Condominium hotels and resorts, advice for investors (Part 1)

The term condominium hotel is best summed up by this description: The accommodation units are individually owned but they are under a management umbrella and marketed as a unified group and operated as a hotel. Add on some common area facilities such as a spa, a front desk, restaurants and bars and administrative areas, with in-room dinning, property upkeep and maintenance .

All very simple really, or is it? What makes a condo hotel unit such a complicated piece of real estate  to purchase and be owned? The following commentary is not unheard of. Not what you will hear from a real estate agent!

The most important aspect to consider is the relationship between the players, i.e., the developer and real estate agent who are hell-bent on selling the units, the rental management operator or hotel operator who is concerned the buyers are being misinformed with hugely overstated revenue projections by the developer’s sales team (revenues they will never be able to achieve), the management of the common areas (strata) who may or may not be the rental or hotel operator who is concerned that the owners are not fully aware of all the ongoing fees and cost involved in looking after the property as perhaps these fine details have not been presented in the purchase contracts (a classic response to any one who asks is “they are being worked out right now”) and the owners, the buyers who buy into it.

First up the buyers (the owners ) review all those glossy sales packaging, great pictures, revenue projections in your face that have little or no realistic market research behind them, which may or may not resemble the actual projections the management company presented to the developer, who package it all very well of course with fine print that is basically meaningless. Your home in paradise!

Then owners end up being peeved off with the management company who have to bear the brunt of the owners’ frustrations as they gradually find out that their net revenue, after all the commissions and operating costs, in no way cover all of the ongoing costs, and that includes strata fees to cover the management and upkeep of the common areas and the like, all the general repairs and maintenance, taxes, etc. Especially so after deducting the rental operator’s fees that could be near 50% of revenue.

So as condo hotel ownership gets to be a bit of a financial let down for the owners, the pressure gets tight, everyone is trying to reduce costs and maximize revenue. So the owner decides it is about time to take a trip and have a bit of a break, and experience his second home and see what is actually going on. (See Part 2 of this most interesting topic!)

Condominium hotels and resorts, advice for investors (Part 2)

Upon arrival the front desk agent greets you in the same friendly manner as they would greet a normal guest, and a key is handed over and you make your way up to your unit.

As you enter you are immediately taken to the dark marks along the wall near the entry  door, luggage marks you guess, the dining table has large scrape marks and one leg is partially broken, there are  glasses and plates missing from the stock you originally purchased, the towels look faded and worn, the carpet hasn’t been vacuumed well, the drapes are not fitted correctly with broken attachments at the top and the bed sheets have hairs on them.

You reflect back to your last monthly statement, which details costs of 50% of revenue to the rental manager, $275 in maintenance and repair costs, the electricity and water bill, your portion of travel agents commission costs and credit card commissions, and the hotel marketing franchise fee, and then you try to figure out how much if any will be left over to pay the mortgage and property taxes. You also note last month was the high season and you couldn’t even stay in your unit so you expected your bottom line income to be one of the best months of the year.

You ask to speak with maintenance about the work not completed in your unit, and get transferred to the rental management company’s in-house maintenance department. A voice mail kindly responds with a message request, which you leave, which is not replied to.

On return from a day enjoying the sights, you decide to speak to the rental management company to complain, firstly about all the revenues which are below expectations, and then all of the repairs and maintenance issues you feel are costs that should be borne by the rental management company as the damage you have seen in the unit has to be renter and guest related and not owner related.

A conversation then occurs that focuses on the definition of what normal wear and tear is, and the owner’s responsibility in covering normal wear and tear costs, but the broken table leg is agreed to be fixed by the management company at their costs. That makes you feel good, until you remember the rental income issue was never discussed. You then make a call to someone else and are reminded that there is a lot of competition and the rental market is not growing as was originally thought, but “we are out performing the competition,” what ever that means. You decide it’s time for a night out to relax and take a meal in the hotel’s restaurant thinking any profit will be reflected in your next monthly statement until you realize on return to your unit that the hotel management company does not share any profit in other areas of the hotel other than income generated through the rental of the units.

Boy, this is getting messy you think, and off back down to the bar for a night cap! (Continued in Part 3!)

 

Condominium hotels and resorts advice for investors (Part 3)

Have you read Part 1 and 2 regarding condominium hotels and resorts?

Following on in this true saga, the next morning on awakening you feel water on the bathroom floor and look up to see on the bathroom ceiling a water stain and dripping water. A quick call to the front office agent and you get passed onto the rental maintenance department. However you are then  passed onto the common area building maintenance department, (the strata property management company as your building has both a rental and a strata property management company and is not managed by one operating entity)!

