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The Once Hot Condo-hotel Trend Continues to Chill; Trump Has Contracts for About 65%
 of the 339 Condo-hotel Units at Chicago's Trump International Hotel & Tower 
By Kathy Bergen and Susan Diesenhouse, Chicago TribuneMcClatchy-Tribune Regional News

Dec. 2, 2007 - -- The acid test is just about to begin.

As soon as Trump International Hotel & Tower, the city's first new-construction condo-hotel, gets a city permit to begin its phased opening, developer Donald Trump will find out for sure whether Midwesterners and others are willing to fork over megabucks to buy a pad in his luxury inn.

Though hawking a killer brand at a killer site, the flamboyant salesman is aiming to ink sales at a time when the residential real estate market is plummeting and the once-hot condo-hotel trend continues to chill.

"Frankly, there are developers who are concerned about buyers coming to the closing table," said Scott Steilen, a principal at Warnick & Co., a lodging advisory firm.

The Trump team acknowledged the potential for no-shows, but said there have been no signs of hesitancy so far. "We're in constant contact with purchasers," said Ivanka Trump, Donald's daughter and vice president of development for the Trump Organization.

That contact will have to continue a bit longer than expected, as a planned Dec. 3 opening was delayed because the City of Chicago has not yet issued a partial occupancy permit, saying some fire-safety work needs to be completed. Further inspections are expected this week.

The permit would allow several guest floors to open while construction continued on others, with hotel completion expected next spring. With the permit, Trump could begin closing deals on the condo-hotel units.

And the local hotel industry is waiting, with bated breath, to see how the closings go.

"I think it's the strongest project coming on line, and if there is significant fallout ... it will get bigger and worse for less well-branded properties," said Karen Johnson, executive vice president with Jones Lang LaSalle Hotels.

"Trump will be the latest news," said Pat Ford, president of Lodging Econometrics, noting that if buyers get cold feet it would cause developers of other downtown luxury condo-hotel projects to rethink their plans. Individuals who signed contracts to buy units are unlikely to walk away from their non-refundable deposit, typically 20 percent of the purchase price, Ivanka Trump said. "That's a lot of money to lose."

In the early marketing phases some buyers signed sales contracts with only 5 percent deposits, according to documents filed with Cook County.

So far, Donald Trump said he has contracts for about 65 percent of the 339 condo-hotel units in the building. Individuals buy these units, often as a second home, and place them in a rental pool when they are not using them, to generate income. Room rates are expected to start at $300 a night.

Trump was not precise about the number of condo-hotel unit sales but said they were slightly more than the 223 units reported in May, and that prices ranged from $500,000 to $9 million.

The project's condo-hotel room sales took off smartly three years ago but have flattened more recently.

"The market in Chicago is dead as a doornail right now, as is the rest of the country, other than Manhattan or Palm Beach, Fla.," Trump said, blaming the nationwide credit crunch. "But that will change. A lot of good things could happen in Chicago's case. It has a great chance of getting the [2016] Olympics ... and if credit becomes available again, that will help."

Meanwhile, he said he plans to retain ownership of unsold units and add them to the hotel rental pool. Trump is juggling an array of other projects in this tough market, including sister hotels in Las Vegas and Ft. Lauderdale.

The 92-story mixed-use tower at Wabash Avenue and the Chicago River, which will be the second-tallest building in the city, after Sears Tower, when it is completed in April 2009, also will have 486 traditional condominium homes. About 77 percent of those are under contract.

Looking at condo-hotel and traditional condos together, "we have sold more than $600 million worth of units," Trump said. This amounts to about three-fourths of construction costs, which Trump estimated at $775 million earlier this year but now says could go as high as $800 million.

Development costs rising

With units selling slowly and development costs potentially rising, observers say Trump may be feeling the pain afflicting other developers around the country who have to increase their equity investment in a project to stay in compliance with the terms of their construction loans and other financing.

Trump said his stake in the project is about $40 million. He also has a $640 million construction loan from Deutsche Bank and a $135 million mezzanine loan, which is shorter-term, higher-cost financing that fills the gap between the equity, the debt and the total project cost.

Usually if there are cost overruns lenders will not advance more of the construction loan until they know who will provide the money to pay for the increased costs, either the equity investor or the mezzanine lender, industry sources say. Until more equity is invested a bank loan may be deemed to be out of balance.

Trump said he is not feeling such stress.

Asked about the potential for costs to rise from $775 million to $800 million, he said, "In my world, that's about the same thing. ... We are on budget and ahead of schedule."

"I have a lot of cash and haven't had to renegotiate my financing," he said. When he secured financing in 2004 underwriting terms were easy, he said, and lenders "were throwing money at you." Trump, one of the first to enter the Chicago condo-hotel market, had the advantage of selling early into a hot real estate market.

But the big question, say industry observers, is how real are the sales of condo-hotel units and condominium residences?

