Hotel Law Blog

Many roads lead to Rome . . .

In the transformation of the condo hotel business I spoke of earlier (see, "Las Vegas Report from IMN Condo Hotel Conference," we see changing the condo hotel landscape, there will be a sea change affecting almost all projects. A return to fundamentals, a new emphasis on integration of project components at a higher level, and projects made outstandingly successful by individual project merits.

And that is the key point of today's message -- generalizations may strongly suggest one approach to success in specific areas, but particular markets and circumstances will validate others. So let's get into the specifics to see what I mean.

What drives the successful sell outs now?

As I said before, there is a "sea change" going on, a total transformation of the condo hotel industry. This transformation will be good for quality players and for the long run, but will be painful for some in the short run. There will be a renewed emphasis on quality and a punctilious commitment to delivery on expectations -- managing those expectations realistically, but then delivering on them. (See "Condo Hotel Fundamentals -- 5 Keys to Success!")

The condo hotel phenomenon is driven by the buyers of the units. If they don't buy, you don't have a condo hotel! It's that simple. So what do you do to have a successful sell out in today's market? Like the Trump 8-hour blow out in Waikiki or the Paul Allen one-day sell out?

A critical part of it is the inherent quality of the project and its administration ... quality planning, quality product, the right team, and great execution. Now, more than ever, you need your entire team assembled up front and providing their input in a coordinated fashion -- at the front end of the project. You need your marketing team -- the men and women who will actually sell the product to your buyers -- to be talking with your lawyers and architects and designers to put together the right product to sell. Do you want to be like GM in the 1960s building what it wants to and trying to shove it down the consumers' throats, or like Toyota, diligently studying what the consumer wants and trying to build a better version of their dream? It lead Toyota on to unimagined success. I suggest that is the model to follow.

Marketing, Marketing, Marketing. In the U.S., with the SEC restrictions, condo hotels are best marketed by real specialists, not the local residential brokers -- unless they are properly supervised, trained and directed. Everyone wants to think they can make this work but it usually does not. Real estate brokers are used to talking about values, income, appreciation, investment value and all the things that are forbidden for condo hotel sales unless you want to be a security. [You do not! Trust me on this.] So think, the specialists in condo hotel sales like Sunburst, Weitzman, Sunshine, Playground, and a handful of others.

Use restrictions. For SEC reasons, the developer cannot impose significant restrictions on owners' use of their condos, unless they are merely passing through reasonable and pre-existing municipal ordinance restrictions (NOT something negotiated in a development agreement!). Some think that use restrictions are a God-send, helping them creates a viable hotel operation by making it more likely that unit owners will put their units into a rental pool. I would rather rely on owners' instincts and fear that use restrictions are more likely to limit buyer incentives. Apparently this depends very much on the individual market and buyer expectations. Many buyers in many markets to not appear concerned about use restrictions (whether imposed by municipalities in the U.S. or by developers outside the U.S.). Do your market research!

What should the unit look like? Beauty is in the eye of the beholder, and apparently that eye varies widely from market to market, and price range to price range. The one thing that is clear in the TRANSFORMATION, is that you better identify the buyer for YOUR unit and build what he or she wants. This is not the time to play "Field of Dreams" where if you build it they will come. Find out what they want to come to, and build THAT.

Luxury or budget? Again, I don't know, but personally I am inclined to go with the higher end of the spectrum. There were many speakers at the Luxury and Ultra-Luxury end of the spectrum claiming that demand for their product was undiminished. I think this is an extension of the theory that "the rich can always afford what they want and will buy it" theory. I personally believe this has a lot of merit. I also think it is one of the factors that pushes condo hotels more into the residential mixed-use category of hotel-enhanced mixed-use. It may be that Ritz-Carlton and Four Seasons have it right. But all the other high end brands are very happy to go there too.

Brands. In many (most?) domestic situations, brand power is extremely valuable. It may be less so internationally. Generally speaking, in the U.S., and particularly at the higher end of the spectrum, a well-recognized brand will add substantial value to a project, make it more financeable, and provide a comfort level to unit buyers that is hard to replace. Irene Houck of InterContinental did a fine job at the symposium of describing how InterContinental has gone after this condo hotel segment and is a force to be reckoned with. So are Fairmont, Regent, Mandarin and a number of others. Many great brands (such as Ritz-Carlton and Four Seasons) are more interested in hotel-enhanced mixed-use with residential, but not condo hotel. Trump has become a "brand" and many people are chasing it to see if they can tap into an 8 hour sellout like the Trump Waikiki.

But having said how important brands have become in this arena, and while I would "generally" recommend a brand, there are many stunning examples of immensely successful projects where the branding has not been necessary and perhaps would not have helped. I would say these cases generally tend to be outside the U.S. or in unique markets where some aspect of the market, property, or history create a draw that transcends a brand, or almost creates its own brand.

Resort or Urban location? Generally, I like the resort properties over urban, but I am convinced that the right project in New York, Chicago, London or even Los Angeles can work. I was impressed by stories from several speakers at the IMN symposium how seemingly rural communities had unique complelling demand drivers for buyers of condo hotel units and hit quick sell outs because they did their homework -- they understood their market, their buyers, and what they needed and built to meet that need. The South American cash flow into US real estate is awesome. Oh to be in South Florida . . . But I still love Palm Springs, Chicago, New York, Costa Rica, Mexico, Tuscany and . . . (it goes on).

Does celebrity status equal or substitute for a brand? I don't know the answer to this, but one can look at a lot of specific bets by celebrities and use or their names to make condo hotel projects successful. Where do we start for examples? Well how about some of the situations we have covered here at www.HotelLawBlog.com recently? For example: Magic Johnson, Barry Sternlicht, Paul Allen, Andre Agassi and Stefanie Graf, and Shaquille O'Neal.

There may be many other factors that make a particular project successful. I like quality, sponsorship, planning, and buyer focus. I also like hotel-enhanced mixed-use for most projects, where the condo hotel element is one part of the regime, but only one part, with at least a significant dedicated traditional hotel room element. But I think integration is one of the most important elements. We will talk about that in future postings.

Butler's Maxim

Rule number one is that the project must work first and foremost as a hotel.

Rule number two is that you must manage and deliver on expectations of all stakeholders -- condo buyers, lenders, operators, municipalities, and others.

I have a few other thoughts for condo hotel projects outside the U.S., and will save those for the next posting. I think the condo hotel market outside the U.S. is just starting and is ready to explode -- particularly without the U.S. restrictions imposed by the SEC. But what can we contribute to that movement? Lots!

________________________

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.