Welcome to the wonderful world of condominium hotels. Condominium hotels have been around since the 1980s on a small scale, particularly in resort areas, such as ski towns. Condo-hotel unit owners were certain to have a place to stay during the season, and they could otherwise rent their units out, in which case they could, as landlords, deduct relevant expenses against the income realized. Furthermore, condo-hotel ownership offered certain tax advantages that made real property ownership appealing as a hedge against inflation and an opportunity to realize capital gains at a low tax rate relative to the tax on ordinary income. But condo hotels lost their tax-deduction luster after the passage of the 1986 Tax Reform Act, which, among other things, prevented condo hotel investors from deducting “passive” net losses from their “active” ordinary income.

Fully furnished, so-called transient condominium apartments have been rented out on a short-term basis to tourists for many years. In Hawaii, for instance, real estate management companies do a brisk business in short-term condo rentals on behalf of unit owners. The obvious thing to do for efficiency’s sake was to place a condominium complex under central hotel management. Existing hotels could be converted to that end or new ones built. Only recently has condo-hotel ownership become the rage, particularly in Florida, a state where wheeling and dealing in real estate and other much less tangible things is the traditional pastime for people on the make and take. In fact, Florida led the condo hotel activity twenty years ago, and now it leads the resurgence: a fourth of the condo hotels recently planned for the United States were in Florida

The recent mini-boom in condo hotels rose from the ashes of the World Trade Center. Tourism tanked after the terrorist attacks. Traditional lenders were not interested in risking money on hotels. Hotel owners needed cash to cover operating expenses or wanted to bail out altogether. Why not convert the hotel rooms to condominiums and sell them directly to the public? At least there would be no loan payments to make during the first few years; ninety-percent of the value of the project could be financed by condo hotel investors. Happily for developers, it is much easier to sell equity under the guise of hotel-room usage to small investors, who are relatively uninformed and tend to buy on whims, rather than raise loans from traditional lenders, who tend to be more knowledgeable and cautious when taking risks. If the original hotel owners and operators did not want out of the hotel business, they could use the condo-hotel investors’ money to revamp the premises and take a management contract to retain control over marketing and operations.

The concept took off and money poured in from small investors. If they so chose, they could live in their respective rooms year around; but that was highly unlikely, for not many people would want to reside indefinitely in a hotel room surrounded by tourists. Most buyers would rather invest in the condo-hotel hospitality industry, putting their rooms in the rental pool in order to get a percentage of the gross revenue on their rooms, less relevant expenses. Of course if the hospitality business they invested in went south, their revenue would fall yet their condominium fees would remain the same, and their rising passive losses from the investment units would not be deductible from their ordinary income elsewhere.

Why not build brand new condo hotels? And why not mix things up a bit and devote enough units in a hotel to condominiums to fund development of the entire hotel? Those investments should raise the forty percent needed to secure debt financing for new construction. Soon, around seventy-five percent of hotel developments would have a condo-hotel component. After all, the condo hotel offers optimists the best of all possible worlds. Never mind the pessimists – fortunes are made by repetition of positive publicity while ignoring naysayers during good times. During bad times, vacations are cancelled, second homes if not third homes are unwanted burdens; and the lower echelon of condo-hotel investors, who tend to be under fifty and earning around $85,000 when they are flush, tighten their belts, default and walk away; if their backs are against the wall, they might demand an SEC investigation and sue the condo-hotel developers and their brokers for fraud. Of course the hotel management would already be having horrendous problems with irate condominium owner/activists, who regret agreeing to forfeit half the rent to management in the first place, over expenses and the use of common areas. Of course the owners of the swankest resorts will barely bat an eyelash under the circumstances.

But mind you that even if sweet dreams do not come true, Condotelworlde will remain the best possible world of all worlds, at least according to the optimists with interests vested in it. “What’s optimism?” asked Cacambo. “Alas,” responded Voltaire’s Candide, “it’s a mania for insisting that everything is all right when everything is going wrong.” Despite those wrongs, concluded Candide on an optimistic note, “we must cultivate our garden.” And while cultivating it we must think positively. Even the Florida pessimist might optimistically conclude that Florida will be spared the really big natural disaster, hence the demand for condo hotel units will be impossible to meet for many years after the great northeastern hurricane strikes – perchance cosmopolitan Miami will become the continent’s greatest onshore financial center if not its new capital.

