Condo-Hotel Case Study: The Trump International Tower and Hotel

by Jordan Lavin September 6, 2015 / No Comments

One of the most controversial towers in Toronto made the news again last week. The antenna atop the Trump International Tower and Hotel appeared to become unstable, leading to road closures in the financial district while engineers were brought in to inspect. It turned out nothing was wrong, but it was another chapter in a long story about a troubled major development.

While building issues like a wobbly antenna and falling glass make great video for the evening news, the most important story for those interested in real estate is the financial structure of the Trump Tower.

About the Trump

Initially pitched in 2001, the $375-million, 60-storey Trump was sold as a hotel-condo. Similar to the Four Seasons and Shangri-La, the Trump’s proposition mixes the pride of ownership with the service of a luxury hotel. Owners have the option to rent their units as hotel rooms when they are away, using the hotel’s reservation system. The turn-key investment opportunity attracted a number of buyers, as marketing materials suggested rooms could be rented up to 75% of the time at rates averaging over $500 a night.

The problem with mixed use

Because of the turnkey investment nature of condo-hotels, they’re generally considered to be commercial properties and, therefore, are nearly impossible to get traditional mortgages for. In the case of the Trump, some buyers who assumed they could get regular mortgages were shocked to find their only options for financing required at least 50% down payments, and mortgage rates as high as 12%.

The commercial tag extends to taxation as well. In Toronto, commercial property taxes are much higher than residential property taxes. Canadians who rent out their suites also pay tax on rental income, charged at their highest marginal income tax rate.

Investments are not what they seemed

When those investors who were able to come up with financing did finally close on their units, it was after years of delays. Occupancy rates were lower than expected; by the time the Trump opened, other similar luxury offerings like the Shangri-La and Four Seasons were competing in the space. Owners were on the hook for thousands a month in maintenance fees, while their rooms were rented for half of what they expected.

What to know before investing in property

A few investors took developers Talon International to court to try to rescind their deals. In his ruling, Justice Paul Perell said “all investments are risky,” and denied their petition. While this is only one example of how things can go wrong, it serves as a good reminder of some of the things to keep in mind when you invest in property:

Type Of Property: Are you investing in a residential property like a condo or house, or is it a commercial venture like a condo-hotel?

Contracts: In the case of the Trump, investors weren’t able to get out of their contracts. Be diligent if you’re buying a pre-construction property and know what the repercussions are if you want to sell or assign your unit, or aren’t able to get financing.

Financing: The rules are different for investment properties. Lenders will look for higher down payments, proof of rental income, and proof you can afford to carry your property in times when it’s not rented. If you’re investing in a residential property, you may be able to get a similar mortgage rate to what you would get for your principle residence. If you’re investing a commercial property, it could be a lot harder to get a loan.

Taxes: Don’t forget to factor in land transfer tax when you buy, and property tax for as long as you own the property. In Canada, you also have to pay income tax on any money you make from renting out your property. You could also pay capital gains tax when it comes time to sell, even if you’ve only rented out a portion of your house. And if you’re buying new construction, you’ll have to keep the property for at least a year to avoid paying back any GST rebates.

Laws: Condo or municipal by-laws could impact how you’re allowed to use your property. You should be especially aware of this if you’re planning to use your space as a short-term rental. Some condo buildings don’t allow short-term rentals at all, and some municipalities require you apply for a license and pay fees.

Flickr: Umair Khan

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