Condo-hotel developments (a.k.a., "condotels") are a unique animal when it comes to mortgages. Many lenders don’t finance them.
And with these properties continually popping up in big cities like Toronto and Vancouver, we’re getting more questions on condotel mortgage financing. As such, we’ve put together this quick rundown on the challenges you’ll face when shopping for a condotel mortgage.
What Is a “Condotel?”
As the name hints at, a condotel is a joint hotel and condominium project in the same building. Some or all of the building’s units are sold as condos, and some or all of the units are used as hotel rooms.
Owners of these units can usually utilize any of the hotel’s guest services and amenities (check-in desk, concierge service, housekeeping, gym, pool, restaurant, etc.) The cost is typically included in the monthly condo fee (which is typically higher than a standard condo fee).
The units can be placed into the hotel’s rental program, either on a short-term or full-time basis, with both the unit owner and the management company/hotel sharing the revenues. Participating in the rental program is either optional or mandatory depending on the developer.
In some cases, the condos are separated on distinct levels from the hotels. In other developments, they’re all mixed in.
Well-known examples in Toronto include One King West, Shangri-La, Residences of Yorkville Plaza and the Thompson Residences. Vacation destinations also feature condotels, like the Four Seasons Whistler, for example.
Limited Condotel Lenders
One of the biggest downsides of purchasing a condo-hotel is overcoming the obstacle of financing—assuming you don’t have deep pockets.
Many lenders won't touch them. Condotels have several shortcomings versus traditional condos. Among them:
1) Reputational Risk: Search the web and you’ll find references to countless investors who lost money on condo-hotel investments. They’re not as notorious as time-shares, but they have a blemished reputation nonetheless. They also tend to be associated with speculators.
2) Rental Questions: Many investor-owners have not got the returns developers have promised. The old investor rule of thumb was that a condo-hotel unit must be rented out for at least $1 for every $1,000 it costs to buy. That means a unit costing $250,000 must rent out for $250 per night and be occupied 60–70% of the time. And remember, the management company takes most of that revenue and often prohibits self-rentals.
3) Property Restrictions: For properties that must be put in rental pools, there are often limits to how many days (or which days) you can spend at your property. That makes it “time-share-esque,” except that you own the entire property instead of just a fraction. The management company also determines what furniture/contents you can have in your suite. Most people don’t like either of these restrictions.
4) Higher Fees: Maintenance fees can be materially higher for condo-hotel units, especially where the hotel and condos are not on separate floors, and/or where a luxury name is attached (e.g., Four Seasons or Shangri-La). That’s largely because of the built-in management fees, expensive amenities and even things like separate “refurbishment fees.” Generally speaking, higher fees per square foot hurt resale value, and mortgage lenders want marketability in case they have to take back the property. In most cases, property taxes are also higher (sometimes much higher).
5) Other Resale Issues: Because so much of future value hinges on the appeal of the building and success of the manager, it’s not as easy to predict price appreciation compared to a standard condo unit. You also have a smaller pool of buyers by default, given that many won’t purchase in a condo-hotel due to all the transients flowing through such buildings, the financing challenges and all the other reasons above. And again, from a lender’s perspective, the #1 thing they want to see besides your creditworthiness is property liquidity.
Where to Shop for Condotel Financing?
Forget lenders with the best rates. Most won’t lend on condotels.
Most of those who do require a supersized down payment, like 35–50%, and limit their exposure (number of units they’ll finance) in each building.
It’s also worth noting that you can’t get CMHC default insurance on single units in condotels if they’re:
- in a building blacklisted by CMHC
- part of a rental pool or generate any rental income whatsoever (CMHC will often require a solicitor undertaking confirmed in writing to verify that the unit is not part of a rental pool, and there will be a title search to support that as well).
Barring that, owner-occupied units in condotel buildings that meet CMHC’s criteria can technically be financed with just 5% down, if you can find a willing lender.
As for the private insurers, like Genworth Canada and Canada Guaranty, our experience is that they’re a bit pickier about insuring units in buildings with hotels. Again, if the owner doesn’t live in the property full-time and/or the unit is in a rental pool, it’s a no-go.
One of the trustier lenders for condotel buildings is RBC. Canada’s biggest lender charges no rate premiums on certain condotels and goes up to 80% loan-to-value. Scotiabank is another option.
Here are some of RBC’s conditions, according to one source we spoke with at the bank:
- The property must be in a major urban centre (e.g., Greater Toronto, Vancouver, Calgary or Montreal)
- It must be a high-rise development with designated floors providing separation between the hotel units and condos
- Rental-pool properties are not eligible, whether or not the owner is participating in the rental pool
- Most resort complexes are generally not eligible.
As of today, you can get a five-year fixed near 2.94% +/- 10bps at RBC. That rate even applies to non-owner-occupied condotel rentals, which is noteworthy since most lenders up-charge for even regular rentals.
Certain local credit unions will also entertain condotels.
For more information, the best bet is to chat with a major bank and a mortgage broker. Compare their rates, terms and down payment requirements for your chosen property, and go from there.