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Global Hospitality Advisor: Condo Hotels: Prelude to a Hotel-Enhanced Mixed-Use Revolution Ask the Hotel Lawyer™

Condo Hotels: Prelude to a Hotel-Enhanced Mixed-Use Revolution

Ask the Hotel Lawyer™ is a regular column that provides practical insight into timely legal hospitality issues. In his last column, Jim Butler addressed the complexities of allocating costs among condo hotel stakeholders. In this column, he delivers a new vital message for the hospitality and investment communities: hotel-enhanced mixed-use will build upon the “technology” of the condo hotel phenomenon to launch the next generation of uniquely successful real estate.

Advisor: Jim, you’ve been telling us for some time that condo hotels are one of the most significant developments to hit the hospitality industry in decades. Do you still believe that?

Jim Butler: Of course. Some think the high-flying days of the condo hotel phenomenon are drawing to an end. They point to increasing negative publicity, particularly in South Florida where the boom has become overheated with capital from baby boomers and foreign sources. But we think they miss the point. Condo hotels are here to stay because they have facilitated financing and met a spectrum of stakeholder needs. Yes, there may be fewer condo hotels as consumer demand moderates from the frenzy of the past. But hotels will continue to be combined with residential and other types of real estate in increasing numbers of mixed-use projects because when they are carefully planned and skillfully executed, hotels will act as the unifying force for the interaction of a new generation of mixed-use projects.

Advisor: So what exactly is hotel-enhanced mixed-use, and why are you now focusing on it?

Jim Butler: Once viewed with suspicion, mixed-use is being embraced as a legitimate class of real estate, and hotels are gaining recognition as the “ultimate amenity” for mixed-use projects because hotels can distinguish a project, drive traffic to the property, and provide a dynamic hub for the mixed-use village. Studies show that consumers want to live in an environment where they can work and play. They want to find products and shops specific to their lifestyle, where they can be close to the sports and entertainment facilities that resonate with them, and where they are near to work and to the other elements of their life. The enhancement benefits are functional, economic and lifestyle. Condo hotel development has played a pivotal role in the mixed-use revolution and has helped establish hotels as integral and successful components of mixed-use projects.

Advisor: Why are property developers attracted to hotel-enhanced mixed use?

Jim Butler: Developers have been able to use premium condo unit values to help offset rising construction costs and a dearth of financing for new hotel development. An owner may be able to assemble a better “capital stack” with mixed real estate uses—with the total package of equity, senior debt and mezzanine financing being better. This is because well-planned and executed hotel-enhanced mixed-use projects create a premium value for the project that is greater than the sum of each of the components—the whole is greater than the sum of its parts. Many new projects—particularly from the mid-scale, full-service segment and up—will be developed only where the hotels are combined in mixed-use projects with residential, retail, entertainment and other types of commercial real estate product.

Advisor: Where are hotel-enhanced mixed-use properties being developed?

Jim Butler: All over! This concept has global application and appeal. In the last five years alone, we have assisted clients with more than 80 of these projects in all the major U.S. markets, as well as in Latin America, Asia, and Europe. Many of these projects involved many uses of real estate, including luxury hotel, several types of residential products, retail, entertainment, spas and other facilities.

Advisor: Complex projects must have complex problems. Aren’t these deals difficult to structure from a legal and business standpoint?

Jim Butler: Yes, they are very complicated. A successful mixed-use project will do far more than merely distinguish the placement of different real estate uses next to each other (such as a hotel next to a retail center next to a sports facility). In fact, our direct experience with hotel mixed-use projects over the past few years has produced some break-through solutions to obstacles that held back many earlier mixed-use projects. A handful of our talented professionals have developed an exciting new technology of business and legal arrangements that help to ensure that the integration of the different product types and services is seamless, and that all legal considerations are addressed. It’s been exciting for us, and rewarding for our clients.

Advisor: What advice do you offer to developers considering hotel-enhanced mixed-use projects?

Jim Butler: A lot is riding on mixed-use projects—particularly master-planned communities. The “right” pairing of a hotel with a residential product is critical. Many of the decisions made in hotel-enhanced mixed-use projects will be set in concrete for a long time, perhaps 30 years or more. What if you don’t have the right operator? What if the operator cannot maintain the quality of the project, provide the necessary services or run the hotel without continuous owner capital infusions? What is the impact of a bad hotel operation on your product? Experienced help is needed to help navigate this minefield.

Advisor: Any final thoughts on this exciting concept?

Jim Butler: Hotel-enhanced mixed-use is the perfect marriage of hotels with other real estate product types, with each component functioning independently but also significantly contributing to the value and functionality of other components. Missteps can be costly, so it’s important to do it right from the very start. But when backed by the right team and the best technology, developers will find that their mixed-use visions can be realized.

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Jim Butler is a hotel lawyer and business advisor specializing in creating solutions for hotel owners, developers and lenders. Jim leads a team of 50 members of the Global Hospitality Group® of Jeffer, Mangels, Butler & Marmaro LLP, where they have assisted clients with more than $40 billion of hotel transactions around the globe involving more than 1,250 properties. In the last five years alone, they have advised clients on more than 80 hotel-enhanced mixed-use projects, virtually all of which have included condo hotels and hotel condos. Jim can be reached at 310.201.3526 or