The historic Hotel Del Coronado near downtown San Diego is the latest hostelry to add high-priced condos to its amenities menu. Scheduled to be built over the next 15 years by investors on pricey Coronado Island, the luxury units are plums for a developer in a resort market with high barriers to entry.

The right to build new condos was a likely reason the current owners of the hotel — a partnership of KSL Resorts of La Quinta, Calif., Kohlberg Kravis Roberts and Strategic Hotels and Resorts — could afford to pay a reported $385 million in late 2003 for the 679-room hotel.

“That was just an astronomical price, but if you look at the development strategy, [the investors] could afford to pay a higher price that would not otherwise make sense for a hotel,” says Nathan Moeder, a principal at London Group Realty Advisors of San Diego.

With prices on the first eight units ranging from $2.3 million to $3.3 million, the condos are entirely new, stand-alone construction, and are not attached to the 118-year-old hotel.

To allow condos where the City of Coronado had previously only planned for hotel guest rooms, city officials are granting permission for the owners of the landmark to sell the condos on a “limited-term-use” basis.

“Technically, they are guest rooms,” says William Dodds, a vice president of development with KSL Encinitas Resorts. “We don't call them condominiums.” The distinction means owners cannot stay more than 90 days annually in their condos and can spend no more than 25 consecutive days in any 50-day period.

Condo buyers can enter into a management contract with the hotel, which will treat the homes as guest rooms in the owners' absence. “From the hotel guest viewpoint, the experience will be seamless” between the Hotel Del and the condominiums, according to Dodds.

The first 35 units out of a total 220 are to be completed between December and July 2007, with the remainder to be built over the next 15 years.

The “condo-tel” concept works well in “the best locations,” preferably with a well-known name or brand, according to Moeder with London Group Realty Advisors. “There is cachet to the name of the Hotel Del,” he adds.

Even though the condo market is beginning to soften in San Diego, that is unlikely to put a dent in the pricing of luxury units on Coronado Island, according to Moeder. In downtown San Diego, the median price of new condos was $495,000 in August, a big drop from $654,000 a year earlier, according to Dataquick, a real estate information provider.

“There is still a demand for luxury units, as along as they have a good amenity package, including an attractive community,” Moeder says, citing the reportedly strong pre-sales activity for “condo-tel” units currently under construction at the Hard Rock Café in downtown San Diego.

Building and selling the “condo-tel” units at the Del Coronado was a necessity, according to Dodds, who adds that construction is “the only way we could economically build out the master plan.”

That plan includes a new conference center ballroom, as well as a new underground parking structure, a new access road across the property, and fees to city agencies for street improvements. The owners must also provide a 14-foot-wide public access way along a previously private beach.

Those conditions are costly, but with the condos priced at $2,000 per sq. ft. Moeder believes that “the owners are in a position to make money.”