Article Courtesy of The Palm
Beach Post
By Jane Musgrave
Published April 20, 2008
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.
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.
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