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Mr. Migdal

Condo Hotels

Hotel Management for the Condo Hotel

By Nelson Migdal, Real Estate, Shareholder, Greenberg Traurig LLP

Many of the new condo hotel projects that you have been hearing and reading about are nearing completion and preparing to open for business. The focus of our attention and analysis must now shift from the philosophical foundation of the condo hotel model to the more pressing concern of how to operate the asset in a manner that is consistent with the hopes and expectations of the parties.

The parties interested in this discussion are generally the owner of the hotel unit (the "Hotel Owner"). The hotel unit is the element of the building that is not owned by individual condominium unit owners. This is described and defined in the Declaration of Condominium, and might include things like the lobby, front desk, elevators, facade, roof, pool and health club, and even a "core hotel". At this stage in the life cycle of the majority of condo hotel projects, the Hotel Owner will be the developer or sponsor of the project. The next interested party is the individual condominium unit owner (the "Unit Owner"). These are the end users like you and me, and certainly some investors owning more than one condominium unit within the condo hotel. The expectation is that the universe of Unit Owners will be large and the expectations, demands, requirements and desires they bring to the operation and management of the project will vary by individual. To a certain extent, each Unit Owner is the developer's partner in the project. Next there is the manager or operator of the Hotel Unit, and in some situations, of the association of condominium unit owners (the "Operator"). There are a variety of structures for the contractual relationship by and among the Hotel Owner, Operator and Unit Owners.

Finally, and hopefully to a lesser extent, there may be a lender that financed the project and that remains present because the Hotel Unit continues to be owned by the Hotel Owner, and the Hotel Unit secures the Hotel Owner's loan, as the borrower, from the lender. The goal is to deal with the lender at the time of the closing of the loan, pay down or pay off the debt through the sale of individual condominium units, and have a positive cash flow from the project so there is no active involvement by the lender.

Heads in Beds

Some Unit Owners want their condominium unit to be their second or vacation home. A small minority of these Unit Owners will not want to be part of the rental program and will never be part of the hotel room inventory available to the Operator. The majority of Unit Owners are expected, and offered benefits and inducements to make the decision easier, to enter into a Unit Management Agreement ("UMA") and place the condominium into a rental program operated by the Operator. Even if the Unit Owner will use the condominium unit as permitted under the UMA, and this may include limitations as to the number of days of use each year, and certain "black-out" dates, the Unit Owner will want the unit to be rented as part of hotel room inventory to produce income for the Unit Owner. To make matters more interesting, there are plenty of condo hotel projects in which not all condominium units are owned by Unit Owners.

These projects have a hotel component that is owned by the Hotel Owner. This strategy provides the Operator with a "core hotel" and a minimum number of hotel rooms in inventory that are not subject to the variables of managing the condominium units owned by Unit Owners.

The first challenge is the unit rental rotation. The wise Operator today is relying upon an algorithmic program to rotate condominium units through the hotel room inventory. The Unit Owner should be made to understand, through the initial declaration of condominium, the UMA and periodic owner reports, that there are a variety of factors that the Operator must consider when renting hotel rooms that may override the programmed rotation schedule. For example, professional conferences may request studio units before one and two bedroom units. Guest preference will always be honored by the Operator. A careful reading of the documents with the Unit Owner should show a clear disclaimer by the Hotel Owner or Operator of (i) any level of occupancy of any condominium unit, (ii) equal distribution of rentals among condominium units and other hotel rooms owned by the Hotel Owner within the "core hotel", and (iii) commonality of rental rates. The Operator will be in the unenviable position of being the first party to hear from Unit Owners who may be unhappy when the revenues received through their participation in the rental program were less than expected.

Predicting Inventory

The Operator has a further challenge in being able to predict room inventory, particularly as it relates to advanced bookings and group bookings. The presence of a "core hotel" is very helpful to the Operator, and assures the Operator of at least some level of predictability of inventory. When there is no "core hotel", and even if there is, the Operator must become intimately familiar with the UMA and how the length of the term of the UMA will impact inventory. The range of variation within the market today is so diverse that generalizations are impossible. Nevertheless, there are elements of the UMA that both Unit Owners and Operators should attend to that will improve the relationship between the parties and the operation of the project.

