From an article published by the Associated Press, June 2005 Mike Schneider


"The hybrid concept of a luxury hotel that sells some of it units as condominiums has become one of the most popular trends in the industry in recent years. Condo-hotels in the past two or three years have expanded beyond traditional markets in ski resorts or Hawaii and into other tourist destinations such as Orlando and Las Vegas. Projects also are under construction in urban centers like Atlanta, Chicago and New York, where the Plaza Hotel is being converted.

The concept has risks for both the developer and the condo buyer.

Financial risks
The Securities and Exchange Commission considers the condo offering
a security if income and expenses from the rental units are pooled and if a condo unit is sold with the explicit expectation the buyer will earn money or derive tax benefits from it. If the development is structured as a security, it can only be sold by a securities broker and it is easier for an investor to sue the developer under the SEC's anti-fraud rules, according to Los Angeles attorney Jim Butler.

Most developers choose not to sell their projects as securities to avoid the SEC complications, so they are prohibited from discussing the economic or tax benefits from a rental arrangement or project on how much a condo unit can earn in rental income. Many buyers make decisions without all the facts.

A developer typically has to come up with around 40 percent of the equity for a traditional hotel; a condo-hotel development requires much less investment.

"If you're not allowed to communicate revenue expectation, often times buyers are making a decision based on incorrect information or overly optimistic information," a quote from Mark Lunt, Ernst & Young in Miami.