"If Trump really sold $600 million worth of units in an $800 million project that's spectacular," said George Fantini, chairman of Fantini & Gorga Investment Bankers LLC in Boston.

And since 132 condo-hotel units have been sold to corporate buyers that lowers the risk because businesses are more likely to close on the units than individuals, industry sources said.

Given the turmoil in the mortgage market, many individual buyers are having trouble getting mortgages and are not closing on units they agreed to buy. Others may decide to forfeit the deposit and go after a similar but cheaper unit now that prices are falling.

Nationwide, the rate of new-home buyers canceling contracts has spiked upward.

"For the most part, large builders are reporting cancellation rates of roughly 40 percent, up from about 20 percent in the strong housing market of 2002 through 2005," said Stephen Melman, Director of Economic Services for the National Association of Home Builders in Washington, D.C.

And there has been some dramatic cratering in the condo-hotel market.

"I know of one [condo-hotel] project in South Florida that ... was supposed to have been two-thirds sold out but when it opened in July with 158 units, they had seven closings," said Johnson, of Jones Lang LaSalle.

"I can't imagine Trump would have the types of problems that happened in Florida, which is Ground Zero for overbuilding this product, coupled with crazy speculation," she said. "Anything with the Trump name on it and the river location -- that's just a fabulous piece of real estate."

The hotel's decade-old sister property on Central Park West in New York has done "very, very well," she said.

Still, she said, "I wouldn't be surprised if there was some fallout" as deals move to closing.

Already, the condo-hotel trend in Chicago has slackened. While there were at least a dozen projects in the pipeline two years ago, many have fallen away, particularly projects involving new brands or independent properties.

One exception has been the conversion of the Hotel Raffaello, a vintage property at 201 E. Delaware Place, into a condo-hotel. Located in the shadow of the John Hancock Building, it is the first to market.

"It's just a property with a great location ... and it rents well because it's moderately priced," said Gail Lissner, a vice president at Appraisal Research Counselors.

And one new luxury brand, the Elysian, is under construction at 11 E. Walton St., with 70 percent of the 188 condo-hotel suites under contract, said David Pisor, chief executive of Elysian Hotels & Resorts. The property, to feature a Charlie Trotter restaurant, is due to open next November.

High-end brands in pipeline

What remains in the pipeline are high-end brands, such as Shangri-La, Mandarin Oriental and Canyon Ranch, but movement is slow.

The Mandarin Oriental, planned for 215 N. Michigan Ave., has not yet secured a construction loan, and developer Palladian Development LLC declined to disclose how many of the 252 condo-hotel rooms are under contract. The project will include full-time hotel residences and traditional condos as well, with a sell-out cost projected to be $650 million.

"We're comfortable with the path we're on but in the current environment, like everyone else, we're looking at various options," said Peter Connolly, president for hotels of Palladian.

Construction has started on the 90-story Waterview Tower, planned home of the Shangri-La, but developer Waterview LLC is still trying to finalize financing. About half of the condo-hotel units are under contract. The project, which will cost $480 million to develop, includes regular condos as well.

While the credit crunch is a major factor affecting the condo-hotel market, there also are questions about whether these purchases are good deals for investors.

Assessments can be hefty

Some buyers go into the deals expecting them to be income-producing, the idea being that rental income would exceed mortgage payments and monthly assessments. But maintaining a hotel is costly, and monthly assessments can be quite high. The monthly assessment for a condo-hotel room or suite in the Trump Tower is expected to average $1,350, while the assessment for a regular condo home should average $1,150, said Jim Petrus, chief operating officer for Trump International Hotels Management.

A Jones Lang LaSalle study found that generally these are not income-producing investments, Johnson said, adding that the potential payoff is all tied to appreciation.

"So if we're entering a period where values are going to be flat, or God forbid, declining ... it's a whole 'nother story," she said.

"You need to approach it with second-home economics in mind, that 'I'll write a lot of checks, I'll hold it until I'm empty-nesting, and then I'll sell it,'" she said. "It's not something you'll get in and out of in a year or two or three."

Some investors got in and out quickly before the condo market cooled, noted Steilen, of Warnick. "The idea of buying and flipping your contract for more money ... is just not present," he said.

Investing in a condo-hotel unit at a property such as Trump "certainly has sex appeal," said Mark Eble, vice president/Midwest for PKF Consulting, a hospitality advisory firm. "You can tell people at a party, 'I'm in a deal with Donald Trump.' And in the case of Mr. Trump's property, it's also a fabulous location."

But, he said, "it still remains to be seen whether investors would've been better off buying T-bills or mutual funds."

Asked about risks for individual investors, Trump said, "It depends. If the wrong guy builds the wrong building in the wrong location, that's one thing."

But, he said, "the Trump International in New York is one of the most successful in the country ... values have doubled, tripled, there have been tremendous returns."

kbergen@tribune.com

sdiesenhouse@tribune.com

-----

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