Homework: Part-Time Properties
The ins and outs of limited-term-use agreements.
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The soon-to-open Terranea Resort in Palos Verdes, California, offers potential homeowners a host of benefits—expansive ocean views, a nine-hole golf course, direct access to secluded beaches—but only on a part-time basis. The hotel monitors how many days owners can spend in its 82 Mediterranean-style villas and casitas, which are available for purchase under limited-term-use agreements. These agreements restrict the number of days owners can stay at their residences and often require that they rent their units as hotel accommodations—either through the resort or a third party—when not occupied.Limited-term-use models are similar to those of condo-hotels, although the latter arrangements do not necessarily regulate usage. While all limited-term-use agreements restrict access, policies vary from property to property. At Terranea, owners are allotted between 60 and 90 days of use per year. They can stay as many as 29 consecutive days in their residence but must vacate the unit for at least seven days after long visits.
Benefits to limited-term-use agreements include access to resort amenities and property management provided by the hotel. But potential owners often assume—sometimes incorrectly—that the model offers a financial benefit in that they can earn ample income on their homes when not in use.
The U.S. Securities and Exchange Commission prevents most developers from releasing specifics about the expected rental income of a limited-term-use property. "A condo-hotel developer can’t guarantee what the occupancy or nightly rates of the room will be—there’s no way to accurately predict that," says Joel Greene, president of the real estate brokerage firm Condo Hotel Center. "The developer is only permitted to sell the real estate and the lifestyle."
The government’s restrictions are intended to protect buyers from unfounded promises made by unscrupulous developers. If builders do want to make promises on the financial return of a property, they have to register with the SEC and make a detailed disclosure list—a costly and time-consuming venture that most avoid.
Although buyers who purchase limited-term-use properties at yet-to-be-completed resorts may not be able to predict the exact income they will earn, an estimate of expected income could be determined by conducting an independent survey of occupancy and nightly rates at comparable properties. Buyers can also look to the income models of other established condo-hotels, most of which allot 10 to 12 percent of the rental profit for management and split the remaining percentage between the homeowner and property developer.
Any lack of detailed investment information does not seem to be hurting sales of limited-term-use properties. In addition to Terranea, which has sold 60 percent of the units it has released, the 35 cottages and villas at Beach Village at San Diego’s Hotel del Coronado, where owners are limited to 90 days of annual use, sold all but one unit within nine months. And last fall, Trump SoHo in Manhattan released 400 limited-term-use suites that grant owners 120 nights of annual use. Currently, less than half of the units remain available.
Condo Hotel Center, 305.944.3090, www.condohotelcenter.com
Terranea Resort, 866.366.7474, www.terranea.com
