October 30, 2006
No easy exit | The business of running an inn can be challenging, but trying to turn the property into condos may be even more so
By Jeffrey Bouley
Maine has seen its share of condominium plans rise ˆ and fall ˆ in a variety of ways during the past few years. From new construction to conversions of mills, office buildings and residential rental units, condos boomed and now may have busted.
But the allure of condominium projects has attracted its share of believers in another class of property owners: lodging operators. Across the state, inn and bed-and-breakfast owners have considered converting their facilities into condominiums or are offering the properties as condo development opportunities to attract a bigger pool of potential buyers. For some owners, operating as an inn or bed and breakfast doesn't seem as lucrative as turning what often are marquee properties into condominiums or single-family homes.
It's a concept considered recently by Barbara Hathaway Ward, owner of the Danforth Inn in Portland. This summer, she began offering buyers the chance to reserve condominium units in the 23-room historic Federal-style mansion. That plan has since been abandoned in favor of simply selling the property as a single residence with an asking price of $2.1 million. Hathaway declined to be interviewed for this article, but her broker, Jim Walsh of Waterglen Realty Group in Portland, notes that the condominium plans are now simply an option for a new owner to consider. "We're just saying that it has development opportunities, but we're not pitching any one particular opportunity, and it's listed as a private residence," Walsh says. "We're saying, 'Come into it and make your own determination about what to do with it.'"
The Inn at Goose Rocks in Kennebunkport also highlights condo possibilities in its sale offer. A real estate listing with Masiello Group touts that "condominium docks are in place for a new owner if they wish to convert." (Broker Stephen Farrar of The Masiello Group did not return calls seeking comment.) And in Damariscotta, the Oyster Shell Motel, which sometimes is listed on lodging websites as the Oyster Shell Resort Condo, is now for sale as condo units. The property actually was built as condos back in 1988 but had always been operated as a motel and never marketed as condos before, says current owner Jack McGrath of Eastern Atlantic Financial Group in Cohasset, Mass.
Then there is the Black Point Inn in Scarborough, which put a twist on the typical approach of converting a lodging property into private residences. Rather than a condo conversion, the owners that purchased the oceanfront inn in January of this year received approval in August to reduce the hotel's size from 84 guest rooms to 25 and create 13 house lots. "There was never a plan to go condo," says John Maibach, the inn's general manager, "but we do plan to move forward on scaling back the inn and subdividing the property for single-family homes."
Despite these recent efforts, inn-to-condo conversions are relatively rare, notes Tim La Plante, a broker with Prudential Northeast Properties in Camden who specializes in lodging property sales. And with good reason, he says. "It almost never happens because it's generally not the highest and best use for the property," La Plante says.
For those considering the idea of going condo as a way to maximize the value of their properties, there also are pitfalls that are difficult to overcome. Zoning laws and renovation costs alone are enough to derail many such plans, say La Plante and others, even in a strong condo market.
Temptations and frustrations
The allure of condo conversions is easy to see, says Greg Dugal, executive director of the Maine Innkeepers Association, because the condo economy seems reasonably healthy. He notes that Maine was the only state in September to show growth in the housing market, driven completely by second-home purchases. As a result, even though not a significant real estate trend, recent efforts by innkeepers ˆ particularly B&B owners ˆ to sell their properties as single-family homes has caused the Maine Innkeepers Association to lose "numerous members," Dugal says.
The temptation to pursue condo conversions, or the sale of a property as a single-family home, is particularly strong for owners of smaller properties like B&Bs, especially when the lodging and hospitality market is facing slow times. "Frankly, when you get below 10 rooms, it's really hard for an inn or B&B to make a living," Dugal says. "The business model for a property that small just doesn't entice the banks to fund the property as an inn, so it becomes almost a necessity to sell it for the residential real estate value of the property."
Dugal suspects the Danforth Inn wasn't facing that kind of problem, despite having only nine lodging units. "Barbara's situation is a little different, in that she had the niche of the upper echelon traveling market and she was pretty much one of the premier lodging properties in Portland," he says.
Yet hotel development in recent years added to the Danforth's upscale lodging competition. "Portland is less seasonal than many communities in Maine, but there is still a short window to make your money, and if occupancy drops and taxes go up, it can be quite a proposition to make a go of it," Dugal says.
But jumping on the condo wagon isn't necessarily the best option, and La Plante suggests that Ward and others who've pulled back from condo conversions probably will fare better than those who go through with such plans. "Aside from the fact that most of these properties are best suited for the business of being an inn, many of them probably couldn't become condos because of zoning laws and property codes," La Plante notes. "Even if a listing agent says a property is ideal for condos, that doesn't mean he or she has done any research to see if a town would allow such redevelopment. The Inn at Goose Rocks is approved for condos, but I don't know of any others right now."
The problem, he says, is that many inns and B&Bs are grandfathered to be exempt from zoning regulations that would otherwise prevent them from operating as lodging establishments. Small inns and B&Bs often are historic buildings, but old buildings often are on non-conforming lots or have other issues that would prevent them from being operated as inns if they hadn't already been doing so for decades.
