Nov. 27, 2005 --Luxury hotel proposals are popping up in Chicago like so many desert flowers after a long drought, and it seems almost every developer is betting on the same virtually untested concept: hotel condominiums.

At least 12 downtown projects will include hotel condominiums, which are rooms or suites sold to individuals, who have the option of placing them in rental pools when they aren't using them.

More than 2,100 of these pricey dens will be marketed here over the next five years, mostly to affluent Baby Boomers looking for a second or third home.

None of the units have come to market yet, so there is no test case. And looking elsewhere in the nation doesn't help much, either.

"There is very little track record," said Pat Ford, president of Lodging Econometrics in Portsmouth, N.H.

And so a grand gamble is getting under way.

For the trend to succeed long-term, there will need to be a winnowing out of the weaker contenders, a deep and renewable pool of well-heeled buyers, as opposed to short-term speculators, and a sustained recovery in downtown luxury-hotel business.

Other factors could derail the vision as well, among them rising interest rates or a pullback of tax deductions allowed on second homes.

"I have my doubts that all the projects will be built or that all will be successful," said Arthur L. Buser Jr., managing director at Jones Lang LaSalle Hotels. "There will be some that are winners, and some that are last-to-the-party, or not as well done, or only half sold out. ... There will be some failures."

The proliferation of proposals stems from hotel developers' continuing difficulties in obtaining more traditional financing.

"Occupancy and room rates have not recovered sufficiently," noted Ford.

With a condo-hotel project, the developer "gets an opportunity to use other people's money," he said.

And those other people, namely the hotel condominium purchasers, generally don't have the same expectations for return on investment as would a typical financier, noted Buser.

"An individual owner would like a profit, but doesn't necessarily need one," he said. "But he does want a place."

It's certainly true that some buyers are willing to take the long view on investment return. Attorney James M. Duggan is buying a one-bedroom suite at the proposed Elysian Hotel, primarily as a weekend getaway spot to share with his wife and secondarily as an investment.

"Up front, I'll be in the red, but I'll be having a great time downtown," said Duggan, a Lake Forest resident who is a principal at Handler Thayer & Duggan LLC. "I think I'll be cash-flow positive within five years."

And he expects the value of the unit to appreciate over time.

Other prospective buyers in the Chicago market view the transactions strictly as moneymaking opportunities.

Real estate broker Viju Patel is paying $389,550 for a one-bedroom unit at Hotel 71 at 71 E. Wacker, which is being redeveloped as the Solis Chicago Hotel Condominiums.

Because she is an early buyer, she hopes to see substantial appreciation in the value of her unit, enabling her to sell within three years or so.

She likes the proximity of two luxury hotel-condominium projects: the Trump International Hotel & Tower, under construction across the river, and the Shangri-La Hotel, proposed for 111 W. Wacker.

Those properties will add cachet to the Solis, whose room rates will be a little less stratospheric, said Patel, a South Barrington resident who is a partner with Keller Williams Success Realty.

"Some of the Trump units have doubled in value over the last two years," she noted.

"I think the Solis property will appreciate a lot initially, once the facelift is done," she said, adding that a high-end, brand-name spa may be among the amenities.

The companies selling hotel condominiums generally steer clear of touting their investment potential, said attorney David Neff, co-chairman of the lodging and time-share practice at Piper Rudnick Gray Cary.

"If they are viewed as investments, then you have to register the offerings as securities," he said. Most companies prefer to avoid this extra layer of administration and expense.

Still, many hotel condo buyers have dual financial goals: to recoup most, if not all, of their mortgage and maintenance costs from rental income, and to see price appreciation whenever they choose to sell their units.

Realizing the first goal may be difficult, some observers say, given hefty monthly condo assessments and fees layered atop mortgage payments and real estate taxes.

Monthly assessments and fees could run as high as $2,000 at the Trump project, at the ultra-luxurious end of the spectrum.

Hotel condominium operators "will need to get pretty aggressive on room rental rates and occupancy levels in order for buyers to come out whole on these deals," said Gail Lissner, vice president with Appraisal Research Counselors.

"With the more expensive units, it will take a while until Chicago reaches room rates high enough to provide a return on the investment," said Ted Mandigo, a hotel consultant based in Elmhurst.

The greater potential, Lissner believes, lies in price appreciation on the units over time.

In fact, prices for units at the Trump or the Elysian have appreciated significantly in the two years since these early-bird projects were announced.

At the Trump, units are priced between $815,000 and $3 million-plus, compared with $559,000 to $1 million-plus two years ago. At the Elysian, asking prices top out at $925,000, compared with $700,000 in 2003.

Whether prices remain on an upward trajectory in Chicago remains to be seen.

Consumer choices will be expanding, as more newly announced projects begin marketing. So far, only six of 12 downtown projects have been actively selling.

And some of the existing upward momentum is likely attributable to speculators, who typically comprise an estimated 25 percent of hotel condo buyers.

"When they feel the party is over and stop buying, 25 percent of the buyers disappear, and it's a much thinner market," Buser said.

One of the few cities with any extended history in this niche is Vancouver, which saw overbuilding in the 1990s.

"People bought on projections that properties would continue to ramp up, and it didn't happen," said Buser, of Jones Lang LaSalle. Prices fell, leaving unit owners in limbo until the market recovers.

In contrast, Miami has seen torrid price appreciation lately, so much so that some developers have broken contracts with potential buyers in order to resell units at higher prices, leaving some irate former customers on the sidelines, noted Mandigo.

"To me, the units in Chicago are not quite as strong an investment," he said, citing weaker room rates, the bitter winters and a substantial supply of hotel rooms in the suburban market.

"The hotel condominium flurry really has been at the luxury end of the market," said Scott Steilen, principal at Warnick & Co., a hotel advisory firm. "And I think there is a legitimate question of whether this market is deep enough to absorb all that luxury lodging supply,"

That said, some projects will pan out better than others.

"This is still location-driven," Steilen noted.

And investors should remember they are buying a piece of a hotel.

"Look at how the chain is doing, find out about the management company and its track record," said attorney Neff.

For Patel, who is buying a unit at the Solis, this was key.

She likes the fact that West Paces Hotel Group LLC, which will manage the hotel condominiums, is headed by Horst Schulze, a Ritz-Carlton veteran.

And buyers should keep in mind that ownership and management companies can change, and that new regimes can institute new ways of operating.

In 2003, the Grand Traverse Band of Ottawa and Chippewa Indians purchased the 660-unit Grand Traverse Resort and Spa in Acme, Mich., and later that year announced plans for an extensive renovation program.

For the first time, owners of the resort's 234 hotel condominiums were asked to participate in a uniform refurbishment plan, with costs ranging as high as $40,000, a hefty sum given that many units are valued at around $100,000.

"There was a complete owner revolt in October 2003," recalls David Boyer, a Chicago attorney who owns one of the units.

Two years and many hard feelings later, the two sides appear to be approaching the possibility of detente.

The owners have "agreed the initial plan was too ambitious and are allowing the condo board to be part of the think tank," said Michael Mysliwiec, a Michigan lawyer who is president of one of the condo associations.

"Rather than a divorce between the owners and the condo association, I'm working to patch things up," he said. "I don't know if I'll succeed, but I'm trying."

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