Own to rent

Buyers embrace hotel condos but struggle with options, projections

Trump TowerFrom beach houses to timeshares, Americans are always looking for new means of escape, and one of the newest – the hotel condominium – is proving a smash hit in the Second City.

A couple of years ago, few Chicagoans knew what a hotel condo was. Today, more than 1,500 hotel condos are scheduled to open during the next three years at seven highrise developments.

The Falor Companies, an early player in the local hotel condominium market, recently announced the conversion of Hotel 71, at 71 E. Wacker Drive, into 454 hotel condos. That’s in addition to the 260 Falor already has in development at the Aldens Hotel and Hotel Blake, in the South Loop.

Falor’s projects are exclusively hotel condos, and a 250-unit Mandarin Oriental hotel, which reportedly will open at 215 N. Michigan Ave. early in 2008, will follow that same mode.

Other new highrise developments are devoting a portion of their buildings to hotels. Teng & Associates, developer of Waterview Tower, has added 200 hotel condos to the 233 conventional units planned for its 89-story highrise at 111 W. Wacker Drive.
The newer projects come on the heels of two of the most ambitious ones – Trump International Hotel & Tower and the Elysian. Developer Elysian Hotels and Resorts plans to build 183 hotel condos in a Gold Coast boutique that it says will be the flagship for a new luxury hotel brand. The Trump Organization, already the best-known brand in the current mix, added 59 more hotel condos to plans for Trump Tower early this year, bringing the hotel unit total to 286.

“(Hotel condos are) absolutely the darling of the industry,” says Gail Lissner a vice president of housing analyst Appraisal Research Counselors. “Every day I get a call from another person who wants to do a residential development with a portion devoted to hotel condos.”

Perhaps best described as a hybrid – part timeshare, part condo and part luxury hotel – the hotel condo allows buyers to own a particular hotel suite in fee simple. Like any condo, the unit is deeded and can be bought and sold at any time. But like a timeshare, suites generally are available to their owners for a predetermined number of days each year. When owners are not in residence, they can put their units into a rental pool, splitting a suite’s income with the hotel.

Hotel BlakeThe owners of hotel condominiums have private storage where they can keep belongings when they’re away, and when they’re in residence, they have full use of their units – as well as the perks of an upscale hotel, on a fee-for-service basis. There are monthly assessments and real estate taxes, as in any condo building, and the owners also share in the costs of operating the hotel.

Services vary from project to project but typically include 24-hour door staff, a concierge, swimming pools, spa services, gourmet restaurants, room service and valet parking.

It’s a model that has appealed to Chicagoans, and developers say that so far, local buyers have mainly driven the market. Trump’s prime buyers have been suburbanites looking for in-towns and former city dwellers who want to keep a place here, according to Tere Proctor, director of sales at Trump Tower.

“People love Chicago as a city,” Proctor says. “People who have grown up around here want to maintain a residence. I bought a unit myself because I always want to be able to come back to the city.”

Show me the money
The growth of hotel condos was an innovative solution to a specific problem: financing. With limited financial backing for new luxury hotels following Sept. 11, 2001, many hotel developments were derailed.

“What started this was right after 9/11 everything was in the dumps and a real estate developer couldn’t get a loan for anything,” says Jim Walesa, a Chicago financial advisor who recently bought a hotel condo unit in Florida.

Struggling hotel developers were able to build equity by adding a for-sale residential component and pre-selling the units.

“You are minimizing the amount of equity you need to put down to get the bank financing,” explains Joel Greene, president of the Condo Hotel Center in Florida. “Typically 50 percent of your project is pre-sold to individual buyers, minimizing risk to the bank and developer.”

The concept is proving as popular with buyers as it is with lenders. At press time, Trump was nearly 70 percent sold on its hotel condo units, and Falor had 42 of 162 units remaining for sale at Hotel Blake. From the lowest priced units at the Aldens Hotel to the most expensive suite across the river at Trump, Chicago developers are charging anywhere from the $270s to $3.2 million for a hotel condo.

The buyers paying these prices often hope that their units’ income will offset real estate taxes, maintenance and mortgage payments, with change to spare. A few years down the line, they plan to sell for a profit.

“There are two kinds of buyers,” says Falor Companies President and CEO Robert Falor. “Buyers that are investors that will never use (their unit) and are buying for appreciation, and buyers that are users.” He estimates that investors comprise about 30 percent of the buyers at Hotel Blake, in Printers Row.

But revenue projections on hotel condos are elusive. Developers avoid giving specifics about the potential investment value of hotel condos because that would bump them into the terrain of securities, subject to Securities and Exchange Commission regulations.

This means that buyers must gather a wealth of information on their own to make educated guesses about the potential value of their purchase.

