Condo Hotel Fundamentals -- 5 Keys to Success!
By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
8 September 2006
Along with the other hotel lawyers in the Global Hospitality Group® at JMBM, I have been involved in structuring more than 85 condo hotel projects over the past few years. When developers come to us with a condo hotel project -- whether it is a new development or a conversion -- we look at five key factors to assess the viability of the project.
These factors are: 1) economic fundamentals, 2) the condo hotel program's design, 3) a condo hotel regime that will ensure adequate hotel room inventory, 4) structure and documentation to assure appropriate and consistent quality, and 5) not locking down the structure until you have a viable regime design. And although I don't include it in these fundamentals, you have to worry about SEC compliance for a deal marketed or sold to US buyers (See "Why does the SEC care about condo hotels?"). Today, I want to focus on the all-important economic fundamentals.
The condo hotel regime has proven itself beyond question. Although we believe that condo hotels will continue to evolve and improve (See,"Condo Hotels' enduring legacy: Hotel-Enhanced Mixed-Use"), there are certain fundamentals that we think are critical. Today, with a "rising tide" carrying all ships, these fundamentals are ignored by many at their peril, but we highly recommend them for your consideration.
First and foremost, we want to know whether the condo hotel can operate profitably. A condo hotel may help liberate trapped capital, but it's not a cure for a sick hotel that can't generate an operating profit. Simply put, if it doesn't work as a hotel, it's not going to work as a condo hotel.
We want to be comfortable with the economic fundamentals -- demand and supply, the all-in-project cost (acquisition, construction or conversion), operating costs and achievable revenues. We want to be comfortable that the condo hotel is in a good location in a good market -- that it has the right brand and operator, and that the physical facilities and amenities are competitive and suitable for the target market.
On the condo side, it must tap into an appropriate consumer demand and provide the right product at the right price point. Part of the economic equation is determining if the cash flow generated will cover operating expenses and provide some return on investment.
If developers come to us with a project that has not been subjected to a comprehensive market analysis and feasibility study, we will hook them up with one of the experienced consultants we work with regularly, to make sure the numbers work before they invest in the project.
Only dumb luck can replace due diligence and good planning -- and that's not something anyone should ever count on.
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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.
Jim Butler is one of the top hotel lawyers in the world. GOOGLE "hotel lawyer" or "hotel mixed-use" or "condo hotel lawyer" and you will see why.
Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM's Global Hospitality Group® - a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.
Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right "fit" for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.
Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim's books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.
Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm's Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.
