ISHC Mid-Year SymposiumISHC Mid-Year SymposiumFeasibility Study Tutorial for Condo-Feasibility Study Tutorial for Condo-

Hotel OwnershipHotel Ownership

Greg Bohan & Scott SteilenGreg Bohan & Scott SteilenApril 27, 2006April 27, 2006

22

Overarching Issues to Consider When Overarching Issues to Consider When Performing AnalysisPerforming Analysis

• Variations of condo lodging/mixed-use product Variations of condo lodging/mixed-use product • No real history of performanceNo real history of performance• Real estate premium of brand Real estate premium of brand • Availability of operators Availability of operators • It still must pencil as a hotelIt still must pencil as a hotel• Overwhelming majority of projects done at Overwhelming majority of projects done at

upscale to luxury level – middle to lower market upscale to luxury level – middle to lower market remains relatively untestedremains relatively untested

33

Key Differences: Condo Hotel v. Key Differences: Condo Hotel v. Traditional Hotel Analysis Traditional Hotel Analysis

• Residential component and analysis required to Residential component and analysis required to evaluate pricing, absorption, brand premium, etc.evaluate pricing, absorption, brand premium, etc.

• Impact of the business structure of the project on Impact of the business structure of the project on the lodging performancethe lodging performance

• Allocation of revenues and expenses among the Allocation of revenues and expenses among the various stakeholders various stakeholders

• Development program Development program • Other design considerations and their impact on Other design considerations and their impact on

performanceperformance

44

Key Differences: Condo Hotel v. Key Differences: Condo Hotel v. Traditional Hotel Analysis Traditional Hotel Analysis

• Rental program participation by unit owners Rental program participation by unit owners • Length of rental agreementsLength of rental agreements• Owner usage – allowable nights and rateOwner usage – allowable nights and rate• Access to and utilization of amenities by Access to and utilization of amenities by

stakeholdersstakeholders• Market positioningMarket positioning• Development CostDevelopment Cost• Return AnalysisReturn Analysis

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Four Differences to Discuss in Greater Four Differences to Discuss in Greater DetailDetail

• Residential AnalysisResidential Analysis• Business Structure ImpactBusiness Structure Impact• AllocationsAllocations• Cost & Return AnalysisCost & Return Analysis

66

Residential AnalysisResidential Analysis

• Survey the competitive condo landscapeSurvey the competitive condo landscape• Identify most comparable projectsIdentify most comparable projects• Analyze unit mix, unit size, pricing and Analyze unit mix, unit size, pricing and

absorption trendsabsorption trends• Analyze lodging brand “premium” in comparable Analyze lodging brand “premium” in comparable

projectsprojects• Recommend appropriate unit mix, sizes, pricing Recommend appropriate unit mix, sizes, pricing

and absorptionand absorption

77

Residential Factors to ConsiderResidential Factors to Consider

• We all know that buyers are looking for income We all know that buyers are looking for income to cover expenses; however, in the jargon of the to cover expenses; however, in the jargon of the industry, it is a LIFESTYLE purchaseindustry, it is a LIFESTYLE purchase

• Potential for appreciation – with current real Potential for appreciation – with current real estate market cannot be a repeat of what estate market cannot be a repeat of what happened with timeshare in the 80’shappened with timeshare in the 80’s

• No matter what people say, buyers want it to be No matter what people say, buyers want it to be a good investmenta good investment

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Residential Factors to ConsiderResidential Factors to Consider

• Location - Must be in a location where a second or third Location - Must be in a location where a second or third home is desirable, typically:home is desirable, typically:– Beachfront resort locationBeachfront resort location– Mountain ski locationMountain ski location– Other resort location (e.g., Orlando or Las Vegas)Other resort location (e.g., Orlando or Las Vegas)– International gateway cities where it can be a “pied a terre”International gateway cities where it can be a “pied a terre”– Other vibrant urban locations with a host of attractionsOther vibrant urban locations with a host of attractions

• Location - Areas where it may not make sense:Location - Areas where it may not make sense:– Secondary cities with minimal overriding appealSecondary cities with minimal overriding appeal– Suburban locationsSuburban locations– Areas where high-quality product cannot be supportedAreas where high-quality product cannot be supported

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Residential Factors to ConsiderResidential Factors to Consider

• Facilities and Amenities – balance between an Facilities and Amenities – balance between an attractive residence AND a functional hotel unit:attractive residence AND a functional hotel unit:– Quality and durable finishes – very discerning buyers at Quality and durable finishes – very discerning buyers at

this price point; must stand up to “hotel” usethis price point; must stand up to “hotel” use– Package – must have brand standard FF&EPackage – must have brand standard FF&E– 5 fixture baths, where possible5 fixture baths, where possible– Fully amenitized kitchens (room for latitude here)Fully amenitized kitchens (room for latitude here)– Flexible living and sleeping areas Flexible living and sleeping areas – Latest in technologyLatest in technology– Availability of full hotel and concierge services – spa, Availability of full hotel and concierge services – spa,

recreational, dining, shopping & errands, etc.recreational, dining, shopping & errands, etc.

