Who would cover losses by Shangri-La? How much could you owe if the hotel loses money?

     Hotels are one of the riskiest investments to be made in the real estate market, and luxury hotels form the riskiest segment of that market.¹ Whether Shangri-la will be able to balance rising costs in a city that is attracting multiple new luxury properties is a question that investors should consider before making a purchase. As Christian Charre, a senior vice president with Jones Lang LaSalle, pointed out,

“Hotels are the first to feel the repercussions of an economic downturn. If you’re a condo-hotel owner in 2006, you may be enjoying the fruits of a rolling economy.  But if there is a downturn, very shortly that room with be empty.  The value of your condo-hotel could be negatively impacted, and it’s too early in the market cycle to know whether there is a secondary resale market or how much condo-hotels are likely to appreciate over time.”²

    Should a downturn occur, owners could be left financing a failing hotel, with no way to recover their losses. According to Robert J. Webb, a senior partner in the hospitality practice of the law firm Baker & Hostetler in Orlando, a condo hotel cannot be used as a tax shelter-meaning buyers can’t use losses from a failing hotel development to reduce their income taxes.³

    Do you know how much the management fees will be, and how much will be your responsibility? Do you know what rate Shangri-La plans on charging for its rooms, and will this rate be enough to offset the operating costs?

Notes