Global Hospitality Advisor: Hotel-Enhanced Mixed-Use: What Makes a Successful Project?

What Makes a Successful Project?

The following dialogue is excerpted from a panel discussion at The Hotel Developers Conference™ sponsored by JMBM’s Global Hospitality Group®. Panelists include Peter Connolly, Palladian Development; Robert Haiman, Remington Hotels; Tom Ito, Gensler & Associates; Jim Ratkovich, James Ratkovich & Associates, Inc., and Michael Mahoney, Triyar Hospitality LLC. Frank Jansen of Chicago Title Company moderated the panel.

See the June 2006 Global Hospitality Advisor® at JMBM.com for Part One of this article.

Jansen: Let’s talk about brands. Where do they fit into the mixed-use landscape?

Haiman: Not all brands have fully embraced the concept of condo hotels. We at Remington have strong relationships with brands, but it can be challenging. Brands are expensive. If you go with a brand, you need to sew it up early in the process, as brands will help drive sales. But this requires very careful cost-benefit analysis. Expect to get approvals from them every step of the way. If you don’t have a flag, you absolutely must have a professional hotel management company. Not to have either for your project is truly a recipe for disaster. The hotel won’t work without an experienced manager or a brand. Everyone loses.

Mahoney: I am a huge believer in brands for certain properties. In Scottsdale, we are looking for young business clientele, so we need an attractive brand that gives travel points. The W brand is right for this project and we found that they allow us some needed flexibility. Getting a brand to respond timely to your needs is very important, and that has worked well for us, too.

Jansen: Tom, you have worked on some very large multi-use properties that include residential components. How do architects work with developers to design the right room for the specific geographic location?

Ito: At Gensler, our designs are based on feasibility and market analysis studies and attention to the “new demographics.” For example, we have designed a destination resort property in Arizona—Resort Village at Verrado in Buckeye—that is based on the idea of “creating amazing experiences in great places.” It is a mixed-use property with 35,000 square feet of retail and restaurants, a golf course, condos that can be put into a rental program, and townhouses and golf villages. Built in phases, the mix for this property is 40% studio units at about 430 square feet, 40% 1-bedroom units at 745 to 750 square feet and 20% 2-bedroom units at 1,100 square feet.

Connolly: The studios are an interesting component. I have found that the typical condo hotel lender is looking for more than 600 square feet for a condo hotel room, and that must include some kind of efficiency kitchen. If a condo unit is too small, and has no kind of kitchen, you can’t sell it in a luxury condo hotel scenario. Lenders won’t finance it because it’s too hard to sell studios to the end user.

Ito: From the design side, the kitchenette has to fit into the condo hotel project, and it is a challenge—is this a hotel room or a condo? The typical conference hotel room is 435 square feet; 475 square feet for a luxury hotel room.

Connolly: Face it: none of us like to put kitchens in our hotel projects. They get messy and take longer to clean. You have ventilation issues, potential aroma issues—and we would prefer guests eat in the hotel’s restaurant. But kitchens are a necessary component if you want to get condo hotel financing.

Ito: For architects, this is one of our biggest challenges for mixed-use properties. Condos have kitchens and are larger than typical hotel rooms. If you have both condos and hotel rooms within one property, how do we address it? How do we deal with the different bay sizes? Change the size of the hotel? Have separate wings for different product? Differentiate the product through the building mass? Or change the configuration of the building, altogether? It is a very exciting architectural challenge and one we are meeting in designing icon properties, like the one in downtown Los Angeles across from the Staples Center.

Jansen: Tell us about that property, Tom.

Ito: This is an urban mixed-use property, catering to a sports and entertainment clientele. It will include a conference center and name restaurant, as well as a 175-key convention hotel, a 178-key luxury hotel and 262 high-end branded condominium units. We are in the process of selecting the brand right now. The mix is 45% 1-bedroom units at 1,000 to 1,400 square feet, 40% 2- bedroom units at 1,500 to 2,200 square feet and 8% 3-bedroom units at 3,000 to 3,400 square feet. The remaining are 2-story junior penthouse and penthouse units at 2,800 to 4,800 square feet.

