April 07, 2008

But At Least There's a Mint on the Pillow

IT IS RARE that the lead in a newspaper story provides the money quote, but The Wall Street Journal's story on the troubles facing the "condo-hotel" market manages to do it. Says the Journal: "For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble." Ouch!

The Journal goes on to describe the myriad woes facing investors who bought into condo-hotel projects, which let buyers purchase a room they could use whenever they liked, plus receive a share of the revenues whenever the room was rented to hotel guests. The trouble, however, is that the expected revenues for these hotel rooms didn't apparently materialize -- leaving the people who bought the condo-hotel rooms with less revenue than they expected and deteriorating values for the asset. The Journal interviewed one such unfortunate buyer, who says he got burned on his purchase of a room at a Las Vegas casino:

"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit. Mr. Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.

He said the developer's sales staff led him to believe that the hotel would have 94% occupancy and $350-a-night rates, Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.

"I am in so much debt. I don't know how long I can sustain this," Mr. Adekunbi said. Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.

Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.

Now, I must admit I have always been enamored of the idea of a condo-hotel room, if only because I would end up spending a good amount of time in it and aggravating the hotel staff:


ROOM SERVICE: Room service! May I help --
ME: Yes! This is Room 1412, and --
ME: -- I'm calling regarding my aviator's salad. Again.
ROOM SERVICE: Well, now what is it?
ME: Well, I'm sure you're aware that an aviator's salad is supposed to contain anchovies. Yet here I am, once again faced with a cheap imitation Caesar salad, that much to my annoyance does not have any anchovies on it, despite my repeated requests for them. So I suppose my question is, how exactly can I get some anchovies up here? I mean, if I have to go out and buy a tin, that's fine, but do let me know.
ROOM SERVICE: (grumbling) We'll send some up right away, sir.
ME: Thank you. I appreciate it.


ME: Idiot!

Also, if it brought in some revenue to offset the mortgage, well that would be great. But a condo-hotel certainly isn't the type of investment I would sink my life savings into, either. The word "hotel" is perhaps the operative one in the description and hotels can be a bit streaky as an investment. There are off-seasons and bad weather and all sorts of things that can crop up and gum up the cash flow.

As for the buyers -- well, it is difficult to feel a lot of sympathy for them. They're deserving of some, I guess -- it's no fun when your investments tank, and so perhaps some pity is deserved. Still, even in this day and age, there's something to be said for caveat emptor, and the assumptions these buyers seem to have made are a bit strange.

For instance, take our engineer quoted above. He figured he could make a profit based on the cash flow alone from the room rentals; but if that was the case, why would the price not have been higher? After all, if the rental income outstripped the cost of the mortgage income, that would have meant the developer was selling the room at a discount. Another buyer, who sprang for several condo-hotel units in Florida, says the sales staff for his units were preaching the virtues of the hot market and the necessity to buy quickly -- but is that was anything other than what they would do? They're salesmen.

Interestingly enough, though, some developers' enthusiasm for their projects may let the buyers off the hook, the Journal said. If sales staff made detailed statements about income, cash flow and other matters, then one could argue the condo-hotel rooms should have been marketed as securities and not just real-estate. Since securities sales have to be registered, the buyers could then unwind the deals because their transactions weren't registered with the proper authorities. You've gotta love the technicalities.

Posted by Benjamin Kepple at April 7, 2008 12:48 AM | TrackBack
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