Author: Tara Peterson

June 20, 2007

 

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How does the rental program work?

As the owner of a condo hotel unit, you’ll have the option to place it in the hotel’s rental program.  The rental revenue produced by your unit is then shared with the professional hotel management company.  You pay no upfront fees for this management.  Instead, the management company takes a portion of the rental income that is generated.  Although revenue splits between owner and management company vary from project to project, most hover around the 50/50 mark.

 

 

How is Condo Hotel Rental Revenue is Split?

The exact terms of the revenue split vary from development.  However, when it’s all said and done, it doesn’t really matter what the revenue split is.  All that matters is what your cash flow looks like at the end of the month.  Of paramount importance is whether your cash flow is coming close to breaking even or at least making financial sense each month.

 

Some developments will provide owners with a 50% revenue split, but because the average nightly rates and average occupancy are so low, the property will cash flow negatively each month.  On the other hand, another condo hotel might only provide the owner with a 35% rental revenue split, but that owner might end up being cash flow positive, because the hotel’s average nightly rate and yearly occupancy are exceptionally high.  So, don’t ever put too much stock into what the rental revenue split is.  The terms of the split don’t affect your bottom line each month.

 

As previously stated, most condo hotel rental management companies will provide the owner of a condo hotel with a split in the range of 40% - 50%.  It’s not uncommon to find the higher end luxury hotel brands lowering that split to 35%.  But again, don’t think that the 35% split is a drawback.  Luxury brands charge much higher nightly rates and tend to have much higher occupancy, so your ability to cash flow could be much better.

 

To understand how the rental management company determines what rental revenue percentage split to use, you must look at their overall hotel operation.  The hotel operator must bring in enough revenue to operate the hotel at the high level of service that the paying guests expect.  Much of this will depend on the hotel’s particular brand and market position. For example, a guest staying at a five star Trump Towers property will understandably expect more than a guest at a non-branded three star property.

 

If the operator of the hotel collects too little rental revenue, the hotel cannot be maintained at the expected level of quality and service, and they run the risk of not operating a profitable business.  On the other hand, if the operator gets too much rental revenue, the unit owners will have less revenue to pay off their monthly mortgage.  A fine balance must be struck to accommodate all parties.

 

When determining the rental revenue splits, no one formula can apply to every condo hotel property. Each property is completely different and must be assessed on its own merits.  However, all the industry experts agree that the manner in which the revenue split is derived must be logical to all parties and also be substantiated through a financial formula that makes sense to both sides.

 

 

Will my condo hotel cash flow?

Not necessarily.  It is impossible to answer such a general question without discussing a specific condo hotel.  With that said, it should be known that most condo hotels are strategically located in luxurious resort settings and premier urban destinations, which command top dollar for the nightly stays and are always marked by high year round occupancy rates.  This combination of high nightly rental rates and high year round occupancy rates have the ability to create a very desirable cash flow outcome.  It is for this reason that many investors have added condo hotels to their real estate portfolios.  In particular, they’ve been drawn to branded condo hotels, such as Trump, W, Ritz, Westin, Hard Rock, etc.  Luxury branded condo hotels typically secure the very best locations, charge higher nightly rates, and also have a higher year round occupancy than competing hotels in the same market.  But, it should be noted that some of the best performing condo hotels are non-branded.

 

If you’d like assistance in acquiring the proper information that will help you determine whether a specific condo hotel has the ability to cash flow, please feel free to contact us.

 

 

Who will be managing my property and renting it out?

As previously mentioned, the luxury 4 and 5 star condo hotels consistently attract and hire the most experienced professionals in the hospitality industry. This will be the team working for you and overseeing your property.  If the condo hotel is not of a 4 and 5 star caliber, spend more time researching the management team.  Find out what other properties they have in their portfolio and how well they’ve performed.  In particular, review the general manager’s resume.  Ultimately, the overall operation and quality of the hotel is a direct reflection of the general manager’s abilities.

 

 

Should you rent your condo hotel unit on your own?

Depending on the project, you might have the opportunity to rent out your suite yourself.  However, this would defeat one of the major benefits of owning a condo hotel – hassle free ownership!  It is usually far too time consuming and not cost-effective to manage the suite yourself.  Leave it to the professionals to manage your property.

 

 

 

How is the nightly rental rate determined?

Each condo hotel has a revenue management team whose sole purpose is to maximize the hotel’s ability to generate revenue.  They analyze all sorts of market data (projected occupancy, past occupancy, travel patterns, upcoming conventions, etc) and use that to determine the maximum price they can command for a given night.  Condo hotels are focused on generating as much revenue as possible.

 

 

Where can I view a real rental policy?

Premium Condo Hotels is more than happy to provide you with a sample Rental Policy that is typical of many luxury condo hotels around the world.  If you are interested in viewing a specific condo hotel’s rental policy, please contact us and we’ll be more than happy to assist you.

 

Click here for a sample rental policy

 

 

What is the Unit Maintenance Agreement?

The Unit Maintenance Agreement establishes the rights of the condo hotel owner and clarifies their various rental options. The Unit Maintenance Agreement ensures that all units that are to be rented will adhere to a standard hotel FF&E package and will be serviced and maintained in accordance with the hotel’s standards.  Be sure to review a Unit Maintenance Agreement prior to making a purchase.

 

 

Must I enter into a Unit Maintenance Agreement?

Almost always. Most condo hotels require all owners to enter into a Unit Maintenance Agreement. The agreement will remain effective for as long as you own your condo hotel unit. Typically, owners who do not intend to rent their units must still enter into a Unit Maintenance Agreement, which holds owners to agreeing to maintain a certain level of standard of their individual property in the building.

 

What fees are associated with the Unit Maintenance Agreement?

Generally, there are no fees associated with the Unit Maintenance Agreement.

 

Does the Unit Maintenance Agreement restrict me from renting on my own?

No. Most condo hotels allow each individual owner the choice of renting through the hotel sponsored rental program or through outside rental agents.

 

 

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THE ABOVE SUMMARY IS NOT INTENDED TO BE A THOROUGH AND EXHAUSTIVE EXPLANATION OF ALL OF THE TERMS AND PROVISIONS OF THE PROJECT DOCUMENTS. WHILE THE PURCHASER CAN USE THIS SUMMARY AS A GENERAL SUMMARY OF THE PROJECT, THE PURCHASER MUST REFER TO THE PROJECT DOCUMENTS TO DETERMINE HIS OR HER ACTUAL RIGHTS AND OBLIGATIONS. IF ANY CONFLICT OR DIFFERENCE EXISTS BETWEEN THIS SUMMARY AND THE PROJECT DOCUMENTS, THE PROJECT DOCUMENTS WILL CONTROL.