1. As noted, the BOGO can only be used once in your Ambassador membership year and must be relinquished upon check-in.

2. I'd also opt for the IC if this is your first trip to Madrid. The airport HI has no free shuttle (at least according to its website) and is out of the way, about an hour's subway ride to the tourist centre of the city. The "downtown" HI is a bit out of the way, though once you've been there, you'll find your way around the district and the subway station easily enough (Santiago Bernabeu on line 10). And while the IC is also not in the heart of the city, you might as well use your BOGO. It's a nicer neighbourhood, and you can either catch the subway (Gregori Maranon on line 10), a bus or even walk to the Prado and other tourist areas (a healthy 45-minutes). I stayed at both the HI and IC in February (beautiful weather) and had no complaints about either. As a Plat PC member I got a nice suite upgrade at the HI.

3. Staying at the airport the night before really isn't necessary. At either the HI or the IC, you're one stop from connecting with line 8 (at Nuevos Ministerios) that goes to the airport terminals. The subway is 1 Euro, plus another Euro supplement before you exit at the airport, and 2 Euros from the airport to anywhere in the city. At either hotel, the walk to the respective subway stations is about 5-minutes with a wait of maybe 5 minutes for a train to arrive. Add another couple of minutes to do the transfer to the airport line which runs every 15-minutes, you can make it from hotel to airport in less than an hour. For your flight, leave the hotel at 8:30a and you'll have plenty of time.