traditional condominium, residents are offered a structured program to be marketed to a third-party “hotel” guest to enable that guest to rent a hotel room for a specified length of stay. This rental program is usually administered by the “flag,” or brand (think Marriott or Hilton or Starwood), that is running the hotel.

Participation in the rental program gives the owner an opportunity to share the guest room and, in doing so, to share in the revenues generated by the renting out of their particular room (or unit, as it may be known). The owner has very little (if any) say in how things are run or any significant control over recurring expenses. This is because all that the owner owns is the airspace within the painted surfaces of their unit, and even within their own space, there are restrictions as to what they can do.

Most condominium hotel residence documents restrict the owner with respect to how they can furnish and accessorize their unit – particularly if the owner would like to participate in the rental program. Most flags will dictate that they want the unit up to their “brand standard”, with very specific guidelines for furnishings, accessories, and interior upkeep.

The remainder of the hotel – hallways, lobby, stairwells, exterior of the building, etc. - is owned by the hotel lot owner. The expenses for the maintenance and upkeep are provided for in a “shared facilities” budget usually created by the hotel lot owner (or their designated representative). The unit owners must – by contract – pay for these items. The Board of the association has comparatively little to do or say about matters such as the budget and operations.

As an added feature, the condo owner may also rent the unit to him/herself or directly handle the leasing to others. Both official programs and self-rental options present the potential to realize some revenues to assist in offsetting the various expenses of the unit, such as maintenance fees, real estate taxes, and potentially some of the mortgage expense. Frequent travelers to a given city may find this option of owning (and therefore using) their own hotel space appealing, especially when revenues from other users of the same space (as provided by the flag that operates the condo hotel) help to defray its cost to the actual condo hotel owner.

The structure of the “split” on revenues and the other related charges that the hotel can impose – if the owner participates in either the hotel's rental program or some other program – can impact both the cash flow from the rental of the unit and the availability for the actual owners within the condo hotel to use their own unit. It is important to highlight that most condominium hotel owners to date have not realized the positive cash flow that would cover all expenses related to their unit. This has led to some disappointment. To set more realistic expectations, this type of ownership should be viewed more as one that has the potential to offset some of the expenses but not necessarily give a true positive cash return. Obviously, if the owner chooses to reside in their unit – either for a few days or full time (although there are some condo hotels that do not allow full time residence) the opportunity for revenue is reduced while personal enjoyment of the premises by its owner is enhanced.

Alternatively, a condominium residence at a hotel is similar to the standard condominium product, but with a few twists. These units are condominium apartments – usually part of the same building as the hotel, though often (but not always) with a separate entrance, lobby, and elevators.

The residential condominium owner can avail themselves of a number of hotel services – room service, maid service, spa services, etc. - usually on an a la carte basis. The Board of the association has much more control over their budget, even though a minimum level of service is almost always dictated, authorized in the condominium documents, or required by the flag or brand that is running the hotel of which the residences are a part.

Even with the control that the Board of the association may have over the budget, not only does the potential exist that the level of service may be out of the Board's control and dictated by the flag, but also that the maintenance and operational costs of the central plant and the exterior of the building be out of the Board's control as well – and all dictated by the flag of the hotel.

The reasoning here is that the building is serving two entities: private residences and hotel guests. The hotel has more at stake in maintaining the central plant and structure to a consistently high standard to attract not simply residents, but also repeat hotel guests.

In some instances the owners of the condominium units have the ability to register their units with the hotel and enter into a rental program; however this is the exception, not the rule. The owners of these residences are not restricted with respect to furnishings or accessories. This product is usually purchased by individuals who want to conveniently avail themselves of a higher level of service and have the amenities of an adjoining hotel available to them. The return on this type of product is similar to a conventional condominium – usually realized upon sale, or refinance, or conventional extended rental of the unit.