Jansen: Jim, you are developing one of the biggest entitled beach resort properties on the Big Island of Hawaii, which will be different than the urban mixed-use property Tom describes. How will you decide what kind of product to build there?

Ratkovich: That project is sited within the Waikoloa Beach Resort, and it is entitled for a 300-room hotel and 500 condos. We are in the planning process now. We are deciding whether this project will be all condo hotel units that can be included in a rental program, or do we also build dedicated hotel rooms? We are talking to different operators right now—some are fine with 100% condo hotel units, others need some dedicated hotel rooms. Whatever flag we bring in will give us value for our 500 condos that we want to brand, so part of the evaluation is to determine which brand will bring us the biggest premium for our condos.

Jansen: I am curious, Tom, on the architectural side: do you find you have to build both condo hotel rooms and dedicated hotel rooms? How do sizes differ from your perspective?
Ito: 90% of our projects have a residential component and integrating them is the biggest challenge. Condo hotel rooms have to be larger than hotel units.

Connolly: Why do they have to be bigger? If you are building a condo hotel room, you should build it for transient stay. In theory, you are building a hotel for a transient market whether the units are owned by you or by the unit owner.

Jansen: Well, if I travel with my family, I want to have more than one bathroom and I want a full kitchen, whether I use it every day or not.

Haiman: I see the decision tree like this: do you want your project to look more like a condo or more like a hotel? You have to know who your buyer is and determine the ordinance that governs the use of the unit.

Jansen: Who is your buyer for your project at Indian Wells, Robert?

Haiman: At Indian Wells, the buyer must be willing to spend $1 million for a unit, and use the unit for no more than 60 days. The City of Indian Wells has passed an ordinance limiting owner usage to 60 days—and that can be any 60 days of the year. Research shows that buyers of second homes use those second homes 27 or 28 days a year, so we think the 60-day ordinance is very reasonable. In our Development Agreement with the city, we negotiated the right to sell some of the condo units free of the ordinance. The buyers of those units must pay the city $15/day for each day of usage over 60 days in a year in order to help defray the loss of transient occupancy tax. The condos which are not subject to the 60-day use limit have been fetching a price premium, but we want to be judicious about the number of non-restricted units we sell so we’ll have enough units in the rental program, and therefore, the hotel inventory.

Jansen: How have you designed the units for that market?

Haiman: We are building a unit that is much bigger than a standard hotel room—1,700 square feet. Each unit has a “lock-off” that is as big as a standard hotel room. We can rent just the lock-off, just the master suite or rent the entire condo unit. In other words, with 300 condos we can potentially sell either 300 rooms or 600 rooms to the transient market. We also know that people go the desert for outdoor living in the winter, so every condo has 450 square feet of outdoor terrace and a fireplace. This is a “home” feature, not a hotel feature. But we designed the kitchen so that it doesn’t feel too much like a residence. The appliances are very high-end and everything is covered in wood paneling, but we have designed the kitchens so they won’t dominate the living areas.

Jansen: Does the ordinance have restrictions on which 60 days the owner can occupy the unit?

Haiman: No. We know that the best 60 days for revenue in the desert will take place in January through March. Our owners will know that, too. So, depending on their expectations for rental revenue, they can decide which 60 days—or less—they want to occupy the unit

Jansen: I see that our time is up. Thanks to all of you for participating, and thanks to Jim Butler and JMBM for inviting us to speak at The Hotel Developers Conference™.

The Hotel Developers Conference™, sponsored by JMBM’s Global Hospitality Group®, focused on cutting edge issues for the full spectrum of hotel projects: hotel-enhanced mixed-use (including condo hotels), residence clubs, fractionals and stand-alone properties.

Jim Butler is a hotel lawyer and business advisor specializing in creating solutions for hotel owners, developers and lenders. Jim leads a team of 50 members of the Global Hospitality Group® of Jeffer, Mangels, Butler & Marmaro LLP, where they have assisted clients with more than $40 billion of hotel transactions around the globe involving more than 1,250 properties. In the last five years alone, they have advised clients on more than 80 hotel-enhanced mixed-use projects, virtually all of which have included condo hotels and hotel condos. Jim can be reached at 310.201.3526 or jbutler@jmbm.com.