| by Jim Butler & Guy Maisnik,
June 2005
This is Part II of a two-part series. Part
I appeared in the March 2005 issue of the Global Hospitality Advisor.
This article by Jim Butler and Guy Maisnik was originally published in
the February 2005 issue of Urban Land Magazine by the Urban Land Institute
(ULI),© 2005. ULI is the copyright owner of the article. This article
is reprinted with the permission of ULI.
Challenges for the Hotel Operator
The hotel structure needs to be designed to handle
the specific operator's particular market segment in a given location.
The hotel operation needs an adequate supply of rooms on a predictable
basis.
-
First and foremost: how many of the condominium units
will be available as hotel rooms and when?
-
Will an adequate number of rooms be available to
handle large group meetings, usually booked 12 to 24 months in advance?
-
How much meeting space will be needed?
-
How many seats are in the restaurants and lounges?
-
Is there a sufficient and stable supply of rooms
to efficiently maintain needed staff and service levels for everything
from front desk to maintenance and room service?
-
Will there be enough hotel business derived from
rental of rooms to support traditionally unprofitable or less profitable
hotel operations that condominium owners expect or demand, such as food
and beverage?
-
How can cost allocations be kept flexible enough
to meet experience and evolution, while protecting the reasonable expectations
of the condominium owners?
-
How can the operator be assured that capital will
be available for the maintenance required to provide uniform room quality
at required levels to satisfy hotel guests?
-
How does the operator deal with a large number of
condominium unit owners on issues requiring owner consent?
-
How does the operator fairly allocate room rental
allocations among condominium owners and placate unhappy unit owners who
find that their units are less desirable or produces less income than they
hoped?
If the condo hotel structure cannot provide the operator
with sufficient rooms and profit potential, the operator may exercise a
termination right. Termination by the operator may mean that condominium
owners and the lender find that the units cannot be put to productive income-producing
use, and the project will fail. However, if the operator can manage the
property reasonably well, then there are fewer of the typical operator
concerns in a traditional hotel project that must accommodate owner exit
strategies, such as termination on sale of the hotel or upon other specified
events. In fact, condominium unit owners and lenders may be more concerned
about having the operator "locked in" to protect their respective interests
and property values for long periods of time than in other models.
Challenges for the Developer
The natural tug of interests between a hotel owner
and an operator in the context of a traditional hotel provides certain
checks and balances on the power of each, that may not be present if the
developer has no ongoing permanent stake in the project. Developers will
want to go into the deal with the following issues on the table:
-
Does the condo hotel developer expect to make all
of its profit on the front-end sales of the units, or is it expecting to
have value and cash flow from the residual hotel?
-
What support, if any, will the developer lend to
the project if cash flows in the cyclical hotel business run short, or
if capital is needed to maintain the property?
-
What capital calls and limitations are the homeowners
associations (HOAs) subject to in order to support the project?
-
What balance of hotel operator concerns and unit
owner freedom maximizes the value and profit of the condominium program?
-
Will unit owners be more inclined to sign up for
the voluntary rental management agreement with the right operator if their
use of their unit is limited, or does the value of having the potential
for an income stream offset the inconvenience of limitations?
-
Has the developer balanced the legitimate interests
of the condominium unit owners and the operator in negotiating the form
of hotel management agreement?
Challenges for the Condominium Unit Owner
Managing and satisfying the condominium unit owner's
expectations will be a challenge, particularly given the securities law
restrictions on information that can be provided to purchasers. A buyer
who pays a huge premium for a condo hotel over the price of a comparable
"ordinary" condominium may be in for a rude surprise when the resale value
of the property is disappointing or the owner's share of hotel revenues,
after the operator's share, furniture, fixtures and equipment or FF&E
reserves, and other carrying costs, is insufficient to cover debt service,
insurance, HOA assessments and other costs of ownership, much less provide
a reasonable return on investment. Sophisticated condominium buyers will
want to know the following:
-
How will developers and operators keep an inappropriate
speculative fever from breaking out, with unrealistic expectations of cash
flow and profit from placing units in the hotel rental management program?
-
Will the unit owners or the HOAs have the right balance
of power and wisdom to effectively work with operators in the joint cooperative
effort needed for the project to succeed?
-
Can purchasers regard their condominium as an investment
in real estate that may appreciate over time and that may not provide the
return the investor would like on a near-term basis?
-
Will the investor get good financial advice on realistic
cash flow possibilities, and the capital expenditure or CapEx requirements
of using units as hotel rooms?
-
Will the investor learn what hotel investors have
known for years�namely, that the typical FF&E reserves of 4% to 5%
of gross income may be enough to cover routine costs of maintaining a typical
new hotel property, but over the long term, the capital required is substantially
greater and comes in spikes at certain stages in the hotel's life cycle?
-
How will the condominium owner control an inefficient
operator or one who does not maintain the property well?
-
What can be done to ensure fair rotation of available
condominiums rented to hotel guests?
-
Who will asset manage the operator when there is
no single owner of the hotel property, but only individual unit owners
and HOAs possibly lacking in hotel expertise?
|
Jim Butler
is Chairman of the Global Hospitality Group of Jeffer, Mangels, Butler
& Marmaro LLP, a full-service business law firm with more than 160
lawyers in Los Angeles and San Francisco. The Global Hospitality Group
has handled hundreds of transactions spanning the globe, representing $35
billion in total acquisitions, sales, developments and financings of hospitality
properties and companies. Their experience ranges from individual properties
to billion-dollar portfolios. Jim can be reached at 310.201.3526 |
The Global Hospitality Advisor ® is published four times a year
for the clients, business associates and friends of Jeffer, Mangels, Butler
& Marmaro LLP.
The information presented in this newsletter is intended as general
information and may not be relied upon as legal advice, which can only
be given by a lawyer based upon all the relevant facts and circumstances
of each particular situation.
-
Our experience ranges from individual properties to billion-dollar portfolios.
-
Large or small, routine or complex, if a legal matter has your attention,
it deserves ours too.
The Global Hospitality Group® is a registered trademark of
Jeffer, Mangels, Butler & Marmaro LLP |
