February 11, 2008

Ghirardelli Square & Fairmont Heritage Place: Overview And Sales

Ghirardelli Square Aerial

Erected in 1893 to house the Ghirardelli chocolate factory, once a locals destination, and having fallen prey to the Fisherman’s Warf tourist trade over the past couple of decades, San Francisco's Ghirardelli Square is undergoing a major overhaul and rebirth.

Purchased by JMA Ventures in 2004, the chain store and souvenir shops are being shown to the door and replaced with local cafes, restaurants (think Gary Danko), retail (including an offshoot of COPIA) and a spa. Five of the brick buildings are about four months away from being reborn as 53 one, two and three bedroom “homes” (Fairmont Heritage Place, Ghirardelli Square). And the homes are being sold in one-tenth ownership fractions.

Fairmont Heritage Place, Ghirardelli Square Living Room Rendering

The 530 fractions are priced from $262,000 and are roughly 45% pre-sold including a recent acquisition of 120 fractions by Exclusive Resorts (a nice nod of approval). 300 underground parking spaces are available to serve the residences (dedicated spots), restaurants and retail. And the house car will be a Maserati Quattroporte (no word on whether or not you’ll have to use the house driver).

Fairmont Heritage Place: Ghirardelli Square [fairmontheritageplace.com] [Virtual Tours]
Ghirardelli Square, San Francisco [ghirardellisq.com]

First Published: February 11, 2008 4:33 PM

Comments from "Plugged In" Readers

I really do not understand the whole fractional ownership "thing". I was on Maui recently and you cannot walk down any beach without some salesperson stopping to make you a pitch for one of the fractional ownership projects going on over there (and there are dozens!).

If I lived in (?) and wanted a place to stay while in San Francisco, wouldn't I be better off investing the 300,000 and using some of the interest to stay at any hotel suite of my choosing? Is the whole point of these type of places so you can say you "own" a place in San Francisco, Maui or Napa? Are there any tax advantages?

Posted by: anonandon at February 11, 2008 4:47 PM

Are my eyes playing tricks on me or was there just a 2nd comment here referring to recent comments that Satchel made on the old Ritz thread regarding its cash flow? That comment seems to be gone now.

Anyways to save you the searching, you can find that thread at : http://www.socketsite.com/archives/2008/01/real_reductions_and_returns_at_the_ritzcarlton_residenc.html#comments

[Editor's Note: No tricks, but let's try to keep the two discussions separate (two very different situations in terms of sales and financing of the developments).]

Posted by: The Milkshake of Despair at February 11, 2008 5:21 PM

Let's see ... $300,000 for a 1/10th fraction (36.5 days). That's $8219 per day PLUS maintenance fees of god-knows-how-much. I think that for $8219, you could spend a month in a pretty nice hotel and have change to spare.

Repeat 36.5 times. Does this make any economic sense at all? Do these types of units have any resale value? Do they appreciate over time? Income from hotel operations? Why would *anyone* even consider this kind of "deal"?

Someone, please enlighten me.

Posted by: Jimmy (Bitter Renter) at February 11, 2008 6:23 PM

Jimmy - I am sympathetic to your comments - but of course the $300,000 doesn't just buy you 36.5 days - it buys you 36.5 days EACH YEAR IN PERPETUITY.

But, having now corrected your math, I totally agree that this is a crazy deal.

Posted by: Robert at February 11, 2008 7:14 PM

The images of the Ghirardelli Square both here and on their own website look almost more like a scale model than reality. But back to this "investment". What is the difference between one of these units and a hotel suite? In reading through their site, the furniture and even the artwork are selected by the developer. What is to stop one of your other "partners" from destroying the carpet when they bring their dogs? How in the world would you sell your "share" in 20 years? I cannot figure out what the advantage is of this type of ownership, but if these were a traditional condo, I would be VERY interested in this location, but not at these prices.