“A condo hotel unit represents the best of all worlds. It’s a hassle-free, luxurious second home in a fantastic vacation destination. It generates rent revenue that offsets the cost of ownership. And it’s an investment with great potential for appreciation,” reads Florida’s Condo Hotel Center website, a system developed by broker Joel Greene, Condo Hotel Center’s president. He claims he has built a better mousetrap, figuratively speaking, a system that has made him more efficient and successful. The system, he says, has so far this year captured for him, personally, double the earnings of the best year he had in the sixteen years before he built it. As a result of the increase in his disposable income, he says, he not only sells real estate, he invests in it as well.

Mr. Greene insists that his reference to a mousetrap should not be taken out of context; that is, we should not infer that he believes his prospects are mice. Yet the metaphor is appealing because the cheese at Condo Hotel Center certainly looks tasty. Interested persons can find favorable testimonials onsite, together with an excellent menu of valuable, free information about the market and the select condo hotel units that Mr. Greene and his colleagues would be glad to earn a part of the commissions paid by sellers. Ninety-five percent of the prospects, he stated in a January, 24, 2005 Miami Herald interview, are more interested in investing in the units than living in them. Ricardo Dunin, who pioneered the Mutiny, South Florida’s first condo-hotel project, in 1999, said in the same interview, “Don’t buy a condo-hotel unit as an investment. Just don’t do it.”

But it seems that most people who are selling condo-hotel units are a good deal more positive on the investment outlook than investors, although federal law bars real estate brokers from marketing the units as investments. Developers and brokers are likely to run afoul of the securities’ laws when they stress rental income when pitching condo hotel units, therefore salespersons are likely to point out that the condo-hotel world’s premium lifestyle alone is worth the, er, ah, expenditure, well worth paying a premium for. “Cash flow should not be the main reason to buy,” states Condo Hotel Center publicity, skirting the law – getting around it is so bothersome that some developers are seriously considering marketing condo hotel units as registered securities. Condo Hotel Center flirts with the law: “Think of the revenue generated by your hotel condo unit in the rental program as helping to offset your costs…. If you buy a quality property in a good location, you could end up with not only a second great home but a real estate investment that appreciates with time and will net you a profit when you sell.” Moreover, “Prices for condo hotel units have been appreciating at a faster rate than traditional condos or single family homes, making them all the more attractive to real estate investors.” The value of an investment, as we know, is closely associated with cash flow. Of course a public security offering should explicitly state the risks at length, one risk being that higher prices entail greater risk in an exuberant, speculative market.

The future remains bright even in its darkest corners, in some broker’s minds. “Miami is an untapped metropolis,” pronounced Mark Zilbert, whose condo flipping facility is at www.condoflip.com. So small investors have cause to hope that Miami at least is not a mousetrap where mice and men shall soon be tapped out. This particular product and time are presumably different. Statistical history indicates that people avoid purchasing and maintaining ownership of second and third homes during downturns, but Condo Hotel Center has published Bob Waun’s analytical report to the contrary. Mr. Waun, a former mortgage banker and now CEO of Michigan’s Vacation Finance, claims that the condominium bubble is so much bunk dramatized by the Press – we believe prophecies of doom enthrall pessimists. Notwithstanding the occurrence of certain inexplicable anomalies once attributed to God’s mysterious providence, probability based on supply-and-demand statistics gives rational analysts cause to expect long-term trends to continue to the long-run advantage of folks who have the foresight to take the plunge now. The current law of averages dictates that the upward inclination to buy second and third homes will be supported by the relatively small but growing population of Boomers and Echo-Boomers who have faith in inheritances – that reminds us of the credulous man who leaped from the Brooklyn Bridge to his death on December 31, leaving behind a note that only 9 people before him had done the same so far that year, so he was complying with the Law of Averages, that 10 people would jump every year. But according to recent statistical studies the retirement river will run dry for the bulk of the ageing population; they can expect dire poverty; that threat alone is enough to induce our already disaffected youth into believing that if they do not save and invest enough money for professionals to handle and get a high return on in the form of high salaries, commissions, and capital gains, even dog food will be too expensive for them to eat when they mature.

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