A condo conversion, however, would trigger a change of use that would negate the grandfathering of the property and require an owner to go through a lengthy, difficult and costly process before receiving approval as residential units. "If you make a major change like a condo conversion, you also have to worry about complying with life safety codes and the Americans with Disabilities Act," La Plante says, "and that can mean huge expenses for things like installing sprinkler systems or handicapped accessibility. And then there is the challenge of making the structure physically work as condos when it is probably a single-family home design."
He recalls an inn in Smuggler's Cove, for example, that considered a condo conversion, but the owners couldn't create enough condo units in the building to justify the cost of the overall renovation. Selling as a single-family home is a more likely prospect, La Plante says, given that an inn or B&B is often in a tourist destination that's an attractive area for second-home buyers or retirees.
Waterfront trumps all
La Plante admits there is one factor that can trump all the challenges of a conversion: the ocean. "Waterfront property kind of takes the common sense out of everything," he says. "So even though an inn is still probably the highest and best use for a oceanfront property, it's not inconceivable that it would be more financially profitable to sell it as a single-family residence or even consider condo conversion."
He recalls two examples of coastal locations that were too perfectly situated to survive as inns during the real estate boom of recent years: the Inn at Canoe Point in Bar Harbor and the John Peters Inn in Blue Hill. "Both were fairly large, successful, active inns that ended up selling as private residences," La Plante says.
Dugal thinks a good share of decisions to convert to condos or sell as single-family homes may be driven by panic. He says owners often would be better served by riding out lean times in the lodging industry than giving up the property. "May and June were terrible for innkeepers," he admits, "but September and October have been fantastic. I don't think that rushing into a condo conversion is the best idea from a business standpoint because of all the potential costs and headaches and risks."
Dugal does admit that for some looking to leave the business, selling as condos could be a better exit strategy than trying to find someone to take over the business. "On the other hand, if you can sell units for $250,000 to $650,000 each, that can be a huge shot in the arm," Dugal says.
Since pulling back from condo plans and placing the Danforth on the market as a single residence, Walsh says he has shown the property "numerous times." He plans to host a business-after-hours open house at the property with the Portland Chamber of Commerce to give people a chance to see the property up close and consider not only buying it, but what its future usage might be.
Regardless of the Danforth's future, given the potential costs and regulatory hassles involved with inn-to-condo conversions, the practice is never going to be a major real estate trend, says La Plante, who was a successful B&B owner before becoming a broker.
"In five or six years, I haven't had much of anything to do with any kind of deals like that, and I don't see much interest in it or inquires about it," says La Plante. "It's just not a major component of the marketplace ˆ the percentage of inns that would see new life as condos is always going to be an infinitesimal amount."
But the allure of condominium projects has attracted its share of believers in another class of property owners: lodging operators. Across the state, inn and bed-and-breakfast owners have considered converting their facilities into condominiums or are offering the properties as condo development opportunities to attract a bigger pool of potential buyers. For some owners, operating as an inn or bed and breakfast doesn't seem as lucrative as turning what often are marquee properties into condominiums or single-family homes.
It's a concept considered recently by Barbara Hathaway Ward, owner of the Danforth Inn in Portland. This summer, she began offering buyers the chance to reserve condominium units in the 23-room historic Federal-style mansion. That plan has since been abandoned in favor of simply selling the property as a single residence with an asking price of $2.1 million. Hathaway declined to be interviewed for this article, but her broker, Jim Walsh of Waterglen Realty Group in Portland, notes that the condominium plans are now simply an option for a new owner to consider. "We're just saying that it has development opportunities, but we're not pitching any one particular opportunity, and it's listed as a private residence," Walsh says. "We're saying, 'Come into it and make your own determination about what to do with it.'"
The Inn at Goose Rocks in Kennebunkport also highlights condo possibilities in its sale offer. A real estate listing with Masiello Group touts that "condominium docks are in place for a new owner if they wish to convert." (Broker Stephen Farrar of The Masiello Group did not return calls seeking comment.) And in Damariscotta, the Oyster Shell Motel, which sometimes is listed on lodging websites as the Oyster Shell Resort Condo, is now for sale as condo units. The property actually was built as condos back in 1988 but had always been operated as a motel and never marketed as condos before, says current owner Jack McGrath of Eastern Atlantic Financial Group in Cohasset, Mass.
Then there is the Black Point Inn in Scarborough, which put a twist on the typical approach of converting a lodging property into private residences. Rather than a condo conversion, the owners that purchased the oceanfront inn in January of this year received approval in August to reduce the hotel's size from 84 guest rooms to 25 and create 13 house lots. "There was never a plan to go condo," says John Maibach, the inn's general manager, "but we do plan to move forward on scaling back the inn and subdividing the property for single-family homes."
Despite these recent efforts, inn-to-condo conversions are relatively rare, notes Tim La Plante, a broker with Prudential Northeast Properties in Camden who specializes in lodging property sales. And with good reason, he says. "It almost never happens because it's generally not the highest and best use for the property," La Plante says.