So if the share is 1/10 of a year, would that mean that these 2bd's without a view would cost 3.5 million to buy completely? That is a LOT of money to live above a shopping center, even one as iconic as this.

Posted by: anonconfused at February 11, 2008 7:36 PM

To try to get apples-to-apples against a hotel, consider an interest only mortgage (6.25%) on the entire amount. That comes out to $1562.50/month or $18750 per year. Divided by 36.5 that's about $513/night. For a high-end 2br, that actually compares quite favorably against a high-end hotel. However, the website does reference "ownership fees" that would impact this calculation, and hotel rooms have the advantage of being available just about whenever you want them (vs. a fractional where you enter a lottery for the dates you want).

Posted by: MattP at February 11, 2008 8:39 PM

MattP - I don't at all understand your math and how you get 500 bucks a night out of nineteen thousand a year. Seems like you want to consider tax and HOA in the equation too but the cost should still be a lot lower that $500/night. You've got to figure in some overhead for whatever organization organized the property and schedules visits, but that's no where near enough to justify $500/night.

Amused - that "scale model" effect is a photo editing trick known as miniaturization that plays on our expectations of how microphotographs should look. Its an interesting trick that can also be used in reverse to make a property look bigger than it really is. Gee. I wonder if anyone's ever tried that in MLS photos ?

To all who are trying to rationalize the economics of a fractional, I'm with you. I've had the pleasure (NOT!) of liquidating several timeshares (the bastard cousin of the fractional) and can tell you that they are not exactly a good vehicle for investment. Typically the open market value of timeshare resale is about 25-50% of its current "asking" price from the sales office. There's a heavy premium for buying from the sales office. I even tried to liquidate a timeshare that had gone negative in value. I could not even give it away.

I doubt that buyers into this property have to worry about their values going so negative that they cannot give it away. There should always be some positive value to a property in this location. Seems like a quality product.

Does anyone ever profit significantly by buying timeshares/fractionals at retail and reselling later ? I can see how the developer can rake in a bundle, but how about the average buyer ?

The reason I ask is that one can certainly make a bundle if at the right time and place in the normal RE market. How can this be done with fractionals if their value drops 50%+ as soon as the ink on the contract dries ?

Posted by: The Milkshake of Despair at February 11, 2008 9:44 PM

Not to mention that this place is an extra 45min on your cab ride from the airport!

Posted by: EH at February 11, 2008 10:02 PM

Milkshake: Calculation was $18750 per year in mortgage (interest) payments, divided by 36.5 nights per year (as you own 1/10th of the unit) -- comes out to about $513 per night.

While I agree that this ignores some (potentially significant) costs, I think the comparison to a high-end hotel is still valid. For example, a standard room at the Four Seasons is going for $550/night plus tax (I picked a random week in October) -- and that's for a one bedroom, so double that for the equivalent space. Maybe these units won't be quite at the same level as the Four Seasons (and you certainly won't get daily room service included), but I think the point still holds.

I'm not saying these are a great deal, but I don't think they're quite as bad as everyone is making them out to be. Of course, if the unit depreciates significantly, then all bets are off.

Posted by: MattP at February 11, 2008 10:27 PM

Pretty much agree with everyone on how the whole fractional math doesn't add up, but let's remember one of the main reasons fractionals have taken off in the last couple of years is that they are now typically selling a network of properties, not just one. So you can do a week in Paris, Cabo, Maui, NYC, wherever for joining the right fractional company. Not sure if this one has network partners that you could trade days with, but that's a big selling point of a lot of them now. A friend of mine sells fractionals in Hawaii and she mentioned that they make the best sense for families on vacation who want the convenience offered by a hotel (linen service, etc.) but in a more residential setting. And lastly - these typically have monthly/annual HOA dues similar to a condo so your per night cost is going to be above the calculations for just the loan interest.

Posted by: Miles at February 11, 2008 10:30 PM

Timeshares are a scam. It's amazing that people still buy them. Why not just stay in a hotel and invest that extra 250K you have lying around? I've never heard of anyone making money on a time share.

