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!)

 

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.