The economics of condo hotels

By Brian McDonald ~ Photos courtesy OBM International

In the Turks & Caicos Islands, condominium hotels are becoming increasingly popular among developers, residents and visitors considering investing in the Islands. What makes this concept so well received?

Sometimes referred to as hybrids, condo hotels merge ownership opportunities with the appeal of services and amenities provided by a high-end hotel or experienced management company. Although this is not a new concept, the scope of the arrangement has expanded significantly over the years and continues to draw developers, hoteliers/management companies and those interested in purchasing a second residence or a vacation home.

For the project developer, this arrangement is very attractive, for early on, the operational facet is sold directly to a hotel operator or management company. It is up to them to aggressively market the destination. This allows the developer to focus on project-related issues, such as budgets and construction timelines. Once the project is built, the developer will receive rental revenues from vacationers staying in any of the unsold units. Flexible government regulations and financial incentives, such as partial exemption from import duties, enhance the attractiveness of this model.

From the management perspective, whether it is a five-star flagged hotel company, such as Four Seasons or Starwood, or a highly reputable, independent management company, it is a win-win situation. Because all hotel-like features, such as meeting space and recreational facilities, are deeded as individual condominium units and separately owned by the operator, they can effectively manage the property as a hotel. As a result, guests feel as if they’re staying in a spacious five-star establishment, with all of the comforts of home, and the operator obtains profits from the rented condo units.

Buyers see the potential for monetary rewards when investing in a condo hotel, which is why most people seek this arrangement as a second residence or vacation home. Although the initial purchase is usually 25% higher than standard condominium purchases, spot evidence suggests that condo hotel units are holding their value, according to Carrie Coolidge’s June 7, 2004 article in Forbes magazine. In addition to a 5% appreciation per year with the right property, investors can enjoy substantial financial returns when they place their units in the rental pool, despite a portion of these revenues being shared with the hotel operator. These funds can be utilized towards an earlier mortgage payoff. Owners also have the convenience and ease of mind of having their property well managed on a continuous basis.

There are several reasons why the Turks & Caicos are alluring to buyers and developers. First, there is a strong demand for condominium-type residences. Second, location is key. Only one hour and ten minutes from Miami and three hours from New York City, the Turks & Caicos Islands offer a convenient, safe, tropical escape. Third, in TCI there are many reputable international financial institutions, the currency is the U.S. dollar, and British common law presides. These factors ease many of the challenges of investing in a foreign country. Finally, buyers can receive a permanent residence certificate (PRC) when they purchase a home. If an additional investment is made toward an approved business, they earn the right to work in Turks & Caicos. (The amount to be paid to earn these privileges varies per island.)

Taking notice of Turks & Caicos’ many attributes and benefits is the five-star Royal Reef Resort’s CEO Fred Paatz and President Mark Hall. Slated to open its doors in early 2007 on one of TCI’s prime development frontiers, North Caicos, this condo hotel is certain to be extremely successful, according to Paatz and Hall. “TCI has a proven record of condominium sales,” says Mark Hall. “Other resorts have all sold well, and most were sold out before construction was completed or, in some cases, had even started. Despite the high prices, there is obviously a demand for condos. If all of these condos sold well, our project will sell even better with a hotel facility. We feel there is a strong demand for this type of product, as well as a void in the market that we expect to fill.”

quot;Moreover,” adds Hall, “there is currently no five-star hotel in Turks & Caicos, and condo units or villa rentals account for most of the available rental inventory. The hotel and conference market is virtually untapped. The facilities of the Royal Reef Resort will attract not only vacationers, but also conference business. For those interested in investing in a condominium product, these features add to its purchase appeal. What’s more, we are positive that the project will bring additional tourism into the country and create jobs for many North Caicos residents who previously moved to Providenciales to find work. These factors, combined with government’s excellent support, make us confident the Royal Reef Resort is an excellent opportunity all around.”

Designed by OBM International, the 17-acre Royal Reef Resort will feature 95 hotel suites and a total of 220-room condominiums comprised of one, two and three-bedroom units and penthouse suites. Two restaurants, international conference facilities, a spa, a gym, in-room Internet access, resort-wide wireless services, shopping and ecotours are just a few of its many amenities. Concierge, room service and childcare facilities add to its overall appeal.

The Royal Reef Resort will begin preconstruction sales in September 2004, with marketing efforts focused on the United States, Canada and Europe. A local real estate team and select marketing professionals will be targeting those individuals seeking an island escape. More importantly, it is anticipated that development in North Caicos will happen in a very planned, organized and controlled fashion. The peaceful, pristine beauty of the island and its small beaches is very appealing to Hall and Paatz.

“We want to create the true island getaway,” offers Fred Paatz. “We do not want a busy, compact, built-up area. North Caicos is very quiet and has a lot more land available than Providenciales, making it one of the most exclusive of the Islands. It also has a solid infrastructure, an international airport, existing and new private estates, a marina in the process of being built, and most of all, an unforgettable landscape that our guests and owners will be able to enjoy.”

Just as Hall and Paatz saw opportunities in North Caicos, those considering investing in property might want to consider a condo hotel in the Turks & Caicos Islands. However, to be a successful investor, there are some important points to keep in mind when purchasing in this type of property:

* Carefully analyze your financial health and know what you can really afford.
* Know the real established value of the unit you are interested in purchasing.
* You will be a member of a condo association. Be sure to review the association’s Covenants, Conditions and Restrictions (CC&R). Ask yourself if you can live within these rules.
As a new hotel investor, you are also an investor in its management team. Be sure to:
* Review a copy of the management company’s contract with the condo association.
* Understand the details of the revenue splits.
* Be alert for additional management or maintenance fees.
* Consider titled ownership in a high occupancy condo hotel if you’re satisfied with 30 to 60 days of personal use per year.
* Approach your condo hotel purchase as a savvy investor.

The essential ingredients to a successful condo hotel include a great location, excellent amenities, a respected developer and top-notch management team. Be sure to shop around, ask for advice, and find trustworthy professionals to help you in your venture. If you take the right steps, you’re sure to enjoy years of happiness and lucrative returns on your condo hotel investment.

For nearly seven decades, OBM International has been a leader in design excellence. The premier design consulting firm throughout the Caribbean and Bermuda, OBM has expanded its expertise on a global scale by securing projects in the United States, Latin America, Europe and Africa. Today, OBM has offices in Antigua, Bermuda, Bath (UK), British Virgin Islands, Cayman Islands, Marbella (Spain), Miami, Trinidad & Tobago and the Turks & Caicos Islands.

Brian Macdonald is the managing director of the Turks & Caicos office. For more information on OBM, visit www.obmi.com.

For more information on Royal Reef Resort, call (905) 639-7336 or (866) 728-REEF toll free in North America or visit www.royalreefresort.com.