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Condo Hotel Applications - A Twist on the Traditional Hotel

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October 01, 2008
Condo Hotel | Technology
Douglas Clark - dclark@tyleryan.com

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© 2008 Hospitality Upgrade. No reproduction without written permission.

The fundamental difference between condo hotels and traditional hotels is the addition of unit owners to the equation. Owners impact the technology that manages the business process itself and necessitate closer attention to detail.

The business process is substantial as owners alter the traditional level of control that a hotel has over its product.  Instead having unilateral control over all units, the control must first be contractually developed and negotiated when creating the condo hotel product.  If too little control is granted to the prospective owner the product will not be as attractive to purchase.  If too much control is afforded the owner, the hotel management company may find it difficult to operate the product profitably.  There are a few fundamental business process changes that differentiate traditional hotels from condo hotels.

Owner Rental Agreement
The owner rental agreement between the owner and management company is what defines the business relationship. This agreement must then be implemented operationally by the selected software applications. This can either be accomplished by an integrated module of the PMS system or by a third-party application that is interfaced to the PMS.  This becomes more complex when the agreements may vary amongst the individual owners.  Specific parameters that must be defined are: are revenues pooled and shared or by owner? (may depend on location legislation); is the rotation based on revenue, room night or a combination of both?; does the owner occupancy of units affect placement in rotation or revenue pooling?

The owner rental agreement can also define a variety of terms regarding the owner’s utilization of the unit such as booking lead time, total nights/stays, black-out dates, reservation rights for guests of owners and permitted number of comp nights by the management.

Also defined in the owner rental agreement is the revenue split with the management company and all of the associated fees such as marketing, housekeeping, HOA, FF&E reserves, etc.  These fees are either included in the split or invoiced separately.

Condo hotel software must not only implement the owner agreement in a fair and unbiased manner, but must also produce reporting that clearly identifies revenues, splits, reserve balances, etc.

Rotation is a key element of the condo hotel business model.  Rotation of rooms to better spread wear and tear is a nice feature of many PMSs.  A condo hotel on the other hand is contractually obligated to offer rooms in a fair and unbiased manner to ensure that all individual owners have an equal opportunity to realize revenues. 

Often the room selection is almost entirely based on guest preferences and rotation rules do not apply. If a guest wants a deluxe one bedroom, ocean view, ground floor unit that is away from elevators, there may only be a couple of rooms that meet the criteria although there may be many of the specific room type.  If one of the two is already reserved for a portion of the requested stay, then the choice narrows down to one.  Problems arise, however, when the rotation rules actually result in lower revenues.  In the mentioned example, the first room that was booked was for a single night on a promotional package rate, whereas the second booking was for seven days at full rack.  While the first unit’s owner was correctly given priority in booking order, the second unit’s owner receives much higher revenue.  This effect is exacerbated if the first unit remains vacant for the balance of the available nights as the unit is now at the end of the rotation queue for that room type.  A key determinant to this is whether units are blocked at point of booking or at time of arrival.  Some condo hotel management applications can book based on room nights, revenue or a combination of both, but this must be clearly spelled out in the owner rental agreement.

Unlike a traditional operation, hotels cannot identify last-sell rooms based on issues such as noise and view unless these were defined in the original purchase agreement and the owner rental agreement.  If not so noted, the management company is contractually obligated to place guests in those rooms based on the rotation schedule.  The guest may then complain and request to be moved, but that must be his choice.  Knowingly creating an opportunity for guest dissatisfaction is contrary to the service ethic of most of the high-end brands that typically are involved in condo hotel management.

Condo hotel software must not only implement the owner agreement in a fair and unbiased manner, but must also produce reporting that clearly identifies revenues, splits, etc., but can also demonstrate that owner agreement was indeed applied fairly.