Posted by: snark at February 11, 2008 11:14 PM

Can you get a favorable rate, interest only loan on a fractional interest? How would the lender foreclose? Resell your interest for pennies on the dollar? I think the costs will be much higher than the Four Seasons.

On the other hand, if you can pick up an interest in this place in 5 years for 20 cents on the dollar, it might not be such a bad deal.

Posted by: tipster at February 12, 2008 7:06 AM

The key problem to these types of properties is that you have to fit THEIR schedule. Too bad if your lottery selected days of use are when your children are in school. One shareholder gets July 4th weekend, you get January 20th. Give me a break!

The same thing is happening all over Hawaii and the Palm Desert area now. Many projects had started construction as "luxury" condos, but now that the market is crashing , they have switched to time-shares.

I rented a 2bd in Kapalua (Maui) with Kitchen,lanai overlooking waves, private jacuzzi spa off master bath, garage, with views from both bedrooms overlooking golf course and ocean for 390 a night. Like the Fairmont Project, I got maid service, a "stocked" kitchen and fridge, and had use of all club facilities (gym, pools, golf course, clubhouse, etc.) So what is Kapalua doing now?, they are building a "luxury" timeshare project down the beach where lucky "buyers" can spend over 1 million to have a fractional interest in the same location I spent two weeks at for about $10,000 including meals, airfare, and rental car.

Calling this an "investment" is insulting.

Posted by: anonfedup at February 12, 2008 7:21 AM

Fractionals are a great thing. We've gone to Maui 3 times now on special deals offered by the bozos trying to sell us fractionals. The Westin Ka'anapali - 5 star all the way - HUGE suite, really nice. $700 for 5 days/4 nights, and that included a free rental car + $100 in scrip to use at the restaurant. As soon as I open my mouth at the sales presentation and start lecturing the sales guys on finance they throw us out of the presentation (you can imagine how that goes!). So, about $100 per night for a suite that would easily cost $500-750 per night in exchange for 5 minutes of the presentation (until they throw me out)? I'll take that every time.... Not sure why we keep getting the offers, but we didn't get one this year, so maybe they've given up on selling me a $300K perpetual week in Paradise.

Posted by: Satchel at February 12, 2008 7:26 AM

Satchel, I have thought about using the Westin "offer" myself, but their salespeople are so annoying, and I go to Maui to relax. Those Westin salespeople are EVERYWHERE trying to sell their product, from the airport, to walking down the beach, even going into galleries in Lahaina trying to get some poor soul to come listen to their presentation. They remind me of what I call "door to door religious salespeople" who show up clean shaven and in neckties to lecture me on why I am going to HELL if I do not give them my soul and MONEY. I would not be suprised if the Fairmont project does not put salespeople around the wharf and union square trying to lure customers the same way.

Posted by: anonfedup at February 12, 2008 7:33 AM

You're right, anonfedup, they are annoying. My wife is excellent at dealing with people, though, so we make a good team. She always manages to get us an upgrade of the room/suite as well, by nicely pointing out some defect (the last time it was a story about how our 3 year old has been talking for months about the water "slide" and that the new building they put us in was a little farfrom the slide....) We just put off the salespeople with talk about how "the baby" is cranky, and we'll catch them later. Finally, on the last day or so, they pigeonhole us, and that's when I get thrown out of the presentation! :)

The last time we went (September 07), the place seemed very empty. We stayed at the new condo/fractionals that they just built out (can't remember the name), but they were very niceplaces - much better than the hotel portion we went to in '05 I think. Anyway, it's all a game - my wife loves to look for bargains. All things considered, I did pretty well with her!

Posted by: Satchel at February 12, 2008 7:40 AM

tipster : your strategy of waiting 5 years and then buying on the secondary market is the way to go. However I think you have set your mark too low. I doubt that this property's price will drop to 20% of retail. Think 35-45% of retail price.