You are becoming confused…

The strata property manager then makes it clear this is a strata issue and that the owners of the unit above will be contacted and this issue will be fixed by the strata property management company.

The strata property manager now has to ascertain the reason for this leak, and after some time and cost to the owner above concludes it was from a leaking water pipe connection to the dishwasher in the kitchen above, which backs onto their bathroom.

So you pass that information off thinking that the owner above wasn’t in the unit at the time  and why didn’t the rental management company take action on this to stop it, as they rented the unit out. Or shouldn’t they have charged the renter you think, but on asking the strata manager for an explanation so you can better understand how the system works get told that the rental management company didn’t report the issue, as they should have done, and the guests were not charged for any damage. On asking the rental management company why this happened you are told that the guest checked out before they noticed anything wrong as it was a hidden pipe problem, so they could not consider charging the renters, and anyway this was a wear and tear issue and not related to any actual direct action which could be defined as abusive by the renters, so no action would have been taken to charge the renters anyway.

You are perplexed and further confused.

Why was the leak not reported to the strata manager earlier, why did housekeeping not report the damaged ceiling in the suite below?

All this leaves you wondering why you did not have this kind of discussion with the strata property manager and the rental manager prior to purchasing the unit. You reflect that the only information you were supplied was some beautiful artistic renderings and some income projections. You leave more troubled than you were when you arrived, blaming yourself for not doing adequate due diligence on buying a second home.

Now add-on to this, how about this model being further complicated by a developer promoting it as a fractional development with 3-month segments with 4 possible owners,  and a flexible rental pool option? One owner can rent if they wish, the others may not if they do not wish to.  Yes, it happens! Anything to sell something!!

Work that one out!!

Who pays for what, is the first question one needs to ask as a buyer, then do your sums and work out the bottom line and ask yourself ‘will this be a good financial deal for me?’ It is a financial investment transaction, you are not buying into a second home, you are buying into an investment where the users of the unit will not be as caring as you, with an investment model which over the years has proven to be a risky one.

Lesson:  Owners and buyers, beware of the so-called ‘income projections’ presented by the developers and uneducated real estate agents that are totally unrealistic and that bear little or no resemblance on what the net income could possibly be. Get independent advice before buying into a condo hotel.

Lesson: Developers partner with hospitality management that knows how to get results!

Developers who want a partner to make a long term success of a project please contact Mark, and for owners, please do the due diligence!

Sweet dream or nightmare? Buying a small hotel in Costa Rica

What challenges are involved in buying a small resort lodge in Costs Rica? First off the mark is having to deal with Real Estate agents.

Day after day one comes across realtors in Costa Rica marketing small hotels and resorts for sale, with asking prices that are frankly criminal. I would define criminal as promoting a hotels value at a figure picked out of the air, the bare land price,  the cost to build, add some on for revenue generated, near what he bought it for down the road for last week!! No doubt ask them and they would blame the sellers for asking for such prices.

Is it the same as buying a resort vacation home? No. Is the value of the property calculated as one would a vacation home or residential property, that is on emotion? No.

The price you buy at should be based as far as you are concerned around the forward calculation of what cash flow you as an operator can generate from the business over the coming years at today $. It’s based on cash flow! and only that.

Not what $ a seller has invested in it. If a seller has invested 150K in improvements and the cash flow improvement have netted 10K in cash flow, then that’s 10K towards the valuation, not 150K plus “on potential”.

It’s present valuation based on what actual net cash flow from operations the property is achieving to date. The yield % to calculate this valuation based on the quality standard of the buildings and its location.

Let’s use a most simplistic calculation, ignoring numerous aspects of how a calculation of a commercial hotel business should be done.

Take a 10 bedroom lodge with a average occupancy of 60%, that’s 85% for 7 months and 25% for 5 during the wet and low seasons, way above average for small hotel operators in Costa Rica by the way, at an average rate of $60. That’s generating about 131K in revenue.

Costs of marketing, utilities, your sales efforts and affiliations, transport related,  maintenance, cleaning, laundry, linen, communications, grounds upkeep, insurances, local taxes, taxes, add some salaries to help you clean 6 rooms a day, supplies, you will be very lucky to generate a 65%  operating profit before a management salary.

For 365 days a year of pure graft and effort to manage the business, deduct a modest 40K for your efforts, which leaves about 45K cash flow. 10% yield on the net cash flow generated values this property at 450K, if a buyer is happy with a 40K salary! That’s before a capital plan for replacements of major building items, and achieving a 65% OP is questionable.

At 60% occupancy. Scary. Unless you like working for nothing that is.

