Condo-hotels aren't working for either
condo owners or hotel-room renters

As a state condominium ombudsman, Bill Raphan has fielded scores of calls from angry people who own units in condo-hotels a hybrid that took off when the real estate market was sizzling.

Those who own units that are rented out as luxury hotel rooms complain that they aren't making the money they were promised when they slapped down $200,000 to $2 million, hoping for big returns.

Meanwhile, those who live year-round in units that are part of the hotels complain that they're paying exorbitant assessments for valet staff, hotel clerks, maid staff and other hotel services that they don't want or need. At the same time, they resent sharing their pools and tennis courts with an ever-changing bunch of tourists.

Raphan says he listens to the tales of woe. That's all he can do.

Potential lawsuits
 
  • One claims the Resort at Singer Island
    violated federal law by selling the units as
    investments and not registering them with
    the U.S. Securities and Exchange Commission.

     

  • The other accuses the resort of misrepresenting parts of the deal, including not offering a true idea of how much they would have to pay in future assessments.
  • Condo-hotels, or condotels as some call them, aren't regulated by the Division of Florida Land Sales, Condominiums & Mobile Homes even though the state leads the nation in the number of condo-hotel units.

    "It's a mess," said Raphan, an assistant ombudsman for the state agency.

    Raphan's view is shared by many who watched the novel craze begin and crash almost as quickly.

    "I'm not saying the every one doesn't work but the vast majority are failures," said Bob Goldstein, president and CEO of the Boca Raton-based Hospitality Consultants Inc.

    While the reasons are many and varied greedy developers, buyers with unrealistic expectations, the collapse of the real estate bubble some owners are fighting back.

    Resorts of Singer Island, a 20-story condo-hotel that recently won AAA's coveted Four Diamond Award, now faces two possible class-action lawsuits from owners who claim they were duped into buying units that have become financial drains.

    The most closely watched lawsuit involves West Palm Beach attorney James Beasley's claims that the resort, owned by the financially troubled WCI Communities, violated federal law by selling the units as investments and not registering them with the U.S. Securities and Exchange Commission.

    "It's a simple lawsuit, a very straightforward theory," he said, of the suit he filed on behalf of four unit owners, three of whom live out of state and another who lives in Miami. "The only reason the hotels were offered for sale was as an investment."

    Beasley declined to talk about the details of his clients' investments in the 239-unit oceanfront hotel.

    "From everything I've heard it's a first-class facility but a financial disaster for people who bought the hotel units," he said.

    Joseph Ionna, an attorney representing the resort, declined comment. But, in recent SEC filings WCI promised to vigorously defend the lawsuit that, if certified as a class-action lawsuit and ultimately successful, could cost it $138 million.

    Because the owners can stay in their units, Goldstein said he doubted that the purchase would constitute an investment that would have to be registered with the SEC. "It would be an investment if you don't have the opportunity to use it yourself," said Goldstein, whose company provides a wide-range of management, consulting, development and valuation services to the hospitality industry.

    Still, he acknowledged that many condo-hotel owners have gotten hurt.

    The deals were structured to give developers the money they needed to construct luxury buildings or, in some cases, convert aging condos or hotels into upscale resorts. In many cases, developers under-estimated construction costs and over-estimated how much each hotel unit would make.

    For instance, to make the numbers work, they estimated that rooms would be occupied 90 percent of the time and command $300 a night. Instead, the rooms were occupied 60 percent of the time at $150 a night.

    Not only does the owner not get the money he or she hoped to get to defray the costs of owning the unit, but the value of the unit falls.

    "Who's going to pay the price?" Goldstein asked, rhetorically. "The poor unit owner because they gave the developer a huge profit upfront."

    The other threatened class-action lawsuit against the Resort at Singer Island accuses it of misrepresenting various elements of the deal, including not giving buyers a true picture of how much they would be forced to pay in future assessments a claim the resort denies.

    Sheldon Greene, founder of the Miami-based Condo Hotel Center, said income an owner got from renting out his unit as a hotel room was never intended to cover all of expenses, including the mortgage. It was to be "the icing on the cake."

    He attributed much of the litigation to people who got in over their heads financially and now want a way out.

    Selling a unit is almost impossible unless a buyer has cash. With the real estate market in free fall, few lenders are approving loans for condos, much less condo-hotel units, said Bill Davis, a private lender and former president of Palm Beach County Mortgage Brokers.

    "They are difficult to finance in the best environments, but it's almost impossible to finance one now," he said.

    Still, Greene said eventually, as the market recovers, that will change. He acknowledged that some "bugs" have to be worked out, particularly in properties which combine year-round residences and hotel units.

    But, he said, he is convinced that the condo-hotel is good for people who return to the same destination repeatedly and have the financial ability to own a luxury unit.

    "Right now they're suffering with the rest of the real estate market," he said.