For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble.
Many buyers purchased the hotel rooms from developers hoping to get paid every time the room was rented.
But condo hotels, which account for as much as 10 percent of all hotel rooms under construction and a much greater percentage in resort markets such as Orlando, Fla., and Las Vegas, are coming back to haunt many of the people who bought the units, the developers that constructed the buildings, and the operators hired to run the hotels.
Some projects also are being brought to the attention of regulators by investors.
"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit.
Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.
He said the developer's sales staff led him to believe that the hotel would have 94 percent occupancy and $350-a-night rates.
Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.
"I am in so much debt. I don't know how long I can sustain this," Adekunbi said.
Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.
Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.
During the real-estate boom, many Americans scrambled to buy anything they could -- office condos, warehouse condos and high-rise residential condos, which are crowding the skyline of cities such as Miami.
But condo hotels were one of the most dangerous investments of them all.
Hotels are risky investments in real estate because occupancy can swing with the weather or the economy.
Developers loved condo hotels. "It minimized the upfront risk to the developer, and shifted it to the individual unit owners," said Mark Lunt, a lodging analyst at Ernst & Young.
Many developers said they insisted that buyers regard condo hotels as vacation homes that they would use rather than income-producing investments.
Some condo-hotel buyers are happy. But other buyers are suing developers to get out of their contracts, claiming they were misled.
In Florida, a group of buyers is suing WCI Communities Inc., claiming the developer sold them condo hotels in the waterfront Resort at Singer Island as unregistered securities.
The buyers said they bought the units as investments, not primarily for their own use.
WCI said it intends to "vigorously defend" against the lawsuit, according to a recent Securities and Exchange Commission filing.
Other buyers are staging revolts inside high-end hotels. At the Trump International Hotel & Tower in Las Vegas a group of condo-hotel owners are clamoring to rent out their own hotel units using their own operator because they said Trump takes too much of the rental revenue.
A Trump spokesman said the company's rental agreements are competitive with other condo-hotel rental-management companies in the area.
In other condo-hotel developments, a few buyers are talking to the SEC, alleging possible securities fraud, according to their attorneys.
One issue could be whether developers sold these units as investments, which should have been registered with the SEC or other regulators.
In some cases, lawyers said, a real-estate offering may be comparable to a security if the offering creates expectations of profits resulting from the efforts of a third party. An SEC spokesman declined to comment.
Historically, the SEC has suggested it wouldn't take enforcement actions against a condo-hotel developer as long as the company didn't provide prospective buyers with projections of income or expected occupancy, among other conditions.
Many developers were careful not to market condo hotels as investments, but "many others find it difficult to restrain themselves from creating expectation of investment returns and cash flow," said Rob Webb, a senior hospitality partner in the Cleveland office of law firm Baker & Hostetler LLP, which has represented condo-hotel developers in cases where buyers have tried to rescind their contracts. "All you have to do is find the developer's newspaper ads, and it could be a devastating blow."
Some buyers said developers should have registered their condo hotels as securities, which might have allowed them to review a detailed investment prospectus before they bought a unit.
For some buyers, a securities law claim could provide a way to undo a purchase. "The rights of recovery are so much better if you can say it is a security," said Burton Wiand, a former SEC attorney who now practices at Fowler White Boggs Banker in Tampa, Fla.
If the transaction should have been registered, buyers can rescind the deal and get their money back, without having to prove fraud and misrepresentation, attorneys said.
Michael Trombley, a retired major-league pitcher who lives in Fort Myers, Fla., is one of several investors who have filed lawsuits alleging securities laws were violated in the sale of units in the Clearwater Cay Club in Clearwater, Fla.
"They were always trying to preach to people that the market is hot. This is a no-brainer. You'd better get in quick," said Trombley, 40 years old, who spent most of his career with the Minnesota Twins and Baltimore Orioles.
In 2005, Trombley, along with five friends and family members, bought five units in the development for a total of about $2.2 million, according to his attorney, Bruce Barnes, taking out loans to finance the entire purchase price.
Trombley estimates the four units he holds are worth at best 40 percent of the original purchase price, he said. Carrying costs, meanwhile, are running about $14,000 a month.