One Condotel Owner Looks to Defy Florida Real Estate Rules

The Penguin Hotel was doing well for three years, as room rates rose and it became an attractive, affordable destination for visitors to South Beach. Owner Markus Friedli, however, has not been similarly pleased with the four months the unit has spent as a condotel.

Sales have been slow for the property’s 44 modest, albeit stylish rooms. In a popular, urban market such as Miami, the aim of such a development is to attract those seeking a Florida home loan, often for a vacation house, in a unique setting.

”I thought it would be easier,” the 41-year-old hotelier said after selling seven units. Therefore, Friedli might try a third incarnation for the Penguin: selling it as an investment security.

The Penguin would remain a condo-hotel under that scenario, but the units would be sold under federal law governing stocks and shares in other profit-making enterprises.

A unique real estate endeavor

It’s a legal framework virtually unheard of within the South Florida real estate industry, where sales staffs are warned against marketing property as investments for fear of running afoul of federal security laws. And it could involve hundreds of thousands in dollars in registration fees, awkward disclosure documents, strict advertising controls and extra exposure to litigation should buyers end up unhappy.

By declaring the Penguin a security, Friedli would defy conventional wisdom in the real estate industry but confirm the assumption that many condo buyers are investors looking for a profit - a scenario that many expect to grow less popular for those seeking Florida home loans in 2006.

Many see profit - or at least cash flow - as a main selling point for condotels, which offer title to hotel rooms that owners can then rent out for a share of the rental income.

”You’re buying into what is really a business, just as if you were buying a stock in any other business,” said Bart Bartholdt, a lawyer with Graham & Dunn in Seattle, who wrote an article on how to avoid security-law infractions while selling condo-hotels.

Avoiding the securities designation isn’t easy, making the condo-hotel sales process one of the more complex business models in real estate. Here’s why:

• Real estate agents can’t discuss a project’s hotel operations. At the Saxony, a new condo-hotel project in Miami Beach, buyers will meet with one sales staffer about the actual units, then walk to another building to learn how to rent out their rooms.

• Securities law bars the pooling of rental revenue, meaning condo-hotel owners can only receive income from their specific units. But rates in a hotel swing wildly depending on a room’s location and when it was booked. Conventions lock up scores of rooms at a discount years in advance, while last-minute vacationers pay a premium.

• Hotels can’t require owners to rent their units to the public, meaning would-be buyers aren’t entirely sure whether their investment is in a hotel with 300 rooms or only 50.

The ups and downs of the condotel market

Though condo-hotel sales financed dozens of hotel projects throughout South Florida - including a Four Seasons, Ritz-Carlton and other prestigious hotel brands - some question whether buyers are prepared for the ups and downs of the notoriously cyclical lodging industry.

”It’s hard to meet a buyer’s expectations on a good day,” said Gary Saul, a lawyer with Greenberg Traurig who advises condo-hotel developers. “God forbid we should have another 9/11 and the hotel market slows down substantially. You’re going to have upset buyers.”

Condo-hotel developers and Florida home loan brokers dismiss those predictions as misjudging why buyers are drawn to the projects. They say most condo-hotel buyers primarily want a maintenance-free vacation home with hotel services, and they view rental income as a bonus.

”They figure, I’m going to buy a unit anyway. If I can put it in a rental program and make some money off of it and cover my overhead, that’s great,” said Rosalia Picot, whose Picot and Co. Realty Advisors managed sales for the Hilton Fort Lauderdale Beach Resort opening this summer.

Declaring the Penguin a security would allow Friedli’s sales staff to avoid many of the restrictions faced by other condo-hotel developers. He could also require owners to rent out their units, a key advantage for small hotels like the Penguin.

In a slower real estate market, he could pitch buyers directly on the upside of the Penguin as a hotel– including guaranteeing a profit for the first two years.

”You’re buying into the hotel business” with a condo-hotel, Friedli said. “The real estate boom in the last years sort of took the focus off the business side [of condo-hotels] and put it on the property value.”

Friedli said he has not yet decided whether to go the security route with the Penguin. It would be a unique way to take advantage of those looking for a Florida home loan of this nature.