Understand the term of the UMA

There is no industry standard. Terms as short as one year and as long as 10 years, and rolling or automatically renewed terms are all present. Operators are dealing with the UMA term and advanced bookings in a variety of ways. The important lesson is to develop documents, such as the UMA, that will permit the Operator to book business into that condominium unit beyond the term of the UMA. One strategy is to develop a UMA that automatically extends the term of the UMA to match bookings made during the stated term of the UMA for guest occupancy that will not occur until after the end of the stated term of the UMA. This means that the Unit Owner will be denied use of the condominium unit until the advanced bookings occur, and that the condominium unit must adhere to brand standards during that extended period of time. The advanced consent of the Unit Owner in the UMA will be important.

Another factor to consider is the Unit Owner's personal use. The UMA should have an advance notice requirement for personal use that bears a logical relationship to the cycle of advanced bookings. Whether three months, six months, or 12 months, or a longer period of time is appropriate will depend upon the elements of the project, its location and seasonality, its market position and many other factors. The Operator that can best manage its inventory and Unit Owner expectations will perform better than the competition.

Brand Integrity

Investors and just plain folks have bought and will buy condominium units for a wide variety of reasons. When selecting among competing condo hotel projects, buyers will consider the "brand" or name that will be on the hotel. This is particularly true for the buyer who aspires to have the condominium unit generate some rental income when it is not being used by the Unit Owner. The names of the rich and famous, as well as the names of the most successful and recognized hotel chains in the world are affiliated with condo hotel projects and might certainly be expected to sway a buyer from one project to another.

What may be less clearly understood by this group of Unit Owners is that those famous brands come with a level of quality and cache that must be maintained, at the Unit Owner's expense. For the Operator, it means that brand standards must be maintained at all times. Remember, when a third party guest books the hotel room, it may be a condominium unit owned by a Unit Owner, but neither the guest nor the Unit Owner handles that transaction. It is all done by the Operator. And when that guest checks-in, the "guest experience" for the duration of their stay, must be consistent with the level of service and quality that the guest associates with the name that is on the building. If that guest experience is below par, both the Operator and the Unit Owner suffer. The Operator may suffer greatly because a bad guest experience diminishes the likelihood of not only a return visit to that property, but a booking at any other property bearing that brand name. The Unit Owner suffers when bookings decline if any element of the Unit Owner's interest includes gaining rental income.

A properly documented project will impose an obligation to maintain brand standards on every Unit Owner, regardless of whether or not the condominium unit is in the rental program or the subject of a UMA. For example, a condominium unit that is not in the rental program will not have obligations as to the interior unit, but will have obligations as to the exterior of the unit and payment obligations as to certain common areas. The condominium unit that is part of the rental program will have extensive obligations relating to both the exterior and the interior of the condominium unit. The package of furniture, fixtures and equipment, interior maintenance, replacement of worn articles and required "upgrades" will be addressed.

Hopefully, between the Operator and the condominium unit owners association, there will be logical arrangements for required reserves for replacements. This can ease the surprise and hardship that might arise when brand standard upgrades are required. Think of it this way, when you see hotel brand advertisements for new beds, televisions and interior amenities, the Unit Owner of every condominium unit in a rental program of that brand has either made adequate reserves available to pay for it or will receive a bill to pay for it. These are expenses of the Unit Owner, not of the Operator.

Operating a condo hotel presents challenges unique to that type of asset. Even for really experienced hotel employees there will be new skills to learn. It is unclear where Operators will find the number of general managers and senior staff to fill the new jobs created from the new condo hotels, but hopefully they will have a high level of self-esteem and great communications skills necessary for dealing with the hundreds of Unit Owners who see themselves as partners of the Operator.

Nelson F. Migdal is a Principal Shareholder at Greenberg Traurig and head of the Mid-Atlantic Real Estate practice group. He has practiced hospitality law for over 25 years. He handled the management agreements for The Echelon Place, in Las Vegas. In Panama, as owner's counsel, he obtained the first "Trump" license in Central America. Nelson is owner's counsel for The Trump Soho Project, and handled the Exclusive License with Trump in Istanbul. Nelson is an officer of the Academy of Hospitality Industry Attorneys and a member of the International Society of Hospitality Consultants. Mr. Migdal can be contacted at 202-331-3180 or migdaln@gtlaw.com Extended Bio...

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