And if anyone's wondering why the retail price is so much higher than the real market price, it is because the sales cost is so high. It costs a lot to compensate salespeople scattered all over the place to herd tourists to your property. It is also expensive to fly prospective buyers out for free vacations with the hope that some will sign.

Posted by: The Milkshake of Despair at February 12, 2008 9:41 AM

Satchel you are my hero! I always wanted to go to one of these subsidized vacation and brush off their sales pitch, but my family won't be up to the game.

By the way, can you share some of the arguments you use to lecture the sales guys on finance of timeshare?

Posted by: asiagoSF at February 12, 2008 10:21 AM

asiagoSF - Here's an argument you might want to try. Ask what you can expect as a net resale price if you want to sell after 5 years. Twenty bux says that the answer will be the non-answer "You will love this place so much that you will never want to sell. You'll want to pass this property down to your kids."

The salespeople know the real answer and realize that it will be a deal killer.

Posted by: The Milkshake of Despair at February 12, 2008 10:28 AM

The only way that these things make any sense at all is at the high, high end: St Regis, Four Seasons, or equivalent.

But as luxuries, not as investments.

What you get for your capital, borrowed or not, is the ability to stay in a 2 BR suite for the price of a standard (i.e. the cheapest) room in the equivalent hotel. It's less flexible than an equivalently luxurious condo pied a terre but it costs less and you don't have to furnish, maintain or manage it. Plus you get daily maid service and don't have to load the dishwasher.

It's similar to buying a $100,000.00 car or owning a private jet, or a fraction thereof. There are a lot of much more sensible alternatives. And although the resale value of these can sometimes be quite good, it's usually not uppermost in people's minds when they make the purchase.

Shoes probably provide an even better analogy. But I'm not even going to start...

Posted by: Salarywoman at February 12, 2008 10:42 AM

Someone help me out here. In my (poor, plebian) mind, the Ritz Carlton and Fairmont seem to be equivalent projects (in that they are both, high end fractionals). I would put the Exclusive Resorts portions in the uber-high end (luxury) market. Currently, the Ritz fractionals are, as far as I can tell, selling for around a ~15% discount on the secondary market. We've also seen on past threads that middle-of-the road fractionals (Marriot Grand Residence, Tahoe) seem to be losing up to 50% of their value. When depreciation is the norm, I would think fractionals are a hard sell. I agree that at the extreme luxury end of things, they are probably treated as a consumptive purchase.
For what its worth, Carol Llyod's Surreal Estate column had a good article about DYI fractionals, which seems to be the way to go if you want more bang for your buck.
http://www.sfgate.com/cgi-bin/article.cgi?file=/g/a/2007/05/11/carollloyd.DTL&type=printable

Posted by: EBGuy at February 12, 2008 11:11 AM

EBGuy,

DYI fractionals: Do Yourself In?

Posted by: tipster at February 12, 2008 11:59 AM

fractional ownership should be banned in San Francisco. there is zero redeeming social, economic, or environmental value. people can stay in freaking hotels.

Posted by: duh at February 12, 2008 1:56 PM

The fractional concept escapes me as well.

As the finances never seem to pencil out in a reasonable way, the attraction for some people may be in the real or imagined sense of familiarity, of always coming back to the same place.

Maybe fractional buyers are the well-heeled version of people who travel all over the country in their RV's, but would never want to stay in a hotel and never, never, use a strange toilet.

After hours behind a long string of RV's inching their way across the tundra towards Alaska, I suddenly realized it is all about the toilet seat.

Posted by: redseca2 at February 12, 2008 3:25 PM

These extremely expensive timeshares are for the uber rich where $300k isn't that significant.

Timeshares are profitable because people pay for them and then don't use them. Such consumer idiocy is not uncommon. Sales people jump on that, but that doesn't mean that the whole concept is a ridiculous proposition.

