We’re extending our editorial coverage this week to include another luxury real estate option: condo hotels. In a four-part series, Helium Report analyst Calvin Chin explains the concept, analyzes the numbers, reviews major players, and provides a list of key due diligence questions.

Condo Hotels Explained

Condo hotels are typically high-rise buildings developed and operated as luxury hotels in some of the most desirable vacation locales in the US and around the world. These hotels have condominium units which allow individuals to own a luxurious, full-service vacation home they can use whenever they like. When they aren’t using this home, the owner can leverage the marketing and management power of the hotel chain to rent and manage the condo unit as it would any other hotel room.

The investor essentially owns the condo deed to a specific hotel room or suite and pays property taxes, insurance and maintenance fees as they would on a traditional condo. Most owners then opt to participate in the hotel’s rental program—in exchange for management fees and a share of rental revenues, the hotel management company rents out the room, on a rotating basis with other available units.

Thus condo hotels offer all the pleasures of a luxury resort hotel with amenities such as spas, health and fitness centers, concierge and maid service, fine dining, etc.; and the promise of rental income without the hassles of dealing with tenants. The on-site management is responsible for all the maintenance and interaction with the renters for those times when the owner isn’t using their vacation home. In some instances the rental income can even cover most or all of the ownership costs. Given these attractive characteristics and a fairly limited supply of new and secondhand units, condo hotels have also seen annual appreciation as high as 45% in hot markets such as Las Vegas.

Of course, these benefits don’t come without some limitations. For owners who want to take full advantage of the hotel management and fully participate in the rental program, some common drawbacks include:

• Reservation requirements: to ensure availability of the unit, owners need to let the hotel know in advance, sometimes as much as 60 days prior to their stay
• Unit conformity: units come fully-furnished according to the hotel’s decor and standards and changes are not allowed. Sometimes owners are held responsible for periodic furniture replacement as well.
• The inconvenience of packing for your own vacation home: personal items such as clothes, personal effects, photos, etc… cannot be left in the unit unless there is an owner’s closet.

Other limitations apply regardless of your participation in the rental program:

• Living restrictions: some hotels and some local governments put limits on the amount of time owners can stay in their unit in a given year (to ensure hotel capacity and hotel visitor tax income)
• Lack of transparency: under SEC regulations, if the seller stresses the investment potential, it comes under SEC jurisdiction, rules and restrictions, and is taxed as an investment. Therefore condo developers uniformly do not provide important data such as room rates and occupancy levels which would help estimate potential rental income. This can make the purchase decision more difficult.

Nevertheless, for a growing class of affluent investors and luxury vacationers who want the freedom and flexibility of a deeded second home (during usage and/or sale) and the amenities of a resort or destination club. So much so that nearly every luxury hotel development today includes condos.

• Part 2: Financial Analysis
• Part 3: Brands and Projects
• Part 4: Key Questions

Email tips@heliumreport.com to request the PDF version, which will be released later this month.