Occupancy, rates key
One of the most important elements to consider is the income split on rental revenues. When someone rents your room, how much does the hotel keep and how much goes to you? Typical packages range from a sliding scale at the Elysian that gives owners 18 to 42 percent of the income their rooms generate to an arrangement at Trump Tower giving owners 100 percent of the revenue.

What may seem like a no-brainer (why get 18 percent when you could keep it all?) is actually far more complicated. Income is offset by monthly fees – the lower the percentage of revenue for buyers, the lower their fees – and balancing the two can be tricky.

“If (the owners) get 100 percent of the revenue from the rental then the developer is going to cover his end through a high monthly maintenance fee,” Greene explains. The estimated monthly fees for a studio at Trump are $2,800, while certain plans at the Elysian have no monthly fees. When Jiten Patel, a 35-year-old Streamwood pharmacist, purchased a suite at the Elysian, he chose a plan that allows him to stay 18 nights per year and receive 42 percent of the rental income.

“I don’t have to pay the association fee,” Patel says. “At Trump 100 percent (of the rental revenue) goes to you, but the association fee is quite a bit. If mine doesn’t rent out, the only money that I’ll be losing is my mortgage.”

Occupancy is another important factor and, of course, one that’s difficult to predict. The average occupancy rate at downtown hotels during 2004 was 70.6 percent – up from 70.1 percent the previous year – according to a study by Elmhurst-based TR Mandigo & Co. Given the average nightly rate of $154.71 quoted in the study, the typical downtown room had gross receipts of nearly $40,000 in 2004.

But there’s nothing typical about several of the new hotel condo developments. Trump Tower and the Elysian likely will be at the higher end of the spectrum, on par with the Peninsula, where rooms run $465 to $1,310 a night.

Buying into a brand clearly has benefits, though measuring them isn’t always easy. “I personally do not recommend properties that don’t have a good franchise unless it has a well-known name, already has a track record and is doing well,” Greene says.

Proctor agrees. “(The Trump Organization is) building an amazing building, but the branding is the icing on the cake,” she says. “People recognize that if it’s Trump, it’s got to be good.”

The Trump Organization is selling all of its hotel condo units, while Falor and some other developers retain blocks of suites. Trump maintains that individual owners have more security when the developer doesn’t retain units because the builder isn’t in competition with his buyers; there’s no question of preferential treatment when it comes to renting rooms. Falor says his company has a failsafe computerized system that treats all rooms the same and prevents such abuse.

Five-star living
Although predicting the investment value of a hotel condo is at best an inexact science, there’s no denying the glamour. There is prestige associated with living in a hotel – names like Coco Channel, Frank Sinatra and the Duchess of Windsor come to mind.

“It may have elements of an investment but really people are making this decision as a lifestyle choice,” says Mary Beth Malone, a partner in the Elysian.

This lifestyle includes the Elysian’s restaurants and boutiques, Trump’s 60,000-square-foot health club, and Waterview Tower’s seven spa treatment rooms. And with all maintenance issues handled by the hotel, hotel condos are perfect for owners who lack the time or expertise to be landlords.

“If someone rents your unit and a pipe bursts and there’s water dripping down you’re not going to get that call sitting in your home in Iowa,” Greene says.

But the best reason to buy a hotel condo, according to Walesa, is perhaps the most obvious.

“Only buy where and what you would live in,” Walesa says. “If you couldn’t see yourself living in it other people won’t either.”

Chicago’s current hotel condo projects include:

· The Elysian, 11 E. Walton St., is scheduled for completion by late ’07. At press time, 81 units remained for sale, priced from the $460s to the $890s. Buyers can choose stays of 14, 35 or 90 nights, and packages giving them 18 to 42 percent of income.

· Trump International Hotel and Tower, 401 N. Wabash Ave., is scheduled for completion in late ’07. At press time, the project was 69 percent sold, with remaining hotel condo units priced from the $810s to $3.2 million. Owners can use their units at any time, and they retain 100 percent of the income generated.

· Hotel Blake, 500 S. Dearborn St., is scheduled for completion in November. At press time 42 units remained for sale, priced from the $300s to the $570s. Buyers can stay 0, 14 or 35 nights, or none at all.

· Hotel 71, 71 E. Wacker Drive, is scheduled for completion in mid-2006. At press time, sales were expected to begin in August. Units will be priced from the $300s to the $700s and stay packages have not been finalized.

· Aldens Hotel, 202 S. State St., was 55 percent sold at press time. Units range from the $250s to the $470s and stay packages have not been finalized.

· Waterview Tower, 111 W. Wacker Drive, is scheduled for completion in September of 2008. Prices on hotel condos will be released in August when sales are scheduled to begin on these units.

· The Mandarin Oriental, 215 N. Michigan Ave, is scheduled for completion in early 2008. Prices and sales details were not available at press time.

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