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What’s a Hotel Condo?

15 May 2012

Hotel condos might sound like something new in Toronto, where there are currently four of these projects (two already open and two coming soon,) but they’ve been in cities all around the world such as Hong Kong and New York for years now. A hotel condo is simply that – a luxury hotel that has high-end rooms for rent, and it also has high-end luxury condo suites attached for sale. Sounds very ritzy and very glamorous but, are there enough people wanting one of these suites to take out a large Toronto mortgage on it? But perhaps the even bigger question is, how are these developers going to sell all of the suites?

The question is a good one, especially considering that the price for the four projects ranges from $1 – $28 million, and Toronto’s already at the centre of far too much bubble talk. What might be even more troubling than the cost of building is that not one of the buildings has sold out yet. Not only does that mean there are more Toronto condos sitting empty on the market, but the developers may have a harder time selling the empty units, as more purchased luxury condos start to appear on the resell market.

“I think any developer has concerns about that,” said Howard Tikka, director of marketing Talon International Development Inc., the company overseeing the development of the new Trump Tower going into downtown Toronto. “If you have units left to sell, and people are taking them to market to resell, there is just not a whole lot you can do about it.”

The Trump Tower was the first to start selling their units in 2004, and it’s already seen its fair share of hardships including bad press, construction delays, and buyers that are unhappy with either their unit or the time it’s taking to finish. Trump is also operating on a different financial plan than the others. Instead of just renting out hotel suites and selling off the condo suites, everything is up for sale in the Trump. People can either purchase the hotel room and then take a percentage of the profits brought in from renting it out to visitors, or they can simply by the hotel room as their own living space.

Why would this turn buyers off? Well, purchasing a hotel suite to use as your own residence means that it will be subject to high commercial property tax rates, and not the lower residential type, making it much more difficult for people to obtain financing for the units.

“I called every major lender regarding Trump,” says one Toronto mortgage broker, Jason Friesen. “The only one I could find that was willing to finance was HSBC. There were some units that had $20,000 annual property taxes for an $800,000 or 1,500 square foot unit, because it was zoned commercial. Lenders wouldn’t touch it.”

A Toronto real estate lawyer agrees that the hotel condos may not have been the right decision for Toronto right now, at least in regards to the Trump Tower. Bob Aaron represents many of the buyers that were eager to get into Trump Tower, and are now trying to find any loophole they can in which to walk out of. Many are even willing to walk away from their $250,000 down payment.

“The monthly costs are too high,” says Aaron. “Or they realized too late that they had overpaid, or can’t finance it, or didn’t realize they were getting into a business venture superimposed on property ownership. They had very smooth sophisticated marketing, and I think buyers were dazzled by being partners with Donald Trump.”

Unfortunately, they won’t be. While Donald Trump has allowed for his name to be used on the tower, he has no ownership interest in it, nor will he be a part of running the tower.

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