Any hotel management company depends on having an inventory of available rooms to sell and to be able to forecast based on that inventory.  The management company naturally wants to have the maximum amount of inventory available for purchase and particularly in peak seasons.  This is fairly straightforward in the traditional model as, barring out-of-order rooms, the inventory is a known constant.  A condo hotel differs from this both initially and long term.  When owners purchase their units they are under no obligation to place them in the condo hotel rental program.  In fact, the developer must not even allude to the potential inclusion in such a program or risk SEC scrutiny and change the transaction from a real estate purchase to an investment.  The condo hotel management company will therefore be uncertain of the total potential inventory until the last unit is sold and the owner elects whether or not to enter into an owner rental agreement.  In the long-term, the inventory is then affected by how often, and in what periods, the owner chooses to occupy the unit.

There are essentially two types of condo hotel buyers; those who wish to have a vacation home that may have some of its costs offset by being rented when they are not resident, and those who want an investment that covers its own costs, but also can be used as a vacation home as needed.  The first group places the greatest strain on a hotel’s inventory as the unit is occupied more frequently by the owner and often during peak revenue periods.  The second group is preferred by the hotel, since it is financially incented to limit owner occupancy and especially in peak seasons.  Hotels therefore like to have owner rental agreements that restrict owners to total nights/stays, black-out dates and booking lead times.  The condo hotel management application must be able to accurately forecast future availability.

Owner Scrutiny
The same two types of owners vary in the attention they pay to their investment in a condo hotel unit.  Some only review it annually when their accountant draws up their taxes.  Others call the front desk daily to find out if a unit was sold the previous night or is booked for tonight.  Some owners have been known to bring doughnuts and coffee to the reservations and front office staff in the hopes of influencing their choices when blocking units.  Condo hotel software that permits online viewing of unit status and other financial information is extremely useful in reducing hotel staff time being occupied with owner relations.

Owner scrutiny, particularly with the current economic downturn in the U.S., is likely to become more intense.  Since developers are not permitted by the SEC to discuss the potential revenue opportunities of the unit without making the purchase and investment with tax repercussions, owners have to analyze the opportunity on their own or seek assistance.  This has resulted in some unrealistic projections of potential net revenue that often does not fully cover the carrying cost of the unit.  With both occupancy and rates being driven lower, owner return will be further reduced. 

Developers are facing legal challenges that units were offered to prospective owners with some representation that they could actually realize revenues.  If this can be proven, and that the transaction should have been registered as a security, the purchaser is entitled to have the deal rescinded and be repaid. 

Owners may also begin to scrutinize the management company more fully as well.  Typically owner rental agreements survive the sale of the unit and can therefore make the resale more difficult or at a lower value.  This is particularly true if the reason for sale is a lack of return.  Owners may begin to seek ways to terminate the owner rental agreements.  This is where the condo hotel management application capabilities become critical.  It must be able to be proven that the software is managing the rotation, assessment of fees and revenue splits exactly as defined in the agreement.  Also, even if an application is capable of this, it is not always possible to track an individual unit through the rotation and specifically determine that the rotation was correctly handled at each point.  Typically, when users manipulate the rotation, the reason why a unit was bypassed is not recorded.  If the affected owner is bypassed for a higher revenue booking than the one that is eventually assigned, he may very well have cause to challenge the hotel.

Some owners are already trying to evade the owner rental agreement at times by renting the unit out themselves and then telling the hotel the occupant is a guest of the owner.  Depending how well written the agreement is there may be little the hotel can do about this and must simply forgo its share of the revenue.  The fact that owners are trying such tactics is an indicator of how importantly they view their financial investment.  Any path that might better their return is likely to be considered.

Changes in the fundamental business processes of hotels are crucial for operators to understand and incorporate.  Traditionally, there have not been potential litigation issues associated with room blocking, but in the condo hotel world there may well be.  Hoteliers are also not accustomed to being accountable to others for the availability and management of inventory.  Condo hotel applications are not only going to have to permit the flexibility to accommodate a variety of complex configurations as marketing strives to differentiate its product, but the process must be transparent and documented throughout.  Managing such high value assets as condo hotel units and meeting very demanding contractual obligations with many individual owners is a new twist on traditional hotel operations.

Douglas Clark is the principal at the TyleRyan Group which specializes in accomodating tomorrow's technology in today's business decisions. He can be reached at dclark@tyleryan.com.

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