Condotel ?

By: Stephanie Diana Gast-Wilson

A question I get a lot from those who work in the real estate field and from buyers alike is “what’s a condotel and why can’t I get financing?”.  Well in the simplest of terms it is is just as the name suggests a condo that runs  itself as a hotel.  Freddie Mac defines them as,”The project operates or advertises itself as a hotel, resort, inn, motel, lodge or
similar type of hospitality entity; includes such terms in its name; has a web site
that presents itself as a hotel, resort, motel, inn, lodge or similar type of hospitality
entity; has units available or advertised for rent through a website that offers
travel services; or is located at the same address or within the same project as a
hotel, resort, motel, inn, lodge or similar type of hospitality entity (Freddie Mac guidelines updated 4/15/15)”.

The major lenders Fannie Mae (FNMA) and Freddie Mac find these sort of properties to be ineligible project types.   Primarily because condotel are such risky investments for all people involved.  
When I explain the above information the question of “why are they risky?”, follows.  Think about it this way when all suffered the crisis of 2008 one of the hardest hit industries was the travel and leisure industry.   If your business involves selling condos in your home owners association (HOA) and renting them out nightly, weekly, monthly for the unit owners that’s a difficult business model for long term success.   Also it is harder to retain owners since few really want to live in a condo with constant occupancy changes.   It also hurts the overall financial health of the project long term.
Now a condotel should not be confused with a condo that has a hotel managed by the HOA or an outside company as commercial space separate from the residential units.  That goes into a topic of commercial space which we will save for another day.
Although the next questions that should be asked and often aren’t are what are the Characteristics of a condotel?  This should be followed by what if any difference in items are  FNMA and Freddie looking for as indicators?  
So as all underwriters will tell you to go straight to the guidelines.  As my CYOB (cover your own behind) moment please consult your financial advisor or underwriter as this is a cursory look at condotels as a topic.
Now that all the disclaimer information is out of the way lets look at how these two lenders view condotels.  

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                            Freddie
See the Freddie Mac guidelines http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/031715Guide.pdf
(The condotel section can be found on page 899 section 42.10.)

■ The project has an affiliation or agreement with a hotel, resort, motel, inn, lodge
or similar type of hospitality entity, and the entity offers rental management or
registration services for any unit owner of a unit within the project
■ The unit owners of the project share Common Elements (including Amenities)
with a hotel, resort, motel, inn, lodge or similar type of hospitality entity, or the
unit owners pay additional fees for the use of such Common Elements if the unit
owner is not part of a rental-management agreement with an entity associated
with the project. The project is a conversion of a hotel, resort, motel, inn, lodge or similar type of
hospitality entity
■ The project has characteristics or services typically associated with a hotel, resort,
motel, inn, lodge or similar type of hospitality entity. Examples include, but are not limited to, the following:
Access to individual units is controlled through a centralized key system
There are restrictions on interior decorating or furnishings, or the units are sold “fully furnished,” or the purchasers must choose from a list of “approved” furniture, floor and wall coverings for the units.
Units have interior doors that adjoin other units.
Units contain lockable storage closets, cabinets, safes or mini-bars.
Room service or food and beverage services are available to unit owners Signage is present indicating whether there are vacancies
■ The unit owner’s ability to occupy the unit is restricted, whether the restriction is
due to zoning or to the existence of a rental-management agreement between a
unit owner and an entity associated with the project.

Examples of an entity
associated with the project include, but are not limited to, the developer, an
affiliate of or successor to the developer, or a hospitality entity associated with the
project.
■ The unit ownership is characterized as an investment opportunity and offers a rental split with an entity within the project or associated with the project, whether or not the project has documents on file with the U.S. Securities and Exchange
Commission or comparable State agency.

                               FNMA
Please see the FNMA guidelines https://www.fanniemae.com/content/guide/selling/index.html .  For the condotel specific infor see page 678 FNMA seller guide section B4-2.1-02
Sources of Information for Researching Hotel or Motel Operations
The lender must perform an analysis of the project to determine whether it is operating as a hotel
or motel. There are several sources of information on which to rely, including but not limited to:
• project legal and recorded documents and exhibits,
• the appraisal,
• the contract for sale, and
• the Internet.
Project characteristics that may indicate the project is operating as a hotel or motel include, but
are not limited to:
• central telephone system,
• room service,
• units that do not contain full-sized kitchen appliances,
• daily cleaning service,
• advertising of rental rates,
• registration service,
• restrictions on interior decorating,
franchise agreements,
• central key systems,
• location of the project in a resort area,
• owner-occupancy density — the project may have few or even no owner-occupants,
• projects converted from a hotel or motel,
• units that are less than 400 square feet,
• projects with a name that includes the word “hotel” or “motel,” or
• interior doors that adjoin other units.
Lenders must thoroughly examine the appraisal, contract for sale, and other documents
to determine if there are guaranteed rent-backs, references to mandatory rental pooling or
management agreements, and SEC filing references and prospectus documents.
The Internet has become a useful tool for obtaining project and unit-specific information. The
project’s website may contain information on the project type, amenities, and the availability of
units for rent. Internet searches may identify unit owners offering their unit for short term rentals
within the subject property’s project. As long as the project is not being operated as a hotel or
motel and the units are not subject to mandatory rentals or to optional leasing programs to a hotel
or motel, then the advertising of a unit for short term rental by the unit owner does not, alone,
constitute the project as a hotel or motel. The lender is responsible for fully evaluating the project
to understand if the practice of offering short-term rentals by unit owners is organized in such a
way that the project’s predominant use is to operate as a hotel or motel.

Hopefully this will help you to be a more knowledgeable investor or real estate professional.   Show your appreciation by sharing and following this blog. 

Work Cited
http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/031715Guide.pdf page 899 section 42.10
https://www.fanniemae.com/content/guide/selling/index.html  Page 678 FNMA seller guide section B4-2.1-02

http://www.condohotelcenter.com/condo-hotels/faqs.html

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