Condo Hotel Mortgages - Better Than Traditional Condos

The condo hotel trend has been much ballyhooed, soreal estate sales process the income potential was
why are lenders still sitting on the fence when it comesemphasized, the consumer will have a claim against
to consumer mortgage financing? Here are threethe developer/Realtor who represented what could be
simple reasons:considered a security. The SEC issued a 'no action'
1.) The secondary markets (FNMA, FHLMC) have notletter that discourages such practices, but many sales
seen enough condo hotel paper to grade the risksoperations find it problematic to stay completely away
rewards of this proportionately new asset class.from the topic of rental income when a consumer
2.) Condo hotel is somewhere between a commercialdirectly requests such disclosure and information. As
hotel loan and a residential second home/investmentlenders assess their risks in this asset class, this issue
property consumer mortgage, so they don't fit neatlyof 'perception of investment quality and intent for
into existing portfolios/guidelines.personal use' is very difficult to measure, but is of
3.) The yield/interest rate that a well-healed condooptimal importance. You can imagine a borrower who
hotel purchaser is willing to pay on a 30-year mortgagelooses money every month, but enjoys their ownership
is much lower than timeshare and other vacationexperiences and is very pleased with his condo hotel.
ownership rates. Making this new yet-to-be determinedOr an investment minded consumer who tires quickly
risk hard to justify.of their condo hotel when they are consistently writing
Many of the new condo hotel offerings are evenchecks instead of receiving them from a condo he
more difficult to mortgage at market interest rates andnever visits. The value of service, amenities and condo
terms, because they are smaller than 600 square feetowner experience has never had more importance to
in size, do not have kitchens, include FF&E chattelreal estate value.
in the sales price, and may be in projects that includeThe on-going hotel management is the next risk that is
mixed use and timeshare/fractional components. Eachforeign to conventional residential mortgage lenders.
of these items defy conventional mortgage guidelines.Lenders entering this niche are often unfamiliar with the
Yet even given these challenges it is clear that lendersmetrics and cyclical nature of the hotel business, and
are closely watching the evolution of the condo hotelneed to approve condo hotel projects with an eye to
market. With each high-net worth, private banking clientthe long-term viability of the hotel, not just the credit
who purchases a condo hotel, bankers are beingquality of the consumer. If the hotel is mis-managed,
asked, "Why won't you lend me a conventionalreplacement reserves are grossly under funded, or if
mortgage on this piece of real estate?" and lendersthe viability of the hotel market is deteriorating the
are being forced to get up to speed on this assetconsumer's ownership experience will suffer, and
class.mortgage default risk rises rapidly.
As interest rates have risen, and the real estateAnother risk is of valuation. The real estate industry
markets in general have cooled, the lending communitymeasures of cost per square foot have been
has been faced with increased capacity to lend.stretched by a residential condo hotel that includes
Lenders are beginning to seek new niche opportunitiesname-brand management and designer label
to fill their appetite for yield and loan volume, condodecorating, 42" plasmas and fine furnishing, spas, gyms
hotel mortgages present a unique opportunity that'sand ski valets as part of the real estate package.
time may have come.Valuations of $1,000+ per square foot have been
High Credit Qualityobtained and the sky looks the limit if this is our
The typical condo hotel purchaser is a high net worthmeasure. The purchasers view is often of price point
consumer who is seeking a quasi-vacation home withnot price per foot, and is skewed further by the
hassle-free rental property benefits and investmentthought of owning part of an income producing and
potential. As with most mortgages, these borrowerslegendary hotel operation. But at these prices, the math
sign personally for the debt, and typically put 20% ormay not work as an investment beyond the trophy
more in down payment. Underwriting guidelines forvalue.
most of the existing condo hotel mortgage productsLenders will enter this new market niche in mass when
require a borrower to qualify for the debt without anythe answers to these risks is easier to measure
credit for the potential rental income from the property.through performance of the first wave of condo hotel
A cash-flow loss is not a loss at all, if the hotel shouldclosings which just began to occur this fall. The
fail to deliver any rental income. If they are trulyseasoning of these loans will be short when the
purchasing with an intent to use and enjoy their condogreatest need for mortgage capital occurs beginning in
hotel unit as a second home alternative, this consumerQ3 2007, this situation has the potential to create a
will be getting a luxury vacation condo for a fraction ofshort-supply of mortgage options for marginal buyers
the traditional condo ownership expense.in marginal projects. The dream of easy, low cost
Where the Risks Liemoney for any real estate asset is over, and it's time
The greatest risk to lenders and consumers in condoto wake up and recognize that most buyers don't
hotel ownership is in the sales approach and intent ofwant to pay cash even if they signed a 'cash contract',
the purchase. Is the consumer buying an investmentfinancing matters to the viability of the condo hotel
property or a vacation condo alternative? If during theindustry.