Comment from a Reader re Oaks and Aurora

A reader kindly sent me this note, in response to a prior posting:

I am concerned about trends in the industry, whereby the Oaks are flouting the law by operating a hotel in a Classification 2 building. The Oaks has more money than any Owner’s Corporation, and they know as long as Brisbane City Council and the State Government of Queensland turn a blind eye to them, they can out spend any Body Corporate in our legal system.

I went to a recent auction run by LJ Hooker in Aurora, and the agent was late because he could not get up and down the lift (the Oaks closes two of their five lifts down between 10:00 am and 2:00 pm). When we finally got into the building, there were hotel guests unpacking and repacking their bags in the lobby. The lifts were crowded with students, overnight stays ....

It is no surprise to me that the auction of a $1.1 Million plus unit did not attract any bids. The vendor made a bid of $725,000, and about 12 people stood around, hands in pockets. After the auctioneer consulted with the owner and got instruction, the vendor’s bid was lifted to $770,000 and again no bids. I don’t know if this property ever sold. It was passed in on the day.

The presence of any hotel group, in my opinion devalues the units and lowers the general feel and look of a residential building and diminishes the lifestyle of resident owners. Other factors to consider are:

Don’t Owners get Higher Rents for Hotel Guests/Short Term?

Your committee and the Manager might try to tell investors that they will earn more money. Yes, their rents might be a bit higher, but that is only part of the story. With higher rents, come higher risks, such as risk of vacancy, more tenant churn, more wear and tear on common property and much higher Management Fees.

Management Fees are Higher

The Oaks tend to return to investors about 48% to 50% of the total rent collected, when the high management fees, charge-on costs and miscellaneous costs are all taken into account. I believe this to be in line with any other hotel group’s figures. Perhaps someone from the Oaks could confirm these figures.

Rental Pools – How do they work?
As an investor in a ‘hotel’, your unit is most likely going to go in a ‘rental pool’. It is impossible to tell how often your unit is let out, as the agreement entitles you only to a portion of the total pooled funds. That means that if your unit is a superior one, and is let fully, you will be subsidizing other units which may be inferior and not let out fully.

Hidden Costs?

There are lots of hidden costs to any investor from their hotel manager. One horror story involves an owner who double checked his statements, and each month they would be buying ashtray, glasses, microwave, mattress protector, etc. The Managers did not need to give any proof that the item was damaged or broken, they simply went ahead and bought these items, added a hefty commission and merrily went about spending the owners’ money, despite instruction from the owner that she would replace any items in the unit herself. Another horror story involves a man who went straight to the manager’s desk and asked if there were any vacancies. Yes, the manager said, just go to that phone over there and ring this number. The unassuming man went over and used the phone, the manager answered and earned 30% commission (out of the owner’s pocket) for the exercise. There are more stories where these come from. This is just scratching the surface.

Fire Regulations?

As indicated already, regulations appear to mean nothing to the Oaks. They run a hotel in Aurora, which is a Classification 2 Building, with inferior fire safety protection for the occupants.

How do Hotel Groups and bad Managers devalue units?

There are many drawbacks to a hotel group taking control of a residential building. Investors need to be aware that although it may seem that rents increase, their net income will drop. Aurora has shown us that units will be significantly devalued by the presence of the Oaks, or any other hotel group. Colin Archer was recently quoted at the Unit Owner’s Conference as saying that “if owners want to buy into a hotel, they should buy a hotel. If they don’t wish to live in a hotel, don’t buy in a residential building managed by any hotel group”, because he well knows the massive and negative impact a hotel operation has on the permanent, resident owners. One owner stood up and asked Colin Archer what owners in Aurora could do to protect themselves, because the Management Rights were sold to a Hotel Group to the detriment of owners. He started squirming in his seat. He is a director of the Oaks, and he was sitting on the panel with Michael Teys who sold him the Management Rights. They seemed to think it was quite a funny joke. After some good natured squirming, Colin Archer said that owners need to ensure a bylaw is in place with a three month limit on leases. To his credit (I think he wants to retain his right to practice law), Michael Teys stood up and corrected Colin Archer. He told the crowd that such a bylaw would offer absolutely no protection to owners.

Take also into account that backpackers, suitcases and crowds in the lobby negatively impact on any residential home. In Aurora, I believe that two of the five lifts are closed off to residents because of the cleaners activity between 10:00 am and 2:00 pm. Cleaners block not only the lifts, but the corridors of all of those unfortunate souls who live on the ‘hotel’ level. There is more wear and tear on common property, and the end result is that all owners pay a price – investors pay the financial price and resident owners pay the price of a diminished lifestyle.

Is there any upside to a Hotel?

No, not that I can see. Hotel Management Rights are there for the sole benefit of the managers, and to the detriment of both investor owners and resident owners. If someone can convince me that the Oaks have increased the value of the units in Aurora, or enhanced the lifestyle of all occupants, I will happily listen. Until I hear a good case for owners, I won’t be changing my mind anytime soon.