For those considering the idea of going condo as a way to maximize the value of their properties, there also are pitfalls that are difficult to overcome. Zoning laws and renovation costs alone are enough to derail many such plans, say La Plante and others, even in a strong condo market.
Temptations and frustrations
The allure of condo conversions is easy to see, says Greg Dugal, executive director of the Maine Innkeepers Association, because the condo economy seems reasonably healthy. He notes that Maine was the only state in September to show growth in the housing market, driven completely by second-home purchases. As a result, even though not a significant real estate trend, recent efforts by innkeepers ˆ particularly B&B owners ˆ to sell their properties as single-family homes has caused the Maine Innkeepers Association to lose "numerous members," Dugal says.
The temptation to pursue condo conversions, or the sale of a property as a single-family home, is particularly strong for owners of smaller properties like B&Bs, especially when the lodging and hospitality market is facing slow times. "Frankly, when you get below 10 rooms, it's really hard for an inn or B&B to make a living," Dugal says. "The business model for a property that small just doesn't entice the banks to fund the property as an inn, so it becomes almost a necessity to sell it for the residential real estate value of the property."
Dugal suspects the Danforth Inn wasn't facing that kind of problem, despite having only nine lodging units. "Barbara's situation is a little different, in that she had the niche of the upper echelon traveling market and she was pretty much one of the premier lodging properties in Portland," he says.
Yet hotel development in recent years added to the Danforth's upscale lodging competition. "Portland is less seasonal than many communities in Maine, but there is still a short window to make your money, and if occupancy drops and taxes go up, it can be quite a proposition to make a go of it," Dugal says.
But jumping on the condo wagon isn't necessarily the best option, and La Plante suggests that Ward and others who've pulled back from condo conversions probably will fare better than those who go through with such plans. "Aside from the fact that most of these properties are best suited for the business of being an inn, many of them probably couldn't become condos because of zoning laws and property codes," La Plante notes. "Even if a listing agent says a property is ideal for condos, that doesn't mean he or she has done any research to see if a town would allow such redevelopment. The Inn at Goose Rocks is approved for condos, but I don't know of any others right now."
The problem, he says, is that many inns and B&Bs are grandfathered to be exempt from zoning regulations that would otherwise prevent them from operating as lodging establishments. Small inns and B&Bs often are historic buildings, but old buildings often are on non-conforming lots or have other issues that would prevent them from being operated as inns if they hadn't already been doing so for decades.
A condo conversion, however, would trigger a change of use that would negate the grandfathering of the property and require an owner to go through a lengthy, difficult and costly process before receiving approval as residential units. "If you make a major change like a condo conversion, you also have to worry about complying with life safety codes and the Americans with Disabilities Act," La Plante says, "and that can mean huge expenses for things like installing sprinkler systems or handicapped accessibility. And then there is the challenge of making the structure physically work as condos when it is probably a single-family home design."
He recalls an inn in Smuggler's Cove, for example, that considered a condo conversion, but the owners couldn't create enough condo units in the building to justify the cost of the overall renovation. Selling as a single-family home is a more likely prospect, La Plante says, given that an inn or B&B is often in a tourist destination that's an attractive area for second-home buyers or retirees.
Waterfront trumps all
La Plante admits there is one factor that can trump all the challenges of a conversion: the ocean. "Waterfront property kind of takes the common sense out of everything," he says. "So even though an inn is still probably the highest and best use for a oceanfront property, it's not inconceivable that it would be more financially profitable to sell it as a single-family residence or even consider condo conversion."
He recalls two examples of coastal locations that were too perfectly situated to survive as inns during the real estate boom of recent years: the Inn at Canoe Point in Bar Harbor and the John Peters Inn in Blue Hill. "Both were fairly large, successful, active inns that ended up selling as private residences," La Plante says.
Dugal thinks a good share of decisions to convert to condos or sell as single-family homes may be driven by panic. He says owners often would be better served by riding out lean times in the lodging industry than giving up the property. "May and June were terrible for innkeepers," he admits, "but September and October have been fantastic. I don't think that rushing into a condo conversion is the best idea from a business standpoint because of all the potential costs and headaches and risks."
Dugal does admit that for some looking to leave the business, selling as condos could be a better exit strategy than trying to find someone to take over the business. "On the other hand, if you can sell units for $250,000 to $650,000 each, that can be a huge shot in the arm," Dugal says.
Since pulling back from condo plans and placing the Danforth on the market as a single residence, Walsh says he has shown the property "numerous times." He plans to host a business-after-hours open house at the property with the Portland Chamber of Commerce to give people a chance to see the property up close and consider not only buying it, but what its future usage might be.
Regardless of the Danforth's future, given the potential costs and regulatory hassles involved with inn-to-condo conversions, the practice is never going to be a major real estate trend, says La Plante, who was a successful B&B owner before becoming a broker.
"In five or six years, I haven't had much of anything to do with any kind of deals like that, and I don't see much interest in it or inquires about it," says La Plante. "It's just not a major component of the marketplace ˆ the percentage of inns that would see new life as condos is always going to be an infinitesimal amount."
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