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Condo Doc's: A Breakdown of the "Right of First Refusal"
As the Condo Hotel industry evolves, developers are finding various ways of protecting their own interests. One way of doing this is including a provision for a “Right of First Refusal” in the condominium documents. Typically, a Right of First Refusal states that a Condo Hotel Unit Owner (Unit Owner) has to allow the Hotel Owner the ability to match any outside offers for the sale of the unit. For example, if an owner at a particular Condo Hotel places there unit for sale on Condo Hotel Marketplace and a prospective buyer makes them an offer of $900,000, the owner must allow the Hotel Owner the ability to match the prospective buyers offer. If the Hotel Owner decides to match the offer, the owner of the unit must sell their unit back to the Hotel Owner for $900,000 due to the Right Of First Refusal provision agreed upon in the condominium documents. While the Right of First Refusal might seem like a burden to the seller, in the end, the seller still gets their asking price of $900,000, regardless of who buys the unit.
Furthermore, the Right of First Refusal can offer additional advantages for other Unit Owners. If the Hotel Owner decides to buy back a unit through the Right of First Refusal, their motivation most likely would be one of two reasons: 1) The Hotel Owner realizes the revenue’s that can be gained through the rental program and wants to purchase the unit back so they can also benefit from the rental revenue or 2) The unit was going to sell below market value (i.e. The appraised $900,000 unit in the example above is being sold for $700,000, regardless of the reasons) and in order to uphold the value of the entire condo hotel property, the Hotel Owner purchases the unit for $700,000 and holds on to it until it can be resold at market value. Both scenarios offer a win-win situation for the Unit Owners and the Hotel Owner. Since every contract and/or condominium document is different, it is of the utmost importance for both buyers and sellers to understand the entire agreement before signing any sales documents. For more information on Right of Refusals, please consult your legal and accounting advisors.
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