Hotel-condo idea a win-win?

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Donna Hogan

Adding and selling living quarters offers a perfect solution for developers trying to finance a new or redeveloped hotel. And it gives well-heeled consumers the opportunity to live in a resort atmosphere - full time or just for vacations. It sounds like a win for everybody, said Jim Butler, a L os Angeles based lawyer who specializes in the legal aspect of condo hotels. But the hardly-new-butsuddenly-the-rage concept generates a plethora of legal and financial consequences, he said.

For consumers. For developers. Even for towns and cities dependent on hotel revenue to pay for roads, parks and other municipal services.

Paradise Valley, a town of panoramic mountain vistas, multi-million dollar homes and no shopping malls, is totally dependent on the resorts and the high-end restaurants and boutique retail shops that go along with them to fill coffers with bed tax and sales tax collected from hotel guests.

Every luxury hotel room developed or redeveloped instead as a luxury condo means a big chunk of lost bed tax - charges added to hotel tabs.

Three so-called mixed-use resorts - Montelucia, Mountain Shadows and Ritz-Carlton - are currently in various stages of development in Paradise Valley. But the typically laid-back town government has gotten aggressive about preserving its income.

"We addressed it with Montelucia through a development agreement," said Tom Martinsen, town manager. "The resort will pay the town 'in lieu bed and sales taxes' each year, guaranteeing the town a stable flow of revenue. We expect to do the same with Mountain Shadows and Ritz Carlton."

The geographically small town is such a desirable spot for resort developers, Paradise Valley can gain such accords by withholding approvals, Martinsen said.

But even for cities with more diverse revenue streams, the loss of bed tax is still a concern.

"As an industry there is a lot of confusion about whether condos add or take away from (tourism revenue)," said Rachel Sacco, president of the Scottsdale Convention & Visitors Bureau. "But what we do know is most developments and redevelopments now include condos. We're looking at how it will play out."

So are the industry trackers, trying to make new rules for the hybrid hotel developments.

"It can be disastrous if not done right," Butler said. "The front-end structure determines whether a project will be successful or not. You have all the issues with a hotel and all the issues with condos. And when the two intersect, it creates problems that don't exist in either world."

Besides the liability, security and "common area" maintenance rules that real estate experts for condos or hotels are used to dealing with, a condo hotel developer has to determine, before selling the first residential unit, how the units will be controlled and marketed.

For example, the Securities and Exchange Commission says if a person buys a hotel suite as an investment it's a security - just like a stock share - and has to be registered and sold by a securities broker, Butler said. If it's sold as a home, it's considered real estate and is bought and sold like any other housing purchase.

If it's marketed as both - a place to live for a few weeks a year and add to the hotel pool to be rented to overnight guests the rest of the time, it is still considered a security and can cause huge problems for the purchaser, Butler said.

"It just doesn't work as a security, and that makes marketing difficult," he said. "They can't even tell you about the rental program, although once a unit is purchased they can offer one."

And what about those purchased with plans to rent the rooms most or all of the year? For such a business model to be effective, a hotel needs to know exactly how many rooms it has to sell at any time, especially for meeting planners, who book months, sometimes even a year or more in advance.

That means the hotel needs control over when an owner can use his own property, Butler said.

And just about everything else, such as decor and furnishings.

"If you wanted to put pink carpeting or weird decor in your condo, it wouldn't work in a hotel environment," Butler said. "If you are a guest staying at a W or a Westin, you expect a certain image."

Camelback Inn in Paradise Valley, which has been a condo hotel since 1972, has a structure that works well, said Clark Albright, director of sales and marketing.

Owners let hotel management know nine months in advance during peak months and three months ahead in the off-season if they plan to use their casita, he said. Marriott controls all the furnishings and a board made up of owners approves all capital expenditures, he said.