The Lake Geneva Condotel

The ultimate manifestation of real estate boom naivete was shamelessly on display during the condotel boom of the 2000s. The concept took off in cities like Las Vegas and Miami, but also in Chicago and smaller hamlets like Lake Geneva. In 2006, more than $250MM was spent on the purchase of such hybrid properties. The product that is the condotel is, in its most simple explanation, a hotel room, or suite, owned by an individual as a condominium and managed by the hotel for the purpose of generating rental revenue. The hotel wins because they’ve just sold an asset and injected a fresh supply of cash into their operations, or investor’s pockets, and the new condotel owner “wins” because he or she just purchased something that will generate untold amounts of future revenue. At least that’s what the brochure says, and charts with increasing revenue totals that span far into the future are never, ever wrong.

The concept worked, in theory, until the market dropped, and this hybrid ownership, once the darling of amateur investors near and far, became taboo at best. The assets are now, several years into this corrective cycle, as toxic and illiquid as any single form of ownership anywhere. Timeshares, you’re more toxic and even more ridiculous, but today, out of the kindness of my gentle heart, are excluded from this conversation. Hotels that sold these condominium rooms are struggling to produce the sort of returns that their investor owners were promised, and combined with wary buyers and even fewer investors, I’d happily go as far as to say that this condotel style ownership will be shunned for years, if not decades, to come.

The trend for the condotel might have started at Lake Geneva with the Cove, followed quickly, or preceded barely by Harbor Shores, then The Bella Vista, and Mill Creek, and the Grand Geneva and the Abbey, and The Lodge at Geneva Ridge, and Lake Lawn, and the list grew. The appetite for such novel investments was insatiable, and it wasn’t uncommon for entire developments to sell out in days (The Abbey, Lodge at Geneva Ridge, etc). The selling of these products was easy: renovate or construct hotel rooms, put in flat screen television(s), print chart showing higher and higher bars presenting future revenue to the owner, and price the product at a price that appeared to be cheap. If all condotels were $300k, buyers wouldn’t have been as prevalent. But price a unit at $90k and project a 10% annual return, and you could sell units as fast as throngs of buyers could write deposit checks. Life, as the t-shirt says in the present tense, was good.

These happy herds of buyers consumed hundreds of such rooms, err, condominiums, and all was well for a while. Then owners received checks that weren’t always what the glossy brochure said they’d be. And then the markets changed. And in the face of declining revenues in a declining market, owners wanted out. They listed their units for sale, but the next easily convinced pool of buyers was not waiting in the wings. There was no second rush of traffic. It turned out that condotels were easier to sell as investments based on projected revenues rather than on the actual documented revenues received by the owners turned sellers. The condotel bubble had burst, and the fallout is visible today.

Foreclosures in the condotel market at Lake Geneva are common in nearly every condotel building in our market. The illiquid nature of the “investment” leaves cash strapped owners with little choice. Getting a bank to refinance a product like this is roughly as easy as safely towing a water skier through the Chain on a sunny Saturday afternoon. With no buyers in sight, and no bank relief available, foreclosure is the inevitable, and unfortunate result. Then the cycle grows even more vicious as continued foreclosures push the price lower and desirability lower, and increase the public’s growing concern that real estate might not always be a safe, reliable investment.

Amid all of this doom and condotel inspired gloom, there is a market for this type of ownership, but only if a buyer views the instrument with the right focus. Let’s assume that condotel style ownership isn’t going to appreciate anytime soon (read: huge handfuls of years). If that assumption is embraced, there is still a spot for a condotel in this world, even if I’m never going to be that buyer. If a condotel is viewed solely as an investment through which a real estate investor seeks to generate an annual return on their invested cash, and that investment produces a high enough dividend to warrant the ownership, who I am to say it isn’t a good idea? If that $90k unit really does produce a 10% annual return, can I argue with that in light of the 1% return I might otherwise get on that banked cash?

The issue here is not of appreciation, but of depreciation. Even if that hypothetical $90k unit generates my desired return, and has done so consistently throughout the downturn, is the unit worth buying if the price of the units all around it continue to drop? If my $90k unit generates a nice return for me for a few years and then I wish to sell it and discover the value is now only $70k, has that been a good investment? That’s a rhetorical question obviously. There have been a few sales at the Abbey hotel of late at price levels that appear to be so low that even a continued decline in the broader condotel market could be absorbed by those new buyers. If returns are solid, and purchase prices are silly low, then perhaps the condotel has found at least some form of redemption.