UK: Condo Hotels in the UK

Condo Hotels provide an affordable alternative to outright ownership of holiday homes and a means of investing in real estate outside of the Stock Exchange. Condo Hotels (and similar products such as fractionals and membership clubs) developed in the United States. Securities regulations there prevent marketing these products as investments. Instead, they are offered as lifestyle products: an opportunity to buy a holiday home in the likes of Aspen or Miami Beach, with a full complement of amenities and sometimes a variety of other benefits depending on the operator and the scheme. There is a logical appeal of paying for what you use: why pay full market value for a property which you use for only a fraction of a year? There are many other attractions: do away with the administrative hassle of maintaining, managing and marketing your property; and the prestige of an association with a leading sector brand in the best locations.

Interest in this sector is flourishing in the UK too. Without the same regulatory restraints here, these products can be marketed as investments and as commercial investments that can be put into a SIPP.

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Condo Hotels provide an affordable alternative to outright ownership of holiday homes and a means of investing in real estate outside of the Stock Exchange. Condo Hotels (and similar products such as fractionals and membership clubs) developed in the United States. Securities regulations there prevent marketing these products as investments. Instead, they are offered as ‘lifestyle products’: an opportunity to buy a holiday home in the likes of Aspen or Miami Beach, with a full complement of amenities and sometimes a variety of other benefits depending on the operator and the scheme. There is a logical appeal of paying for what you use: why pay full market value for a property which you use for only a fraction of a year? There are many other attractions: do away with the administrative hassle of maintaining, managing and marketing your property; and the prestige of an association with a leading sector brand in the best locations.

Interest in this sector is flourishing in the UK too. Without the same regulatory restraints here these products can be marketed as investments and as commercial investments that can be put into a SIPP.

Largely as a consequence of the regulatory differences between here and the United States, we are using slightly different structures in the UK. In simple terms here, the products are offered along the lines of a sale and manage-back to each private investor. The investor is sold (typically by way of a long lease) a property interest comprising a single hotel room. The lease will be on the same sort of terms as you would expect to see for a property sold outright, but with one important difference: the Condo Hotel lease will exclude any outright entitlement to occupy the room. The real sophistication lies in the form of the manage-back. In addition to the usual manager’s obligations, a Condo Hotel Management Agreement will provide for a host of personalised administrative services for the investor’s benefit (for example, VAT accounting). Typically the investor receives as his Owner’s Return a percentage of the gross receipts attributable to his hotel room (this will not include food, beverages, car parking etc), after deduction of the manager’s fee and service charges for ongoing maintenance and repair of the Hotel. The Owner’s Return may be guaranteed and perhaps also the service charge deductions capped for an initial fixed period. If properly structured the Owner’s Return could be (or could in part be) determined according to the overall success of the Hotel. Although the investor’s Lease will deny entitlement to occupy the room, the Condo Hotel Management Agreement should give the investor the right to use his room (or an equivalent room in the Hotel) for a minimum number of days in each year. Typically the investor’s entitlement is worked out on a points system, allocating a different number of points to individual days of the week and different times of the year. These points could be transferable and used at different hotels run by the same operator; or in some other way may entitle the investor to preferential treatment.

After rapid expansion in the States, this sector has hit some practical problems: there are operational difficulties managing a hotel with condo elements to it; there is an apparent lack of a secondary on-sale market; and the big question remains how to tackle future obsolence. Here in the UK we are perhaps fortunate to be a little way behind the United States and are able to draw lessons from the experiences over there. Here as well there are some potential obstacles. These are long term investments. The sweetener of the guaranteed income return, in relative terms, seems short lived. After that, the Owner’s Return is dependent on general and local market conditions as well as the manager maintaining performance standards. For these products there seems an overwhelming reluctance on the part of the operator to commit itself to specific performance targets/operational standards or offer a proper company guarantee. This may be the state of the market, but the finer detail of these products seems to be dictated by the manager’s own terms. Should market conditions for the sector change for the worse, these terms could be perceived to be unfair, which could open the possibility of specific regulation as happened in the past with timeshare selling.

This article first appeared in the June edition of Hotel Report.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 09/08/2006.