Apart-hotels: business specifics and attraction of international hotel operators

30 July 2021

7 minutes

How does a condominium apartment hotel work and what should you pay attention to in order to avoid pitfalls while developing a business in this direction?

Ivan Lun, a hotel consultant, partner of Burford Management and Consulting, shared key information about the specifics of condominium projects with the industry magazine Commercial Real Estate.

Catch the difference

First, let's understand the terminology and find out what is the difference between a hotel, an apartment building and a condominium house.

The hotel — usually has one single owner who rents out rooms for short-term accommodation and sells additional services (restaurant, conference room, fitness and SPA, cleaning). It is managed either by the owner or by hotel managers hired by him, it also can be hotel operators. This model always assumes a large staff. An apartment hotel is simply the definition of a hotel concept, where the rooms have a large area and are equipped with a kitchen.

An apartment complex — its owner is one legal entity or individual who rents apartments or apartments (units) for medium – or long-term residence. Property management is usually run by the owner of real estate managers with small staff. Additional services are not provided.

Condominium complex — here the units are also designed for medium-and long-term residence, but their owners are different persons who independently rent out apartments. Real estate management is carried out by a service company (or a management company), in the west it is a HOA-an Association of homeowners, an analogue of our OSBB. She also owns all unsold property — external walls, roof, engineering networks, technical premises. In this model, the staff is quite limited, and there are no additional services.

First of all,

apartments for an apartment-hotel are non-residential premises for long-term residence with fully completed repairs, equipped with furniture and decor up to cutlery, with completed public areas and well-trained staff (although without a full list of services, as in full-service hotels like Novotel, Holiday Inn, Radisson hotel).

Secondly,

the developer's motive in this case is to attract financing by selling the apartments to individual owners at the design stage and exit the project as quickly as possible. But there is one important nuance here: you can completely get out of the project only by selling the owner-company of all public premises (corridors, elevators, boiler room, engineering networks), which in this situation is a ballast for business.

Third,

buyers of apartments are offered to purchase passive income from an organized daily rental of a unit.

Nuances of the work of a condominium project in the format of an apartment hotel

Operation according to the principle of action is more like a service or management company. In this regard, the owners of the apartments cannot change the management company or its head.

For a management company, a rigid contractual framework is necessary for co-existence with many owners — it is critically important to register it before the start of apartment sales.

Public places, office premises, infrastructure and engineering equipment, elevators, roof, landscaping on the site, external facade structures and walls — all this, when put into operation, must be registered as the property of the holding, management or service company, which will monitor everything responsibly, repair building elements in a timely manner, consolidate individual owners and distribute the earned dividends among them.

In fact, the holding company or the management company performs the functions of the management company, and its maintenance and coverage of depreciation costs for repairs or updates must be paid by all co-owners of the apartments.

The service company pays bills for the use of municipal utilities — electricity, water supply, heating — and distributes them among the owners of units, and it is important not to forget that the cost of “communal” for commercial users of non-residential stock is higher than for owners of residential facilities.

In addition, there are extra payments: the land tax of the house territory (before the division among the owners), the real estate tax, and the income tax of individual owners.

If a condominium building includes more than 120 apartments, it is allowed that a certain part of the equipped units will not be returned to the reverse lease for the operational work of the apartment hotel. However, the number of such apartments should be limited — so that there are always at least 80-100 keys in the operational turnover. This preserves the scale effect of economic activity, especially in terms of operating costs. And this is sometimes critically important for an international franchisor operator.

Another point: in this case, the owners and residents of apartments that are not involved in the operational turnover are deprived of the right to use recreational or technical areas that are offered to guests as additional services (fitness room, swimming pool, breakfast, etc.)

In case the individual owner of the apartment wishes to sell or assign the rights to his unit, it is necessary to prescribe conditions in the purchase and sale and leaseback agreements regarding the joint liability of the first (former) and new owners for the payment of possible debts and the clear preservation of the lease terms.

In the process of searching for an international franchisor, it is important to take into account the mandatory criteria for primary screening:

pay attention to the networks that operate in Eastern and Central Europe, have an impressive customer base, a serious booking system and a recognizable “apart-hotel” brand in the portfolio. Such networks will add value to the hotel, increasing the occupancy level of the accommodation and the average daily rate of ADR;
the potential name of the hotel or brand should “sound”, ideally the name should be well-known or, at least, easy to remember and be euphonious. For example, the Hawthorn by Wyndham Apartments are hard to perceive by our ear, while the Ramada by Wyndham Residences are much easier to remember;
to stop the choice on networks that are definitely ready to enter condominium projects with a large number of owners. Such projects often entail risks of poor project management, inefficient planning and operational chaos in general. And this, in turn, is a reputational risk for networks.

At the further stages of selection, it is important to pay special attention to all types of explicit and hidden fees, as well as the nuances of complex contracts due to the specifics of the hotel business.

5 international franchisors 3-4* interested in cooperation with condominium apartment hotels

ACCOR Group: Adagio, Access to Adagio Novotel Suites, Swissotel Residences

Windham Group: Ramada Residences

Louvre Hotels Group: Tulip Residences, Tulip Residences

Radisson Group: Radisson Serviced Apartments

An important point: it is necessary to monitor the situation on the local market in order to adhere to the conditions of competition and avoid “cannibalism” between hotels of the same hotel group belonging to different owners.

From the editor:

Working with international operators is often associated with an additional load, strict requirements for condominium projects and the lack of extensive experience of interaction between franchisors with such a format of apartment hotels. But the management companies in Ukraine are already able to work with condominiums, they understand the specifics of the format well and are willing to take over the management of condominium apartment hotels.