Hotel Law Blog

Foreign markets are hot!

As I noted yesterday, from our own experience and from the IMN Condo Hotel Symposium in Las Vegas last week, it looks like the condo hotel market outside the U.S. is exploding, particularly in Mexico, Costa Rica, the Caribbean, London, Spain, in other spots throughout Europe, Dubai and elsewhere in the Middle East, China, and perhaps India.

Why? Why hasn't this phenomenon burned itself out? Why is it spreading to other continents and jumping oceans?

Why the condo hotel market is on fire outside the U.S.

I won't go over all the basics again. (send me an email at jbutler@jmbm.com if you need the primer or poke around www.HotelLawBlog.com a bit). Initially condo hotels are catching on elsewhere for all the reasons they have in the U.S. -- the confluence of benefits to all stakeholders, including real estate investment for unit buyers, convenience, amenities, lifestyle, ego gratification, and so on. But outside the U.S., there may be even more advantages than available here.

The additional advantages largely stem from freedom, or potential freedom, from U.S. securities laws. In some jurisdictions, the unit sale may still be treated as a 'security" (such as in Canada), but the government is sufficiently enlightened to make that a reasonable and predictable process. In many others, as long as there is no fraud or misrepresentation, the sale is free from significant government intervention. In general, however, it is permissible in these other jurisdictions to sell the condo hotel unit as an "investment" and to treat buyers as "investors" instead of insisting that they use the units for personal purposes without any current income expectations.

As a result, foreign developers may be able to do all the things that U.S. developers would like to do but generally cannot. These things include the following:

1. Structure and market the condo hotel unit sale as an "investment" in real estate -- both for current income and for long term appreciation. Some may even guarantee a minimum return on investment.

2. Require each condo hotel unit purchaser to place his or her unit into a clearly defined rental program, and if they do not wish to participate, they may be refused the ability to purchase the unit.

3. Pool income and expense from the condo hotel units so that the risk of buying an individual condo hotel unit is spread over all the units in the hotel, or all units in a particular class or group of units.

4. Provide potential condo hotel unit purchasers with all the relevant documents for the condo hotel program while they are evaluating their investment, instead of requiring a purchase before they can find out the relevant details of the rental program, see the rental agreement, learn about the "splits" and the like.

5. Provide potential investors with reasonable and well-founded projections, comparables and other economic data to help them evaluate the investment.

6. Impose use restrictions on the condo hotel unit purchaser either limiting the owner's use of the unit to some time period (i.e. not more than 90 days per year on some kind of notice arrangement) or prohibiting it altogether to guarantee smooth hotel operations with a predictable hotel rooms inventory. After all, a condo hotel project must work first and foremost as a hotel ... and a condo project.

WOW! What a concept! If only the U.S. SEC could get comfortable with a procedure to permit this in the U.S.

And of course many foreign investors have a great appreciation for the everlasting value of real estate. So add the condo hotel advantages of hassle free ownership, the quality available from luxury brand management, a ready rental program from the hotel, plus all the lifestyle, convenience, and other benefits, and who needs to ask why this is catching on outside the U.S.? The question is, how did it work in the U.S. so well with all these crazy SEC-generated restrictions and contortions?

Why foreign condo hotel projects need U.S. condo hotel "technology"

Foreign markets are importing US condo hotel technology.

To get a leg up, developers outside the U.S. are studying the latest condo hotel "technology" from the U.S. for 3 reasons:

(1) after hundreds of deals and billions of dollars of projects, in the U.S., a handful of lawyers and advisors have figured out some excellent solutions to business and legal problems that have plagued condo hotel developers for 30 years -- solutions to integrating the functional and operational aspects of the mixed hotel, residential and other real estate uses,

(2) many of the ultra-refined U.S. approaches will deliver highest levels of satisfaction to local and international buyers of condo hotel units without reinventing the wheel,

(3) many foreign-based projects will be marketed to or purchased by U.S. residents and it is wise to consider U.S. legal implications and deliver a product that looks like something they expect. In fact, many of the expectations of U.S. condo hotel unit buyers may reflect the needs and desires of their off shore brethren.

Foreign market condo hotel product may be free from U.S. SEC restrictions (or not, as noted above when marketing to US residents), and experienced U.S. advisors know all the sticking points to help develop an ideal regime structure for marketing. This will be very interesting to watch!

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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.