The condo hotel trend has been much ballyhooed, so why are lenders still sitting on the fence when it comes to consumer mortgage financing? The secondary markets (FNMA, FHLMC) have not seen enough condo hotel paper to grade the risks/rewards of this proportionately new asset class.

Condo hotel is somewhere between a commercial hotel loan and a residential second home/investment property consumer mortgage, so they don't fit neatly into existing portfolios/guidelines.

The yield/interest rate that a well-healed condo hotel purchaser is willing to pay on a 30-year mortgage is much lower than timeshare and other vacation ownership rates.

Yet even given these challenges it is clear that lenders are closely watching the evolution of the condo hotel market.

The typical condo hotel purchaser is a high net worth consumer who is seeking a quasi-vacation home with hassle-free rental property benefits and investment potential. Underwriting guidelines for most of the existing condo hotel mortgage products require a borrower to qualify for the debt without any credit for the potential rental income from the property.

The greatest risk to lenders and consumers in condo hotel ownership is in the sales approach and intent of the purchase. Is the consumer buying an investment property or a vacation condo alternative? Lenders entering this niche are often unfamiliar with the metrics and cyclical nature of the hotel business, and need to approve condo hotel projects with an eye to the long-term viability of the hotel, not just the credit quality of the consumer. If the hotel is mis-managed, replacement reserves are grossly under funded, or if the viability of the hotel market is deteriorating the consumer's ownership experience will suffer, and mortgage default risk rises rapidly.

Condo Hotel Mortgages - Better Than Traditional Condos