In the years following the 2008 Great Recession, the hospitality industry has seen a proliferation in sales of branded residences, particularly in North America. These branded residences often are part of a mixed-use development that includes a hotel component. Some projects feature larger branded residences in a standalone building apart from the hotel, while smaller residences often are included within the hotel and sometimes referred to as condo-hotel units. If a hotel is part of the mix, the residence owners may be given the opportunity to rent their residences on a nightly basis through a hotel-sponsored voluntary rental program, and occasionally through a mandatory rental program.
There are many reasons for the proliferation of branded residences, including the fact that U.S. investors overall are awash with cash. Since the Great Recession, basic money supply in the U.S. has increased from approximately $1.6 trillion in January 2009 to approximately $20.7 trillion in April 2022, according to the Federal Reserve Bank of St. Louis. Many cash-flush Americans have sought to invest in assets that can serve as stores of value, such as well-located and well-sponsored second residences or vacation homes. To the extent that the residence is eligible to participate in a hotel rental program, U.S. investors can generate revenue to offset some of their carry costs.
From the perspective of hotel developers, the inclusion of for-sale branded residences generally allows them to reduce their financial risk, achieve an early return of capital from the proceeds of residence sales, and pay down their construction financing on an accelerated timeframe. Additionally, a hotel development with strong sales of pre-construction branded residences could receive more favorable financing terms, as well as a price premium based on the strength of the brand. Finally, more than a dozen states allow residential developers to use buyer deposits to help fund construction costs, potentially providing additional capital for hotel projects with a for-sale residential component. In combination, each of these factors can enhance a developer’s internal rate of return (IRR) for a project.
In many parts of North America, it’s becoming rare for developers to exclude branded residences or condo-hotel residences in a resort development. In fact, where permitted by local zoning laws, developers often elect to allocate as much as one-third of total resort room inventory to third party-owned residences and condo-hotel units with a voluntary rental program. (The remaining two-thirds of room inventory is typically devoted to traditional hotel guestrooms.) The demand for branded residences extends to non-resort urban markets, particularly U.S. “gateway” cities. Consider, for example, The Park Hyatt New York, which offers a combination of luxury hotel guestrooms and branded residences in the heart of Midtown Manhattan.
In addition to the benefits for developers, the owners, tenants and guests of branded residences or branded condo-hotel units may find value and comfort in being part of a project associated with a trusted hotel flag. Unit owners and guests may also enjoy access to “hotel services,” such as housekeeping and room service, which may not otherwise be available in a non-branded project.
In developments with no condo-hotel nightly rental operation, the branded residences may be leased for 30 days or greater, depending on local zoning ordinances and the restrictions imposed by the developer. As a result, these residences generally do not compete with the hotel’s transient business. If a “condo-hotel” rental program is offered, the residences may be available for transient rental akin to hotel guestroom inventory, and the residence owner may elect to participate in the rental program. In the condo-hotel context, the developer, in its capacity as hotel owner, may receive services fees to compensate for administering the rental program and a split of some percentage of the net revenues from the nightly rentals of branded residences.
To be sure, the inclusion of branded residences, with or without a nightly rental program, is not without legal complications. For example, in Florida, where the branded residences trend is especially strong, sales of residence units accompanying a hotel development are typically formed as condominiums under Florida Statute Chapter 718. This requires a formal offering overseen by the Florida Department of Business & Professional Regulation’s Division of Condominiums, Timeshares and Mobile Homes.
Additionally, projects that include a rental program may be subject to registration requirements with the U.S. Securities and Exchange Commission (SEC). Since 1973, the SEC has issued guidance to developers on how to structure a branded residence and rental program offering in a way that does not result in an investment contract. In fact, most developers of hotels with a branded residence component adopt a voluntary rental program rather than a mandatory one to avoid a determination by the SEC that their product constitutes an investment contract. Today, North American hotel brands generally are well-versed enough in the various local, state and federal laws related to branded residences and rental programs to make the increased regulatory framework a worthwhile trade in exchange for a significant revenue stream from royalty and administrative fees.
Although North America is the birthplace of the hospitality-branded residences product, the rest of the world is catching up. North American and international hotel brands are now working with developers in the EU, the Caribbean, Asia, and the Middle East and Africa. According to data from Savills, Dubai is currently the most active market for the development of hospitality-branded residences, followed by Miami, New York, Phuket and London. And while luxury and ultra-luxury brands represent two-thirds of today’s branded residence product, that market share is giving way to upscale and midscale branded residences by the likes of Marriott, Hilton, Hyatt, InterContinental, Accor and Wyndham. This move beyond the luxury and ultra-luxury sector is expected to appeal to a significantly larger market, likely ensuring the continued growth and evolution of branded residences worldwide.
Attorney Michael J. Sullivan is an Orlando-based shareholder at global law firm Greenberg Traurig LLP and co-chair of the Hospitality Group. He represents owners in the acquisition, development, finance and disposition of hotels, resorts, branded residences and condo-hotels.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.