Industry Update
Opinion Article23 March 2018

How USALI Rules affect Hotels that add a Vacation Rental Component

By Richard B. Evans, President of Revenue Report Card LLC & Author of “the Definitive Study of Vacation Rentals”

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Changes in USALI (Uniform System of Accounts in the Lodging Industry) financial reporting rules alter hotel metric reporting when vacation rental / residential components are added to hotel properties.

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Metrics for the vacation rental/residential component have to be consolidated with hotel metrics to arrive at metrics for the entire property.

This especially affects luxury brands who carry or plan to carry, sizable "home" inventories adjacent to their hotel properties. While luxury resort brands (or developers) are able to bring in high home sales prices, high-end homes are typically rented out at lower occupancies (and higher ADR's) compared to their adjacent hotels.

Hotels that sell "economic achievement" over "home cost offset", via their rental program offering, could find themselves in contentious relationships with investors who are lead to believe that high returns will result from home purchases placed in the hotel rental program.

Great care need be taken in home sale marketing. At best, vacation rentals in high-end luxury hotel marketplaces offsets some cost but do not produce homeowner profit. This is contrary to what homeowners expect in typical vacation rental scenarios.

Most hotels that add a vacation rental/residential components include a "priority clause" in their rental management agreements that let homeowners know that priority will be given to the hotel over residences in taking reservations.

Because limited marketing platforms exist in the luxury market for home rentals (they often will not use Airbnb, Homeaway, etc.) hotel and vacation rental reservations are often coming in through the same reservation sources as the hotel; the hotel website and hotel call centers to name a few. This simply means that, when the opportunity arises, hotels will prioritize hotel reservations over home rentals.

Needless to say, with the hotel serving as the main profit center at properties, vacation rental/residential occupancy will suffer.

The effect of USALI requirements, on overall results, can create an "altered" year-over-year view of property performance as a whole.

This is especially true when the vacation rental/residential product is being rolled out and coming on line (usually over a number of years).

In Illustration 1 & 2, I show side-by-side examples of hotel and vacation rental/residential metrics and the overall effect of consolidation. You can see, in these two scenarios, consolidated ADR's are higher than the hotel "standing-alone" and RevPAR and occupancies are significantly lower.

In this example, while the hotel is performing adequately, the typical rental of sizable luxury homes shows a significantly lower occupancy.

Needless to say, supplemental statements to the consolidated financial statement, would break these differences out. The consolidated statement, however, the one that is issued to stockholders and investors, at face value, is quite different. These consolidated results, without further investigation, would seem to indicate substantial differences in year-over-year performance.

USALI Rules require that all Rental Management Agreements of one year or more be consolidated with hotel inventory.

Hotels that add vacation rental/residential components typically place automatic renewal clauses in their annual Rental Management Agreements with homeowners. In some cases Rental Management Agreements have a substantially longer term.

In the event that some residences are placed in hotel rental programs for only several months in a year, they would not be consolidated.

This is something to consider when brands contemplate adding a residential program to their hotels.

Richard B. Evans

Mr. Evans has been an executive hotelier for over 25 years. He obtained the following certifications: Hotel Administration, Hotel Accounting Executive, Revenue Management Executive and has completed the Advanced Cornell Revenue Management Certification. He has served hotels, condo-hotels and vacation rental companies as Asset Manager, CFO, General Manager and Revenue Director.

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    Richard B Evans
    President of Revenue Report Card LLC
    Phone: (954) 290 - 3567
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