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Hotel Online Special Report
The Global Hospitality Advisor
MIBM
The "Condo" Part of Condo
Hotels; o
4.0
A Primer on How to Create a
"Common Interest Development
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February 2005
By David Waite
The recent success of projects where condominiums have been
married with a hotel component has created a new development
(and redevelopment)model for both condo and hotel projects. It is
also one offering great profit potential for developers of condos and
hotels alike. While condo developers need to learn a great deal
about hotels in order to be successful with this model,the same is
true of hotel developers learning about condos. Many hotel
executives have never been exposed to the process for creating
condos.
If it Feels Like a Hotel,What Makes it a Condo?
Although the project might look and feel like a hotel, by definition,
at least some portion of the condo units are owned by private unit
owners but are used by the hotel for hotel guests. The hotel operator
is usually the steward for property management, creating enhanced
values by providing premium services, amenities, design,rental
programs, and brand recognition for branded properties.
The condo hotel typically utilizes the well-recognized
condominium form of real estate ownership,which creates
"undivided" common interests in some portion of the land and the
improvements upon which the project is located, coupled with a
separate interest in a condominium "airspace." Importantly for the
condo hotel developer, each separate legal condominium unit or
parcel, once created, can be sold to the public as a separate legal
parcel of real property.
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For example, a unit on the second floor is not attached to the land.
It is "air space" within the building, accessed by stairs or an
elevator. •
From a legal standpoint, the two key attributes of a condominium
are: (1)the ownership by an individual of a separate interest in a
discernable space (a condominium unit), and (2)the ownership of a
proportional but undivided interest in the common area. The
"common area," owned and operated by condo owners as a
"common interest development," is where the hotel operator usually
comes into play.
At least some portion of the "common area" in a condominium
project must be owned by the unit owners as undivided interests or
"tenants in common." Typically,the condo owners also like to
transfer to their homeowners association (or HOA)common areas
requiring regular maintenance and upkeep, as well as those areas
most likely to incur liability. In a condo hotel transaction,the hotel
operator might agree to manage the HOA, all or a portion of the
"common area," and certainly the hotel component of the project. In
a condo hotel transaction, the extent of what is defined as "common
area" can vary significantly from project to project. For example,
while the hallways leading to condo units might be included in the
common area,the hotel meeting rooms, pool, spa, and parking areas
may not be included.
There are different types of condo hotel regimes. The type of
regime used, and the corresponding project,will depend in large
part upon the physical nature of the project,the quality of the
project,the requirements of the brand operator and the business
goals of the developer. Complex legal requirements and business
considerations usually determine exactly which facilities are under
undivided common ownership of condo unit owners, and which are
retained by the developer, operator or other parties.
What Governmental Approvals are Required for a Condo
Hotel Project?
The entitlement process in most jurisdictions can be cumbersome,
time consuming, and costly. The condo hotel strategy begins at the
initial stage of permitting and creating the condominium
"subdivision." (In California,for example, a condominium project
is considered a "subdivision"—in other locales different
terminology may apply, but the process will be similar.)
The ability to permit and construct a hotel condo project is subject
to local laws, land use policies and development standards set forth
in the city's (or county's) general plans, specific plans, zoning
ordinances, and subdivision ordinances.
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Design standards, density and height limitations, parking
requirements, affordable housing standards, historic preservation
issues, licensing requirements and tenant relocation assistance on a
conversion project may all be implicated by local land use policies
and development standards. These are the real world issues that
come into play whether the condo hotel project involves new
construction or the conversion of an existing hotel or multi-family
property to a condo hotel.
What's the Process?
Entitling a "traditional" hotel on a single parcel of land typically
triggers the need for certain land use approvals to insure, for
example,that the zoning allows for hotel "transient occupancy"
uses on the property, and certain other discretionary approvals for
hotel operations such as a"conditional use permit."
But the legal process for creating the condominium portion of the
condo hotel necessarily includes many more steps in the approval
process. To describe the process of creating a legal subdivision for
the condominium portion of the condo hotel project,we will use
California procedures and terminology. They will be similar to the
subdivision requirements in many other jurisdictions.
Importantly, a condominium subdivision requires a "discretionary"
tentative tract map approval from the city (or county). What that
means is that there is no absolute "right" to obtain city approvals for
the project; however, if the application is consistent with the zoning
and land use designations, and there is no community opposition to
the project, and the city staff supports the project, it is more likely
than not that the project can be approved by the city with
reasonable conditions. Although the requirements can vary, in most
cities the subdivision approval process is as follows: an application
for tentative tract map approval is filed with the city planning
department;the application is reviewed by various city agencies
which will recommend approval or denial of the project; a public
notice of the proposed subdivision is sent to owners and occupants
located in the vicinity of the proposed project; an environmental
review is filed and the city determines whether the project will
involve preparation of a full-blown environmental impact report
(EIR); and the city Planning Commission conducts a public hearing
on the proposed project, after which it will approve or deny the
application.
