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Niche Investors Take On Unstable Challenge

By Douglas Hanks

Abe Levitz is counting on Nicky Hilton to pay his mortgage.

The 24-year-old real estate investor bought two rooms for $510,000 each at the South Beach condo-hotel that will bear the socialite's name. He thinks her cachet will command room rates high enough to cover his costs.

"The project did pencil out pretty well," Levitz, who lives in San Francisco, said of the new Nicky O hotel slated to open this fall. "Even at 30 percent vacancy -- which is actually the worst possible scenario -- it will still cash flow."

Only time (and perhaps an expert reading of celebrity gossip columns) will tell whether Levitz was wise to put such stock in Paris Hilton's younger sister. But some analysts say that kind of optimism about profits in condo-hotels -- where buyers rent their units for a share of the rental revenue -- is both common and misplaced.

"I think there's going to be a lot of disappointed buyers," said Ernst & Young hospitality analyst Mark Lunt, who studies condo-hotel financials for developers. "They seem very exuberant."

Lunt warns condo-hotel buyers against thinking revenue from their units will cover a mortgage, particularly with current prices. A new study goes further and predicts most South Florida condo-hotel projects won't even cover maintenance fees, property taxes or other costs.

The report by the National Association of Condo Hotel Owners projected returns for a typical condo-hotel unit in Fort Lauderdale, downtown Miami, Miami Beach and Coral Gables.

Assuming owners keep 35 to 40 percent of the rent -- the standard split, experts said -- they would pay between $500 and $15,000 a year to cover expenses. And that assumes they paid cash for their units; mortgage and interest fees would be extra.

Dante Alexander, president of the association, said a flood of new luxury hotels will keep rates too low to make the units profitable.

"Our analysis is South Florida has tipped the scales," in terms of oversupply, he said. In fact, the study cites the small hotel market of Coral Gables as the one place where condo-hotel buyers could expect returns of between 1 and 2 percent on their units.

More than three dozen condo-hotel projects are underway across South Florida -- from the recently announced five-star upgrade of Ireland's Inn in Fort Lauderdale to the Hyatt Windward Pointe in Key West. And buyers are signing sales contracts at a time of record rates and revenues for hotels.

VACATION HOME

Developers insist most condo-hotel buyers are in it for a vacation home, not an investment.

They market their projects as the ultimate hybrid: own a piece of real estate in a popular resort area, but enjoy the amenities and convenience that comes with a top-notch hotel. Developers portray the rental revenue as a bonus.

"I don't think we have any buyers coming here to the Saxony with a pencil in hand trying to figure out what their return is going to be on their units," said Leonard O'Donnell, president of Crimson Capital, a partner in converting the former budget hotel on Miami Beach's oceanfront into a luxury resort with units in the $1 million range.

Levitz says he's willing to absorb a loss on rent as long as real estate values at Nicky O increase -- a strategy experts say is common among condo-hotel buyers. Still, predicting appreciation is difficult because the current condo-hotel model took off too recently, said Jack McCabe, a Deerfield Beach real estate analyst.

While a string of condo-hotel projects opened in the 1980s, they were generally modeled after a standard condominium with a front desk and not full-fledged hotels.

"It's too soon yet," said McCabe, whose firm is helping investors looking to buy distressed condominiums during a real estate downturn. "It's such a new wave."

Scott Bennett, a personal injury lawyer from Miami Beach, sometimes has visiting friends stay in his condo-hotel unit at the Sonesta in Coconut Grove, but he mostly sees it as an investment. He paid $143,000 for the 15th-floor room two years ago; today, he says, it doesn't cost him a thing.

"By the end of the year, it pretty much pays for itself," Bennett said. "That's the mortgage and everything."

REVENUE GUESS

Examples like Bennett's encourage would-be buyers of condo-hotel projects, but they're largely left to guess at the revenue their units will generate. Federal security law bars developers from passing on the projected hotel guest rate to condo-hotel buyers.

"We can lose our license if we talk to you about how much income you're going to generate," said Marsha Cook, a sales associate with South Beach Investment Realty.

With hotels unable to provide their rate projections, staffers often urge buyers to do their own research on nearby hotels. But that's not easy: virtually no hotels release year-end financial figures, and rates quoted at the front desk fluctuate day to day -- even hour to hour.

Given the Nicky O's prime Ocean Drive location, the promise of experienced managers and the celebrity designers recruited to decorate, Levitz predicts an average daily rate of $581.

That's certainly optimistic. In one of the few public reports on an individual South Florida hotel, parent company Morgans Hotel Group reported the 194-room Delano -- South Beach's best-known luxury hotel -- posted a $474 average daily rate last year. And occupancy at the Delano hit 72 percent, just two points shy of Levitz's worst-case scenario.

But Levitz predicts that with only 95 rooms and an address in the heart of South Beach's nightlife, the Nicky O will outperform even the Delano.

"This hotel is so unique," he said. "I believe in it."


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