What Defines a Condotel

I have specialized in Condo-Hotel, Condo-tel, or Condotel (all the same) financing for over 20 years. I was also asked by the State of Hawaii to write the questions covering condotels on the test taken by those wishing to provide mortgage financing in our state. I have also argued over the years with many a real estate agent if their listing was in a project classified as a condotel.

For the 2,000 real estate agents that receive this newsletter, I please ask that you share the following and keep it for handy reference.

For a lot of you that have never heard of a condotel or what they are, in the simplest of definitions, a condotel is a residential condominium project that operates like a hotel, but the units are individually owned. One very important note for financing: Units must have a full kitchen. Condotels are not hotel rooms. Units without a full kitchen are classified as Lodging Units, and financing is limited. Condotels are very popular in resort areas.

Before I dig into the nitty gritty of condotel guidelines, I want to offer you the first rule of condotel financing:

Because someone got a loan in the past, where the lender didn’t classify the project as a condotel, doesn’t provide any basis for that project’s correct classification.

There are lots of reason why a loan slipped through the cracks. Most of the time it’s an error of someone overlooking a document. Other reasons are very complex.

Let’s dive headfirst into the guidelines! While many of the guidelines don’t come up often, I have highlighted in red the major ones that do.

A project may not be operated or managed as a hotel, motel, or similar transient entity as evidenced by meeting any of the following criteria:

The Homeowners Association (HOA) or management company is licensed as a hotel, motel, resort, or hospitality entity.

• The Project is professionally managed by a hotel or resort management company that also facilitates short term rentals for unit owners.

• The HOA or project’s legal documents restrict owners’ ability to occupy the unit during any part of the year.

• The HOA or project’s legal documents require owners to make their unit available for rental pooling (daily or otherwise).

• The project is subject to voluntary rental-pooling, revenue, profit, or commission sharing agreements with the HOA or management company, or similar agreements that restrict the unit owner’s ability to occupy the unit such as blackout dates and occupancy limits to assure an inventory of units for rent on a frequent basis. This may include daily, weekly, monthly or seasonal restrictions

• The HOA or the project’s legal documents require unit owners to share profits from the rental of units with the HOA, management company, or resort, or hotel rental company.

The project offers hotel type services (including those offered by or contracted through the HOA or management company) or characteristics such as registration services, rentals of units on a daily or short-term basis, daily cleaning services, central telephone service, central key systems.

• The project is a conversion of a hotel (or a conversion of a similar type of transient housing) unless the project was a gut rehabilitation and the resulting condo units no longer have the characteristics of a hotel or similar type of transient housing building.

The project is marketed as a hotel, motel, resort, or investment opportunity.

• The project has obtained a hotel or resort rating for its hotel, motel, or resort operations through hotel ratings providers including, but not limited to, travel agencies, hotel booking websites, and internet search engines.

• The HOA or management company has restrictions on interior decorating in residential units.

• The HOA charges a fee to unit owners or the unit owner’s renter for units rented on a transient basis (1-30 days).
o This includes a surcharge to the unit owners who do not elect to rent their units through the HOA’s property management preferred rental operator.
o This does not include a fee charged to reimburse the cost of wear and tear to the project’s facilities or amenities from the renter.
o This does not include a fee charged for reviewing the terms of the rental contract.

As you can see, there’s lots of rules that govern these types of properties. If you are seeking financing for a resort condo project in Hawaii, it is best to speak with someone who has extensive experience with this type of financing. The worst outcome is going with a lender only to find out near your closing date that they can’t provide you the loan.

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