Yes, on the market for $1m++ no doubt. !!!! Do the math, 500K down, 500K at 8% with 40K interest only payments, 5K to spare. Or 500K yielding 6% and you sit on the beach with your 30K.

40K to go gradually broke, forced to sell out at a loss, with health issues, or 30K for being a beach bum!

For advice on purchasing your commercial hotel business, do your homework and contact mark@turnerlodgingco.com.

 

 

 

Resort hotel development and what is involved

Developing a hotel? New to resort hotel development? As you figure out where to start and as you contemplate the results of the hotel feasibility study, here are a list of basic issues you need to have in place.

If you have not had a market study done by the way get one done, at the very least this should be done by a professional, not the local real estate agent down the road who sold you this lot with the line ‘great spot to build a resort’.

Get you team together. Yes I mention this as it is not uncommon for those who are inexperienced to not realize the amount of team members which are required to kickoff a successful hotel project. Architect, surveyor, builders and engineers,  interior designer, a hotel consultant to assist you with general input and management and brands options, landscape specialist,  someone experienced in kitchen design plans (not the supplier on his own),  special systems experts in communication, security and the like.

Get your permits in order. Environmental and local municipal issues.

Get your finance in order; realize that you need cash to get this off the ground.

Get your development budget tied down and in order, and get advice on this from experts. Realize that base building costs are a smaller than you expect % of the total build out costs.

Get your management team decided on and contracted? Who will manage this hotel?

Educate yourself, get advice, and if all of the above are in place you will have a good chance of success.

So build out is occurring now, what do you have to do to open a hotel?

Management have to figure out how to overcome numerous challenges along the way to opening.

With conflicting interests from numerous parties it is an interesting and challenging profession.

Consider the balancing act!

Your client and or owner who happens to be a local real estate developer wants to sit in the main restaurant to host his potential real estate clients a week after the chef is hired while construction in the kitchen is ongoing, the financier and developer are eager to get guests in the door before the hotel is completed, the hired team needs to be educated, trained, trained and trained again.

Where will the staff and management team come from? How to get the local community  onside? Will the operating concepts and the pricing strategy actually work? Are we on budget with pre-opening and construction costs? Where will we buy our products and equipment? How secure and safe will this place be? What is our image and marketing position? Where will our guests come from? Who will oversee the defects management of construction/ Will we need to take over the property from construction before defects are rectified/ Can the chef actually cook as the owner appointed him/her and we didn’t test his/her skills during the recruitment drive? Will the staff housing be ready? What will be our environmental friendly practices? How do I keep the owners happy. How do I now persuade head office or/and the owner the 1st years budget was too optimistic?

One can go on and on.

Successful hotel development and opening management requires a feel for where one is at as the circumstances change daily, the uncanny ability to figure out the timing issues and kind of worm one’s way through all the obstacles.

Summary

As your resort hotel management team, business adviser or development consultant we will help you avoid all the opening pitfalls. Proven and tested, our experience in opening or re-launching resort hotels is extensive and almost all took place in ‘hardship’ isolated locations where one has to think outside of the box.

 

Hotel development coordination

Who does what in the hotel development coordination process, from the design, construction, purchasing and installation of a new hotel?

What budget category, estimated by whom, designed by whom, contracted by whom, purchased by whom, installed by whom, approved by whom, signed off and controlled by whom?

Where does one start!

Take these areas of responsibility; general construction, furniture, art work, flooring, wall coverings, ceiling finishes, doors, lighting, mechanical, electrical, life safety, security systems, elevators, TVs, music systems, telephones and systems, audio visual, food service, laundry, housekeeping , maintenance related, shelving, office equipments, recreational equipment, window coverings, shower curtains, mirrors, accessories, bedspreads linen, mattresses, terry, uniforms, table ware, kitchen utensils, working inventories, signage, landscaping, roadways and pathways.

Then add-on to that all the team members involved such as the architect, acoustical  consultant, audio-visual consultant, construction estimator, civil engineer, elevator consultant, fire protection consultant, graphic artist, general contractor, interior designer, food service consultant, laundry consultant, landscape artist, lighting consultant, millwork contractor, mechanical engineer, hotel operators purchasing department, systems consultant, structural engineer. Add to that also the owner and developer, perhaps even a real estate agent, the hotel consultant and the hotel manager.

No wonder mistakes happen, items are forgotten, duplications arise, budgets get screwed up, owners get frustrated, delay overruns occur, development costs are strained.

For advice in resort hotel development, contact Mark Turner who has been involved with 9 ore opening and development projects worldwide, and whose hospitality business advisory services are customized to serve independent hotel owners and developers in Central America, the Caribbean, Asia, Africa and southern Europe.