Timeshares can be handy. My grandmother bought a timeshare years ago and has used it every year since. It's $75 to change your week and $75 to change your location. Essentially, that means we can get a two bedroom with kitchen hotel room at a wide variety of locations and times for $150/wk. Since the timeshare is now paid off, thats not bad at all.

You can also give usage of the timeshare to other people. My grandmother regularly "gives" vacations to people in our family. Plus, the timeshare can be inherited so when she dies, our family will still have access to this relatively inexpensive vacation plan.

Posted by: workerdaemon at March 2, 2008 7:33 AM

Well, all you investment experts out there, you are missing the point that this is an investment in enjoyment, pleasure, just like any quality travel experience. You really invest in yourself, and its value is subjective. Now San Francisco obviously does not make sense for a Pat Robertson fan; God forbid you might run into a gay person or meet someone who is pro-choice or anti Iraq war. If you want the beach, this is not your place either. Otherwise SF has lots to offer--good music, ballet, museums, restaurants, mild climate, beautiful scenery, etc. not to mention the nearby Napa Valley/Sonoma wine country. Price wise compare the cost of a two-bedroom suite at a top hotel, not just an ordianary room at a cheap motel in the outskirts. But if you are a "flipper" who wants to make a quick buck in a couple of years, forget it; where can you that anyway these days? But if you are well off, not necesarily "uber-rich" and want to spend 35 days in one of America's nicest cities, this is a fair deal. Europeans with their strong Euro will likely flock to it so no need to be all that concerned about losing your shirt.Many of the above comments are generalizations, it seems.

Posted by: Dutch at March 24, 2008 7:50 AM

No, Dutch, you're missing the point. It has nothing to do with whether you will enjoy yourself here or that the Euro is strong, much less that it's in San Francisco or the people you will meet there

The point is that you can enjoy yourself just as much at a good hotel in SF for a lower cost--plus you can pick your own dates at the hotel! Why should a tenant pay more for inconvenience?

Posted by: Matt at March 25, 2008 11:14 AM

redseca2.. you forgot the annual maintenance fees!!!

Posted by: Mick at March 25, 2008 9:23 PM

if you purchase a fractional with $270K initial investment, you forgo investment returns on the $270K. 3-4% after tax returns equal approx $8-10K per year. plus you need to pay $10K hoa per year, i think, it works out to be approx $500-550 per day for a very upscale furnished 2bedroom in ghiraldelli square that comes with 2 parking spaces. it appears attractive on surface, but really it depends on -

a) whether you have a flexible schedule and be able to use up those days, or trade those days against other fairmont heritage properties. it may make sense if you live in the suburb - somewhere within 3 hrs drive of fisherman's wharf, otherwise i'm not sure.

b) the value of the option in keeping an extra $300K cash around for unexpected needs or investment opportunities. for the very rich, there's not much value.

c) and of course, future after market prices of these units.

unlike ski resorts, value of "peak" periods is marginally less for urban fractionals. you can go for a weekend or a single night (when you are too drunk to drive) based on availability. don't forget you need to pay $100K just to own a parking space in midtown manhattan these days. i believe (not too sure) a fractinal owner can use the garage anytime, whether you are staying for the night or not.

Posted by: topcat8888 at April 10, 2008 10:39 PM

re (a) above, i was told that a fractional owner can also give unused days out to relatives, or rent them out if you're lucky, or trade into Fairmont hotels stays globally.

Posted by: topcat8888 at April 10, 2008 11:03 PM

Sorry Matt--I don't think you get it. My Euro comment relates to the sales potential of the condo complex, obviously, and I said this because there were some comments about "getting stuck" with an unwanted property. As far as hotels are concerned, have you ever heard of "subject to availability" and the "sold-out sign"?It happens a lot in SFO if you want a top notch place.(SF is big convention town). Try to reserve a two-bedroom suite at a five-star hotel in SF and see what it will cost you. As far as "meeting people" is concerned, hotels are not practical with guests moving in and out every day.

Posted by: Dutch at April 19, 2008 5:00 AM

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