Fractional: Welcome to Your Condo. Please Don’t Stay.

By FRED A. BERNSTEIN for The New York Times

The condo in Rancho Palos Verdes, Calif., has three bedrooms, three bathrooms and sweeping ocean views. It can be yours for just under $2.6 million.

There’s one catch: If you buy it, you will be able to use it for only 60 days a year and no more than 29 days in a row.

The California Coastal Commission, an agency founded in 1972, wants to ensure public access to the state’s 1,100 miles of shoreline. So when Lowe Enterprises requested permission to build 50 condominiums, which the company calls casitas, in an oceanfront resort called Terranea in this lush section of southwest Los Angeles County, the commission demanded restrictions. The idea was to keep owners from monopolizing access to the ocean.

According to Peter M. Douglas, executive director of the commission, developers determined that condominiums would be more profitable than hotels. But because the commission’s goal is to maximize public access, it imposed restrictions meant to make the condominiums available to the public as rentals.

Developers agreed to the restrictions. But that was during a bull market. Now, Mr. Douglas said, developers say that building condos with the restrictions “turned out to be more trouble than it’s worth.”

At Terranea, the initial offering of units sold out practically overnight in 2006, according to Maureen Megowan, a real estate agent in neighboring Palos Verdes Estates.

But “sold out,” in this case, means that buyers signed contracts intending to buy. When it was time to close, in mid-2009, the purchasers couldn’t get financing. Matt Walker, a senior vice president of Lowe, would not say how many units have closed, only that “the financing market has changed.”

sohoTerranea’s troubles may not bode well for the Trump SoHo, a 391-unit hotel and condominium building in Manhattan that is expected to open in April. There, owners will be allowed to use their units no more than 120 days a year and no more than 29 consecutive days in any 36-day period.

Rodrigo Niño, the president of Prodigy Network, which is marketing units at the Trump SoHo, said the use restrictions “shouldn’t be a problem because the buyers are from overseas anyway” and will use condos as second or third residences. The units are not time shares; they are being sold outright, at prices that start at about $1.2 million for a studio. But they may feel like time shares to buyers, who, after paying those prices, will be told they have to vacate after just under a month. A renter could move in for the rest of the year.

At the Trump SoHo, the occupancy limits are the result of a zoning dispute. The building is in a manufacturing zone, a designation that allows construction of hotels, but not permanent residences. After the local community board voted against the project, the Bloomberg administration negotiated an agreement to allow the condos, so long as there were residency restrictions that would help create a hotel-like environment.

The restrictions may be one reason the units failed to sell during an initial offering in 2007. The owners hope the opening of the hotel will revive interest in the building, according to Eve McGrath, a vice president at Rubenstein Public Relations, which represents the project.

Condos built within hotels are nothing new. But in a typical “condotel” owners can use their units freely; some units even become primary residences. An owner who isn’t in residence can choose to put the unit in a rental pool to bring in income or can keep it empty.

At Terranea and Trump SoHo, buyers don’t have the second option. They are required to allow the hotel to rent their units when they’re not in residence (though the owners do get a portion of the rent). The requirements are enforceable, said Eric Glazer, a Florida attorney who often represents condo buyers.

Experts pointed to half a dozen other condo developments around the country with use restrictions. The Suites at Beaver Creek Lodge, near Vail, Colo., requires owners to make their units available for rental 300 days a year.

And at the 35-unit Beach Village, on the grounds of the Hotel del Coronado near San Diego, owners are limited to no more than 90 days of occupancy each year (and no more than 25 in any 50-day period). As at Terranea, the restrictions were negotiated with the California Coastal Commission.

When units at Beach Village went on the market several years ago, they sold out despite the restrictions. Most of the buyers, according to Ruth Ann Fischer, a real estate agent with an office in the Hotel del Coronado, live elsewhere and use their condos for vacations.

Ms. Fischer said the occupancy limits were strictly enforced. “We’ve turned owners away,” she said. “They’ve called to make reservations, and they couldn’t because they’ve exceeded their time frame.”

The upside to the use restrictions is that condo owners can earn rental income. At Terranea, units are available for up to $1,650 a night. The developer retains 50 percent of the rent and pays the rest (less a housekeeping fee) to the owner. That could mean income of as much as $700 a night.

But the carrying costs on the unit — including real estate taxes but not including the mortgage or other costs of ownership — are more than $65,000 a year, according to Ms. Megowan, who with her husband, Bruce, a real estate broker, prepared a detailed analysis of the figures. According to the Megowans, a unit would have to be rented almost 100 nights a year to cover the carrying costs. And that might be difficult at a time when Los Angeles hotels are in a slump. (Average occupancy in 2009 was 64.3 percent, down 9.6 percent from 2008, according to Smith Travel Research.) “There is essentially no return on your money for a long time,” Ms. Megowan said.

Mr. Walker of Lowe Enterprises said in an e-mail message that the company would not comment on financial matters.

Terranea is having other problems. Lowe has defaulted on several loans, which has made banks unwilling to lend to buyers of individual units. But the occupancy restrictions won’t make selling the units any easier.

Ms. Megowan said the three-bedroom unit she listed for $2.6 million was not attracting much interest.

Lowe “may have done the right thing for the top of the market,” she said, “but at this point it’s not working.”


Be Sociable, Share!
Leave a Reply