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Well, we know it's poorly built because it started falling apart shortly after they moved in . . . I think my idea, for fanfic, was that it was an isolated hippie commune. It was nowhere near Dream Castle. It was just out in the middle of nowhere.
It used to belong to Night Shade and he sold it to Mr. Moochik to pay off some of his debts. The ponies saw it as a good real estate investment with all of the amenities it had and since their castle was outdated and in need of serious remodeling anyway (all those attacks on the ponies had taken their toll on the foundation of the castle), they gave it to the Grundles and moved. (This wasn't really as nice of a move as they wanted everyone to think because the Grundles spent a lot of time and money trying to fix up the place so it was useable.) Mr. Moochik failed to inform the ponies of the serious magical termite issues in Paradise Estate so there was a lengthy court battle over who was going to pay for it and by the time everything was sorted out the Grundles had decided it was easier to get the flutter ponies to de-smooze Grundle Land and they moved back, leaving Dream Castle to fall into ruin. However, the legend of Dream Castle was passed down through the pony generations and was later rediscovered by a young explorer named Daring Do...
In my head PE was always like a ponified version of the Golden Girls' house.
I was watching Fawlty Towers last night and I changed my mind . . . It's obviously a run-down hotel, poorly run by a frentic, angry, rude pony.