If the decision is appealed or if final approval of the subdivision
requires City Council approval, the application is finally heard by
the City Council. Approvals may include conditions that must be
satisfied within specified time periods.
Some jurisdictions can process condominium subdivision map
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applications within six months while other jurisdictions can take up
to one year or longer to complete the entitlements process. If a
project is in an environmentally sensitive area, a longer entitlements
process should be anticipated. After subdivision approval, and the
conditions of approval are satisfied, a"final" tract map is prepared
and recorded. The final map may be a single-lot tract map, and a
separate "condominium plan" designating airspace units may be
recorded subsequently.
What is a "Condominium Plan?"
The requirement to create distinct legal parcels—which may be
sold individually—will be satisfied when the boundaries of a
condominium are described in sufficient detail in the recorded final
map or the condominium plan. For example, a"condominium plan"
will consist of the following: a description or survey map of a
condominium project that refers to specific monumentation on the
ground; a three-dimensional description of a condominium project,
one or more dimensions of which may extend for an indefinite
distance, upward or downward, in sufficient detail to identify the
separate interests and common areas; and a certificate consenting to
recordation, signed and acknowledged by the record owner of fee
title to the real property included in the plan.
Condominium Governance and Operation—What are
"CC&Rs?"
The basic governing documents of the condominium portion of the
condo hotel project are the recorded "declaration of covenants,
conditions and restrictions" (or CC&Rs),and to a lesser extent, the
HOA's articles and bylaws which contain general provisions
concerning operation of the condominium development and the
HOA.
The recorded CC&Rs contain a legal description of the common
interest development, identify the type of development, set forth the
name of the HOA and the restrictions on use or enjoyment of any
portion of the development that are intended to be enforceable by or
against the condo owners and their successors. The restrictions
contained in the recorded CC&Rs are enforceable by the HOA as
"equitable servitudes," which"run with the land." In other words,
the CC&Rs bind all current and future owners of separate interests
in the development to the operating standards of the condominium
project. This is key. The CC&Rs will include, for example, all of
the essential provisions for the operation of the development, such
as voting rights, use restrictions, and a delineation of the board's
ability to contract for goods and services.
There are many keys to a successful condo hotel project, but a
thoughtfully and carefully drafted series of condo governing
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documents are an essential foundation for building the necessary
bridges between the condo and hotel parts of the project.
How Do CC&Rs Work for a Condo Hotel?
A comprehensive and enforceable set of CC&Rs is a major factor
in the successful operation of the condo hotel. The CC&Rs must
include virtually all of the operating requirements, standards, rules
and regulations required by the condo hotel developer which need
to be enforceable by the HOA, (or the hotel operator on behalf of
the HOA), against current and future condo owners. The CC&Rs
will exclude most of the provisions set forth in the hotel
management agreement between the HOA and the hotel operator,
but must contain critical enforcement provisions for the HOA to
fulfill its obligations to the operator.
Without comprehensive and fully enforceable CC&Rs dictating the
standards and conditions of condo ownership in the condo hotel, the
quality and integrity of the hotel operation could deteriorate in the
event of non-compliant owners,tenants and guests. With the varied
types of ownership interests potentially represented in a condo hotel
project—ranging from hotel owned rooms (branded or
unbranded), individually owned condo hotel rooms,and fractional
or timeshare owned rooms,and the various lenders that have an
interest in the rooms or the project—it is easy to see how difficult
(or impossible) it could be to repair a deficient set of CC&Rs
among the various ownership interests.
How Does the Hotel Part of the Condo Hotel Maintain an
Adequate Supply of Hotel Rooms?
The CC&Rs, HOA articles and bylaws,rental agreements and
related documents comprising the condo hotel must ensure the
delivery of an adequate inventory of well-maintained condo units
into the hotel rental management program for a reasonably long
term.
A successful hotel operation requires a minimum critical mass of
rooms every night if the hotel is to be successful and viable for all
involved—the hotel operator and hotel guests as well as the condo
unit owners and the HOA. Without a reliable room availability,
guests,travel agents and meeting planners will take their business
elsewhere. How do the condo documents and operating facilities
assure the availability of a sufficient number of rooms when
meetings and conferences have to be booked 12 to 14 months in
advance?This is a particularly challenging issue given that an
individual unit owner's participation in the rental pool must be on a
voluntary basis, and the use of a condo unit by its owner may not be
unreasonably restricted.
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must be satisfied, and the CC&Rs must be in place. Establishing
legally compliant condominium units that can be sold to the public
is both time consuming and highly regulated. Doing it right will
allow developers to move their projects forward with confidence.
Doing it efficiently,will enable all stakeholders to begin reaping
rewards sooner rather than later.
David Waite is a member ofJMBM's
Global Hospitality Group and is a
land use and environmental law
practitioner. David has represented
4, clients in obtaining governmental
r! approvals for a variety of condo
development and condo conversion
• projects, and he can be reached at
(310) 785-5319 or by e-mail at
dwaite@jmbm.com.
cum.
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