Developers pondering hotel conversions to condominiums or co-ops must weigh the benefits of long-term cash flows with hefty short-term profits before they sell off a single ice bucket, a process that is now shaping the future of many great New York hotels.
Richard Born, principal of BD Hotels, says that with few prime pieces of hotel real estate on the market, developers have to choose between room service and debt service.
“What happens is it’s always competing forces between the highest and best use for a piece of real estate, and when condo prices start to go over $1,000 per square foot, it’s hard to justify operating a hotel,” Born said.
He explains why hotels targeted for condo conversions, such as the Stanhope Park Hyatt at 995 Fifth Avenue and the Sheraton Russell Hotel at 45 Park Avenue, both the subject of considerable industry speculation, may want permanent residents rather than periodic guests.
Born uses a simple mathematical argument in favor of conversion: If a hotel requires 500 square feet per room, and generates the city average of $250 per night while operating at 75 percent occupancy for 365 days, that’s about $68,000 in annual gross revenue. Using an operating margin of about 33 percent, a hotel developer will end up with a yearly $23,000 profit. After real estate taxes, debt service and other fees, that would end up closer to $20,000 a room.
That same 500-square foot room as a condominium would be worth $500,000, at $1,000 per square foot.
“You have to decide, if you have a building, are you better off selling it off for a number or converting it to condominiums and selling off each individually,” Born said.
If the developer doesn’t own the land on which a hotel sits, it may force them in a different direction – towards conversion to co-ops. A building is definitely worth less as a co-op than condominiums, Born said.
“However, if you decided to go hotel, the hotel that you own would also be worth less, because you don’t own the land,” he said. “So your choices are between two less valuable assets anyway.”
The Inter-Continental Hotel at 110 Central Park South is currently being converted to co-ops, by Anbau Enterprises. The developer is turning the 208-room, 27-floor former hotel into 65 spacious units, each with one to four bedrooms and 1,000 to 3,800 square feet of space. Prices haven’t been set, but are expected to range from $1 to $10 million per unit.
Residents will not need board approval for purchases, sales or sublets, said Stephen Glascock, president of Anbau Enterprises. “The way we write our bylaws, it acts as a condominium,” he said.
Glascock said he believes one reason developers are flipping hotels to condominiums is the difficult hotel market.
“Hotels over the last four years have had a really tough time, partly because of Sept. 11, but also partly because the unions have made it very expensive to run hotels in New York,” he said. “Compared with the volatility of a hotel, a cooperative residential market is very strong.”