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San Diego becoming part of growing condo-hotel combination trend

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The trend of purchasing a condominium-hotel property instead of a timeshare has increased recently with developments in Las Vegas, Florida and Arizona. San Diego is soon to follow with the development of the Diegan.

Unlike a timeshare, in which people purchase one or two weeks to stay somewhere, a condo-hotel offers buyers the opportunity to purchase a condo where they can stay at anytime for up to 28 days per year, without having to make a reservation. When the buyer is not occupying the condo, it is rented out and the management takes care of all the upkeep.

"It's a different vehicle," said Lee Mullinax, sales and marketing director for Vertical Properties, who is working for the Diegan. "It gives the owner the opportunity to use occasionally and generate income when not using it," mentioning owners of condo-hotels at the Diegan will receive 60 percent of the income the hotel receives from the condo being rented out.

Mullinax said owners of condo-hotel are looking for long-term cash flow because they assume hotel rates will continue to rise.

"You're fixing your cost," he said. "Over time it should generate a nice cash flow."

Condo-hotels are also appealing to developers because condo-hotel development requires less investment.

"From a developer's point of view it is a much simpler financing vehicle," he said, pointing out that since 9/11 it has been tough to finance hotels. "If you do it (new development) as a condo with hotel furnishings, then the structure is easier. It makes an attractive way to get the project financed."

While new hotels, office buildings and retail stores are sprouting up near Petco Park and the East Village, the Diegan will be located at the northern end of the Gaslamp Quarter on Fifth Avenue, and is being developed in conjunction with the House of Blues.

The Diegan, which includes 161 studio and one-bedroom suites and 24 penthouse suites, is the only condo-hotel being constructed in San Diego, he said. All the penthouse rooms, which went up for ownership two weeks ago, have all been sold, and the studio and one-bedroom suites, which range from $400,000 to $600,000, are still available. But, they are approaching a 70 percent presale and expect sales to be completed by summer.

The interior furnishings, which are being done by the Rockwell Design Group, vary depending on whether someone owns a studio or penthouse, with some penthouses containing grand pianos. The Diegan will feature the House of Blues Foundation Room club, Whiskey Bar Lounge, health spa, fitness center and two restaurants.

The hybrid concept of a luxury hotel that sells some of it units as condominiums has become one of the most popular trends in the industry in recent years. Condo-hotels in the past two or three years have expanded beyond traditional markets in ski resorts or Hawaii and into other tourist destinations such as Orlando and Las Vegas. Projects also are under construction in urban centers like Atlanta, Chicago and New York, where the Plaza Hotel is being converted.

Hotel developers like the concept because they spread their financial risk among the future condo unit-owners. Individual condo owners like it because they enjoy the resort-style luxuries, and in many cases the hotel rents out their units when they're away.

Smith Travel Research, the lodging industry's leading research firm, doesn't keep figures on the number of condo-hotels in the United States since the popularity of the concept is so recent. But the hybrid concept definitely is a hot topic, said Jan Freitag, director of client services for the Tennessee-based firm.

"Every major player, the major hotel owners in the country, are looking at hotel condos, hotel condo conversions, hotel condo construction to see if it fits their portfolios," he said.

The luxury hotel chains -- including Hilton Hotels, Four Seasons Hotels and Resorts and The Ritz-Carlton Hotel Co. -- have brought new credibility to a concept that was used as a tax shelter until the 1986 Tax Reform Act eliminated the benefits.

"People have a lot more confidence buying into a Hilton or a Four Seasons because they know the name. They know the quality. They know it must be reputable," said Joel Greene, president of the Condo Hotel Center in Miami, a brokerage that sells such units.

Ritz-Carlton, in fact, won't even manage a hotel without a residential component because of the lucrative nature of the condo-hotel concept, spokeswoman Vivian Deuschl said. The Chevy Chase, Md.-based luxury chain first became involved almost five years ago with the concept in Washington, Boston and New York. The company recently opened condo-hotels in Dubai and Berlin.

"This is an idea that has reached a lot of acceptance," Deuschl said.

Nowhere is the concept hotter than in Florida, where the Orlando and Miami-Fort Lauderdale area each could have as many as 10,000 units in the next few years, up from less than 1,000 units five years ago.

Nowhere is the concept hotter than in Florida, where the Orlando and Miami-Fort Lauderdale area each could have as many as 10,000 units in the next few years, up from less than 1,000 units five years ago.

Several factors have led to the nationwide boom -- the improving performance of hotel companies, the recent investment appeal of real estate over the stock market, low interest rates and baby boomers approaching retirement who want to invest in a second home, said Mark Lunt, a hospitality expert at Ernst & Young in Miami.

AP Writer Mike Schneider contributed to this report.

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