“Hotel Condominium Units – What Are You Buying?,” Wealth Management Magazine

“Hotel Condominium Units – What Are You Buying?,” Wealth Management Magazine

When teaching contract law to my undergraduate students at Florida International University, I always begin with a question: “How many of you sign a contract without reading it?” A simple question and one would think that everyone reads before they sign. But no. Mostly everyone signs without reading, whether a credit card agreement, apartment lease, or a cell phone agreement.

Expanding this a step further, I ask my MBA students the same thing. Some are homeowners, typically condominium owners, and when I ask “How many of you read the declaration,” the response typically is, “What is a declaration?”

A condominium declaration is a legal document recorded in the public records that establishes and governs the condominium. It is regulated by the Condominium Act (Florida Statutes Chapter 718), includes the legal description of the condominium property and each individual unit. It establishes who owns what, what rights and obligations unit owners have, who manages the property, and provisions regarding the use of the units and common areas.

When buying a condominium unit from a developer, a buyer gets 15 days to review the declaration and other governing documents and, if unhappy with them, can void the purchase contract. This is called a rescission period.

When buying from a non-developer seller, the buyer gets three days. Florida Statutes Section 718.503 provides a list of documents that must be provided to a buyer. Any buyer who does not obtain these documents and then retains an experienced attorney to review the documents before the rescission period runs out is literally playing with fire.

What is a hotel condominium? Florida Statutes Chapter 718 provides numerous definitions related to condominiums, but no definition for a hotel condominium. A condominium hotel, sometimes called a condotel, is a condominium but operated and managed like a hotel.

What a unit owner owns is typically different than what a unit owner owns in a typical condominium. In a typical residential condominium, common elements include the hallways, elevators, parking garage, lobby, swimming pool, gym, and most other amenities. These are all then managed and assessed by the non-profit condominium association with its unit owner elected board of directors.

The condominium association is governed by Florida Statutes which have numerous provisions directly applicable to condominium associations. Assessments cover the maintenance, but the unit owner controlled condominium association is not in the business to make a profit.

In a typical hotel condominium, the hallways, elevators, parking garage, lobby, swimming pool, gym, and most other amenities are owned, managed, and assessed by a third party. The unit owners generally do not own any of the amenities.

The third party is entitled to profit and may even have professional management handled by a brand such as Marriott or Hilton. Unit owners do not have a legal say in how that third party manages or assesses.

The third party typically has a superior right to rent the units in the building and does so with management agreements with unit owners. The third party is entitled to charge the unit owner a percentage of the rental, as well as a variety of service fees. The hotel guest typically pays extra for parking, cleaning, and a daily resort or facility fee. Those charges typically do not get split with the unit owner. Also, those charges do not offset operating costs. They are the hotel operator’s profit. The unit owners pay for all of the operating costs.

A management agreement with a unit owner will restrict how many days a unit owner can stay in the unit and whether the unit owner will be required to pay the resort fee and parking fee. It is important to note that the Florida Statutes do not include provisions to govern these third parties and unit owners are restricted from amending the declaration to restrict the rights of the third party. Many declarations preclude unit owners from offering any resort-type services including, most importantly, cleaning.

Owning a hotel condominium unit which has good management and can command high daily rates can be a good investment for a unit owner. However, a property with low rental rates, high assessments, and bad management can result in the unit owner’s investment losing much of its value.

So, what’s the conclusion?

Depending on the fees and management, a hotel condominium unit may be a good purchase if the owner’s goal is to have a vacation home to use and enjoy the hotel amenities. However, as an investment to own, have someone else manage and rent to hotel guests, projected revenues and expenses should be carefully considered.

Before buying, check with your accountant for the tax consequences of owing a hotel condominium unit and have your attorney review all of the condominium documents, including any proposed management agreement with the hotel operator, the declaration, and other statutorily required documents before the rescission period runs out. In other words, it’s buyer beware.

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