1010

Business Structure ImpactBusiness Structure Impact

• Rental program participation by unit ownersRental program participation by unit owners– Not all of the available rooms may be salable by the Not all of the available rooms may be salable by the

managermanager

• Length of rental agreementsLength of rental agreements– Are the rental agreements long enough to enable Are the rental agreements long enough to enable

management to solicit group business?management to solicit group business?– What assumptions are used for agreement turnover?What assumptions are used for agreement turnover?

• Owner usageOwner usage– How many nights does an owner get to use their unit and How many nights does an owner get to use their unit and

when?when?– What rate does an owner pay for usage?What rate does an owner pay for usage?

1111

Business Structure ImpactBusiness Structure Impact

• Access to and Utilization of AmenitiesAccess to and Utilization of Amenities– Project’s amenities (e.g. spa, restaurant, etc.) will also Project’s amenities (e.g. spa, restaurant, etc.) will also

be used by residents or other stakeholdersbe used by residents or other stakeholders– Analysis must consider usage from both a Analysis must consider usage from both a

programming and operations perspectiveprogramming and operations perspective

1212

AllocationsAllocations

• Commentary about NYC cooperative hotels in Commentary about NYC cooperative hotels in the 1960’s and 1970’s:the 1960’s and 1970’s:– Sherry Netherland, Stanhope and Carlisle – structureSherry Netherland, Stanhope and Carlisle – structure– Trouble on the ever-so-fashionable upper east side Trouble on the ever-so-fashionable upper east side

more than 30 years agomore than 30 years ago

• Revenue and expense sharing parameters are Revenue and expense sharing parameters are all over the place – no 2 deals seem to be alikeall over the place – no 2 deals seem to be alike

• Some standardization by the major brands that Some standardization by the major brands that are doing condo-hotelsare doing condo-hotels

1313

AllocationsAllocations

• Examples of major allocation methods Examples of major allocation methods – Room revenuesRoom revenues– Food, Beverage and Other RevenuesFood, Beverage and Other Revenues– Rooms departmental expensesRooms departmental expenses– Food, Beverage and Other expensesFood, Beverage and Other expenses– Administrative and GeneralAdministrative and General– MarketingMarketing– Property Operations and MaintenanceProperty Operations and Maintenance– Real Estate Taxes and FeesReal Estate Taxes and Fees– Reserves (critical)Reserves (critical)

1414

Cost and Return AnalysisCost and Return Analysis

• Development cost driven higher by necessity of Development cost driven higher by necessity of larger units and residential/lodging duality of larger units and residential/lodging duality of purposepurpose

• Allocation of cost may be an issue in a mixed-use Allocation of cost may be an issue in a mixed-use projectproject

• Differences between equity and debt requirementsDifferences between equity and debt requirements• Cash up front from buyers of units – so equity Cash up front from buyers of units – so equity

requirements are met using buyer’s cash, not requirements are met using buyer’s cash, not developer’s cashdeveloper’s cash

1515

Cost and Return AnalysisCost and Return Analysis

• Operating returns to developer with common Operating returns to developer with common areas is minimal or negativeareas is minimal or negative– Owners getting 50% or more of the biggest profit Owners getting 50% or more of the biggest profit

engine – Room Revenuesengine – Room Revenues– Food and beverage profits are small at best and not Food and beverage profits are small at best and not

existent oftenexistent often– Meeting space generates no significant profitMeeting space generates no significant profit– If developer doesn’t make the desired return on the If developer doesn’t make the desired return on the

sale of the units, there may be no returnsale of the units, there may be no return

ISHC Mid-Year SymposiumISHC Mid-Year SymposiumFeasibility Study Tutorial for Condo-Feasibility Study Tutorial for Condo-

Hotel OwnershipHotel Ownership

Greg Bohan & Scott SteilenGreg Bohan & Scott SteilenApril 27, 2006April 27, 2006