The Condo-Hotel Gambit
2/6/2005 6:22:15 PM by By DOUGLAS HANKS
It took the Falor family only 21 months to assemble one of the most diverse hotel portfolios in South Florida -- seven prime properties from Islamorada to Coral Gables.
What is the old saying? Make money while the sun shines? Robert Falor, 36, said during a lunch at The Tides, the 45-room celebrity haunt in South Beach his family acquired last year for a whopping $588,000 a key. The climate is perfect to execute our business plan.
He wasn't talking about the weather -- at least not directly. Instead, the president of the Chicagobased Falor Cos. meant the current boom of condo-hotel properties, where hotels sell off their rooms individually to buyers.
More than 30 such projects are either open, under construction, or planned from Fort Lauderdale to Key Biscayne.
Already, the concept has changed how South Florida builds luxury hotels with developers turning to the real estate market instead of banks to fund construction costs. By selling ownership of the rooms in advance, developers secure more than enough money to build the hotels without the risk of making loan payments in the rocky early years of a hotel's debut.
Analysts note that only a handful of condo-hotel properties have been open long enough to offer comparisons for potential buyers, and there's no consensus on whether the units make good investments. Tourism officials also worry that the move toward individual ownership of hotel rooms could leave too few beds for tourists, as well as put pressure on the number of hotel rooms available for large conventions. Such conventions typically need thousands of rooms reserved years in advance.
If you own one of those units, I don't know when you're going to use it, said David Kelsey, head of the South Beach Hotel and Restaurant Association. You can't guarantee you will have the room available for conventioneers.
But, nothing seems to be cooling developers' enthusiasm for condohotels and their quick access to cash.
Last January, the owner of the Sonesta Beach Resort on Key Biscayne announced it will raze the 294-room property to make way for a condo-hotel complex, and Ian Schrager's ultra-hip Shore Club has quietly begun compiling a waiting list for buying its 325 rooms. Fort Lauderdale's tourism boosters also are salivating over a wave of luxury hotels slated to open in that former low-budget paradise for spring breakers - projects financed as condo-hotels.
Then there is the Falor appetite for acquisitions. In May 2003 the family - - David, the chairman; Robert, the president; and Chris, director of renovations -- closed the deal on their first conversion project: the Cheeca Lodge resort in Islamorada, home to George H. W. Bush's annual bonefish tournament. From there they scooped up the Mayfair House, a famed if faded hotel in Coconut Grove.
Then the Falors turned to South Beach, buying the Breakwater and Edison, and then the $500-a-night Tides, once owned by record mogul Chris Blackwell.
Next came the Royal Palm -- 417 rooms on the ocean, a major convention- headquarters hotel and the fourth largest resort in Miami Beach. Waiting for that deal to close, Falor signed a contract to buy the Omni Colonnade, an upscale business hotel in downtown Coral Gables.
People familiar with the deals say the Falors scooped up the prized South Florida properties by coming in early with strong offers and promising quick closings.
They're very aggressive, said Scott Podvin, a real estate lawyer with Stearns Weaver in Miami who represented the Falor Cos. on the Mayfair deal. That's part of their strategy: Let's beat others to the market.
Some industry leaders who had expressed concerns about condo-hotel conversions say they're reassured by the Falors' pledge to reserve rooms for conventions.
Before I met with David and sat down with him, I was concerned, said Stuart Blumberg, president of the Greater Miami & The Beaches Hotel Association. He understands the business. He's not just someone coming in the front door, converting and let me take my carpet bag and move on.
Developers dismiss critics' concerns about a potential shortage of hotel rooms, saying most owners turn their units back to the hotel's rental pool. And, they note the condo-hotel model is creating rooms when most banks won't fund hotels.
To the extent it puts more hotels into the inventory, it's a good thing, said William Talbert, president of the Greater Miami Convention & Visitors Bureau.
By passing on debt, property taxes and other costs to unit owners, condohotel developers open a property with an instant profit on the real estate.
You don't have to wait five years to sell your project, said Francis Nardozza, chairman and chief executive of REH Capital Partners, a Fort Lauderdale investment firm. Essentially, you're selling it on Day One.
In return, unit owners -- who can pay in the low $100,000s for small hotel rooms or more than $1 million for an oceanfront suite -- get free stays in upscale hotels, instead of the housecleaning and shopping that often comes with a vacation home.
And, when the owner leaves, the unit is offered for rent on a daily basis without any hassles for the owner. Unlike time-share units, which generally plunge in value with age, condohotel rooms offer the prospect of appreciation, or at least recouping the original purchase price.
Unit owners split operation costs with the hotel in exchange for a share of the room's rental income, typically about 45 percent. But, with many hotels losing money their first few years in an always competitive and seasonal market, condo-hotel units are unlikely to be cash cows, the experts said.
If I had to give someone advice -- and I probably shouldn't be saying this -- I would say don't buy a condohotel unit as an investment. Just don't do it, said Ricardo Dunin, who opened the Mutiny in 1999 in Coconut Grove, the first South Florida condohotel project since their scattered use as a tax-shelter died off in the 1980s.
The reason you buy a condohotel is for use, Dunin continued. And [when] you're not there, then it's being rented and maybe you pay for your costs.
Federal securities law bars developers from marketing condo-hotel units as investments, but there's little question investors are fueling many of the projects' pre-sales. Ninety-five percent of the time [buyers are] really more interested in an investment than in a vacation home, said Joel Greene, president of the Condo Hotel Center brokerage in North Miami.
If that's the case, then that pool could dry up if the first generation of condo-hotel projects generate too little cash and too low resale prices. But, vacationers scooping up the units would be another story.
If that is, in fact, the end user, I don't think there's an end to the demand, said Gregory Rumpel, the Four Seasons Hotel and Tower, Miami Photo provided by Kreps DeMaria Jones Lang LaSalle Hotels vice president who helped broker the Falors' Colonnade and Cheeca deals.
Hotel markets in Latin America, Europe and Australia have been building condo-hotel projects since at least the 1980s, but the concept was mostly isolated to ski towns in the United States. Then the Mutiny opened, signaling the start of a trend that spread quickly through South Florida.
The last two years saw developers across the country tip-toe into the concept. The Trump International Hotel and Tower in Chicago -- where Bill Rancic went to work after The Apprentice -- is a condo-hotel property. Aventura-based Turnberry Associates launched the first Las Vegas condo-hotel, and other developers are following suit.
The Falor Cos. says it has $1.2 billion worth of property either under contract or in its portfolio and has plans for more acquisitions.
Admirers point to the company's experience running hotels. David Falor used to head up sales at the old Americana hotel in Bal Harbour and the Falor Cos. made most of its money buying and repositioning hotels. You have to understand the hotel business to understand the condo-hotel business, said Ezra Katz, chairman of the Aztec Group hotel brokerage, which is working with the Falors.