Ala Moana condo
buyers back out
Several condo investors tear up
sales agreements because they
cannot get key rental information
After storming the lobby of the Ala Moana Hotel Condominium in July to buy a piece of paradise, would-be investors have canceled at least 5 percent of real estate sales agreements out of frustration that their rental contracts still aren't ready.
The absence of rental contracts means the new owners of the condominium-hotel units can't calculate the true costs of renting them out to tourists and can't accurately determine the return on their investments, which range anywhere from $150,000 to $280,000.
For some of the investors, who were selected from a pool of as many as 17,000 potential buyers, initial excitement has turned to disenchantment as repeated attempts to get the developer -- Florida-based Crescent Heights -- to extend the due diligence period for buying the units have failed.
Still, the dispute hasn't cooled the ardor for the majority of the remaining 3,500 buyers who have paid $10,000 deposits for the chance to get in on one of Oahu's most-talked-about hotel-to-condo conversions. More of the Ala Moana condotel units, which are hotel rooms that have been converted to fee-simple condominiums for sale to individual owners, are slated to be released later this month.
Because the disgruntled buyers won't know how much rental income their investment could fetch in Hawaii's hot condotel market, the issue has the potential to damage the reputation of the state's growing condotel industry and slow its momentum, said Mike Paulin, owner and chief executive of Aqua Hotels & Resorts, which manages five Waikiki condotels.
"Condotels are at the height of popularity in Hawaii; they have been well managed and are riding the wave of tourism," Paulin said. "But if a large project like Ala Moana Hotel Condominium doesn't perform well it could tarnish the condotel image."
The problems at Ala Moana also could create unwelcome scrutiny of the condotel industry and spur costly government regulations, Paulin said.
"So far those in Hawaii's condotel industry, Aqua and Outrigger, have exercised faithfully their duties to buyers and owners and expectation levels have been achieved," Paulin said. "The minute you create expectations that aren't met on a mass basis, you invite government scrutiny; that's what happened to the timeshare industry in its early days."
For the first batch of potential investors in the Ala Moana property, Tuesday night was the last chance to cancel purchase agreements, based on a 30-day right of revision, said Kathryn Acorda-Strona, regional marketing director for Crescent Heights.
"It's really a small handful of people that are concerned," Acorda-Strona said. "Either they don't understand that they have options or they haven't had a chance to talk to the hotel rental office."
She declined to give an exact number of investors who canceled the purchase agreements, but said it affected about 5 percent of the units that have been sold.
Disgruntled buyers say they expected to have the rental information before Tuesday's deadline. They hoped the information would include details on the condotel's rental policies, including in-house fees and rules governing owners and guests. Under the property's bylaws, owners can live in the units only 18 out of every 36 months, so to get their money's worth, investors need to rent out the units. Plus, lenders are charging higher interest rates because the units do not have kitchens, buyers have said.
Acorda-Strona said Crescent Heights is not responsible for providing hotel rental rules and regulations, and that Ala Moana Hotel Services is responsible for hotel operations.
"We aren't selling the hotel rental program," she said. Buyers may choose to use Ala Moana Hotel Services, bring in outside rental companies or manage their own units, she said.
Ala Moana Hotel Services did not return a call to the Star-Bulletin yesterday seeking comment.
Having someone other than the in-house hotel operator manage rental properties is challenging and more than 90 percent of condotel owners use in-house rental companies, Paulin said.
"We've had a number of Ala Moana buyers contact us who own units in our buildings and ask if Aqua would be interested in managing their units," Paulin said. "We've had to turn them down because our policy is only to manage in buildings where we have control over the front desk, housekeeping and maintenance facilities."
James Patton of Coco Isle Realty, which operates just down the street from Ala Moana, said he's negotiating with many Ala Moana buyers to manage their units. "Our phone has been ringing off the hook," he said.
All three of the Ala Moana buyers Patton represented elected to cancel their purchase agreements, for various reasons.
Still, Patton said he has faith that the Ala Moana units will make a good long-term investment.
"In the long run, it will be a successful building and it will be popular," Patton said. "The long-term prospects for all of Waikiki are great and for the Ala Moana Hotel in particular."
The hope that Ala Moana will pay off inspired most buyers, including New York-based playwright Suzen Murakoshi, to stick it out.
Murakoshi, who grew up in Aiea, said she's been looking for an affordable real estate investment in Hawaii since finding she had been priced out of New York's real estate market.
"The purchase price is really low in comparison for the other things available in the market," Murakoshi said. She doesn't think she'll have buyer's remorse over the $185,000 unit that she purchased.
"Obviously, this is a limited product and the price will keep going up."
For people who want to own a piece of real estate in Hawaii, condotels are the least expensive alternative investment after timeshares, but it's buyer beware, said Stephany Sofos, a real estate consultant.
"Condotels are very long-term investments," Sofos said. "Buyers won't make money in the short term because of the cost to get them going."
And, without a strong rental manager, there's little hope of breaking even on a condotel investment, she said.
"If I were an Ala Moana buyer, absolutely, I would want to see the rental agreement before I purchased," Sofos said.