22 Nov

Rental Pool Structure and Unit Sale. Ensuring Quality in the Process

 

Very commonly, Aparthotel, Condotel or Branded Residences offer a “Rental Pool Return”, which, at his simplest form, consist of revenue or profit split between developer and unit owner. We are often involved in reviewing and advising rental pool structures. In the majority of the cases we found that they are not well thought through and this will cause severe problems in future operations as well as disappointments from buyers. What developer should consider before they offer rental pool structure?

1) Cost Sharing mechanism between Hotel part and Residences Part (in case of Mixed use)

The allocation of operating costs should be very clear from very early stages. There will be the opportunity of the sharing of several common functions and staff. Developer should look closely what will be the direct costs allocated to residences and what will be the shared part to other functions.

2) Cost covered by Units owners and costs covered by Developers.

This allocation of costs is proposed by the Developer as part of the Sale process. There would be two extreme cases and several cases “ in between” :

a) Unit owner to be paid with “Net Revenue”- Some Developer would propose to absorb all the operating costs and allocate “Net Revenue” to buyers (typically 20% to 30%, but it could be as high as 40%). In this case, Developer will take more risk related fix costs but more control over the accounting allocation. It is very important the definition of “Net Revenues” and making sure that some variable costs are still deducted at the top.

b) Developer to be paid with “Net Revenue”- In certain cases, Unit owner, via a Body Corporate, will become the main entity absorbing costs. The Developer will become a mere “management entity” and will be paid a fix percentage of Net Revenue (or/and Profit). In this case, Developer will reduce the operating risks but it will also affect the potential upside and business exit value.

We always suggest a “way in between” the two case above, but it largely depend on Developer objective and other offerings in the competitive market.

3) Management Company roles and obligation unit owners.

There will be several implications in the HMA regarding the unit owners/developer/operator relationship. We strongly suggest to properly structuring the HMA considering this three parties affiliation.

4) Buyers’ Use and regulations

The obligations of the buyers in regard the use of the property and common area need to be clear since the beginning of the sale program.  In several cases, the Developer will own the common areas and front of house and the unit owners will only be allowed to make use of it, often covered by usage fee paid monthly. The guests sent by the units’ owners would also need to comply with rules and regulation and the costs related use of the facility need to be properly accounted for.  Unit owners could be subject to proper check in and registration process as it would be applied to transient guests, especially if the property is managed by third party operator.

5) Buyers’ complimentary stays or additional benefits

How may complimentary nights shall the units’ owner be allowed to have? How much shall we charge in case of extra nights? Shall we have black-out dates? Shall we offer breakfast included? Shall we offer exchange programs with other properties? Will they be allowed to sell their free night on an open market? Those and other 100 questions will need to be well covered as part of the Rental pool agreement and marketing campaign.

Bottom line, have the right plan well before you start selling units!