Market Watch - Page 4:

 

When buying into mixed-use, hotel managed projects, there are important legal issues that must be clearly understood. Buying such a property differs from usual sale and purchase, or lease agreements of residential homes and units.

First, all too often customers expecting a certain yield are initially disappointed once the actual returns start coming in, so it's best to make informed decisions by obtaining quality legal and tax advice in advance. Buyers often confuse net and gross returns. Marketing and promotion material often show a percentage return, though this is usually subject to deductions.With internationally-managed properties, these deductions usually include charges credit-card commissions and a reserve for capital repairs or what hotels call FF&E (furniture, fixtures and equipment). FF&E reserves from 3% to 5% of reservations/commissions can exceed that amount.

Other typical deductions are common-area or cost recovery of expenses, tax on rental returns and insurance coverage (structure, contents and liability). In many instances, while a 50% or so return is shown in marketing material and highlighted in the contract, this would be the gross return. After deductions the net could be 40% or less.

These deductions are generally in keeping with sound hotel management and accounting principals, but it's important to know what your actual bottom line return will be. While residential estates use sinking funds, mostly charging annually or through special assessments, hotels use FF & E reserves, saving money from day one in order to address long-term refurbishment. Hotel-managed units suffer more wear and tear than residential units and soft goods must often be replaced every three to four years. The reserve can cover this in later years, but will not cover major replacements or renovations, so returns in later years are often subject to significant assessments, which affect profit.

Hotels, being capital-intensive assets, often see spikes in expenses over time, which makes mixed-use projects less to investors planning long-term, straight-line growth.

Buyers looking at using their during the year, the trend being 30 to 60 days,should look at restrictions of use during high season. "Free stays" arenot always freeas usage fees often