Real Estate Forum - January 2008

“The financing market is a
fraction of what it was.
People are just holding
back, waiting for the New
Year to come.”

LAURENCE GELLER STRATEGIC HOTEL CAPITAL LLC

hotel rents it out, with the owner pocketing some of the proceeds.

In that scenario, the configuration of the actual room can have

a direct bearing on how the buyer financed the acquisition and, ultimately, whether the deal goes into default, Sullivan maintains. It’s unlikely that the purchase of a smaller, more conventional hotel room, with just a bed, bath and a small sitting area, was financed with a subprime mortgage, he says.

Conversely, larger units designed with a kitchen or kitchenette and one to three bedrooms were probably bought with riskier loans. “For a more traditional condominium, particularly in Florida and some places in California and Arizona, you could get subprime financing even on a second home, so those have been affected,” Sullivan says.

He also suggests that some buyers may have been misled into
believing the rental income of their units would cover their mort-
gage payments. “The problem is, a lot of
times the rental income wasn’t sufficient to
pay the debt service,” he says. “So the
senior mortgage might go into default, and
the sub-debt, i.e., the subprime, is definitely
going into default. Unless the buyers want
to come up with money out of their own
pockets, which they didn’t think they were
going to have to, they will lose money.”
The term condo hotel could also
describe a traditional for-sale condo-
minium tower built next to or atop a hotel.
The condos and the hotel share services,
but the condos are occupied solely by the
S K Y^SMowners. In recent years, many developers
have banked on mixed-use projects that
combined lodging (particularly with a lux-
ury flag) and residential. The thinking on
the part of the developers was that the sale
of the residential units would fund the
lodging portion of project. With the credit
markets now in disarray, no longer is that
a bankable proposition. In these instances,
the problem is not so much finding buyers
for the high-end condos (wealthy individu-
als don’t depend on subprime mortgage
financing), but getting a bank to finance
the project.

“Most full-service hotels, with a nice restaurant, lots of meeting space, a spa and gym, be it in urban or even resort locations, don’t pencil out,” Sullivan says. “In other words, the cost of the hotel on a per-key basis isn’t sufficient to generate an adequate return to bring equity or debt dollars to the table by itself. Therefore, a developer puts in residential, so the condo sales bring the cost of the hotel on a per-key basis down to a tolerable level. Adding a residential piece, in both urban and resort locations was a popular, I would say necessary, way of getting these deals financed because without it, the math just didn’t work. Well, that game is over in most places right now, other than a few resort locations with high barriers to entry.”

In those instances, an alteration of the original concept may be in order, Plasencia says. “They are either converting to all hotel or office, retail and hotel. Those projects are a bit more readily financeable