Buy & Hold Condotel units

[Graham Glover]

I've recently come across a deal for 2 units in a condotel complex. I was wondering if all of my BP friends could give their opinions about these types of ventures. To me, it seems like an interesting niche. The main renters are traveling professionals who typically stay shorter periods (I.E. 1-3 month leases).

I can see the obvious cons, but I was hoping you guys could maybe fill me in on the not so obvious ones. Also, what are some of the upsides that I might be missing.

Lastly, I am trying to come up with some creative ways to finance this deal. The seller seems motivated, but I wouldn't say she is very motivated. Would it make more sense to try to buy subject to current financing even though the owner will be selling for a profit? Is it possible to work out a deal where the buyer can owner finance the profit to the seller overtime?

Questions, thoughts, criticisms?

[Dion DePaoli]

Pretty familiar with Condotels. IMO they are not good investments from a cash flow perspective. They are nice to have to enjoy the location on vacation but that is about it. Your cash flow might carry the property but not too much profit above that.

Financing for these types of units is very hard to find post crash. You might have some local Denver banks humoring the deal.

The problem is, the revenue is still based on the operator selling the room like in a hotel. These places generally do not have 100% occupancy. I would think they are closer to 62% occupancy on a monthly basis and subject to seasonal use, depending on the hotel flag.

The flag of the property, or hotel brand, was not mentioned. This matters. Some of the private flags have lousy central reservation systems further reducing occupancy percents. Additionally, having a Hilton flag or similar will be costly to you as a profit share.

Typically the deed restrictions in these types of units is very intense. The owner is responsible to purchase specific beds, chairs, desks, TV's, etc. Again, this is a hotel, so they want the rooms to be homogeneous. Not all are like that but most. Not many corners to cut to lessen capital costs.

When underwriting the past cash flow, you have to really take time to understand high occupancy months. Was there an event in town, will the event return next year, etc. Again, it is primarily a hotel room that you own and some events reoccur and some move locations.

The other property amenities matter as well, just like any hotel. Pool, food & beverage and location. You are competing with other hotels in your area. Many are likely the big boys who do this well full time.

Typically as an owner, you do not have any say so in the daily rate the operator charges for your room. Which also makes cash flow projection difficult. It's not impossible, but you need to get to the bottom of your average daily rates and properly add those into your model with the occupancy. Both of these numbers vary from day to day, month to month and year to year.

Special assessments can be pretty high. In the event you are flagged with a national brand, the property will have to maintain the franchise requirements for the property. Typically they do not capitalize this from a P&L since the revenue is distributed to the owners. So, they have to assess the owners when capital improvements need to be made. In the HOA documents, they will have the R&M budget. You will want to understand what that is and covers. Most of the time it is just general maintenance, so if an elevator goes down or the HVAC system needs an overhaul, you as an owner will split the bill with the other owners.

As I said, these assets are good as a second home type of thing but a poor investment asset. As an owner you will periodically have to re-capitalize the asset and without any control of expenses or cost of goods. The revenue is based on the occupancy and the daily rate which you don't have any control over. You have to share the revenue with the operator, so when looking at the cash flow, get your scissors out and cut the "pie in the sky" number down a couple times. Getting the proper material to do proper due diligence is hard usually.

BTW, this is not just my opinion, the National Association of Condo Hotel Owners (NACHO) also believes these can be bad investments but good second homes.