Happening NowShort-Term Rentals / Airbnb

When a co-host agreement puts the permit in the operator's name, who actually owns the business?

Here is a clause structure from a co-hosting agreement, the kind that circulates for a two unit in a beach town, and it deserves other eyes. The owner holds title. The co-host entity is named as operator of record and, per section 4.2, is the applicant and holder of the municipal short term rental permit. Section 9 says the agreement terminates on 60 days notice by either party. Section 11 is a revenue share, 22% of gross booking revenue to the operator, with the cleaning fee excluded from gross and retained by the operator. The problem: in a lot of these ordinances the permit is issued to a person or entity and is non transferable, and it is frequently capped by zone. Whether that applies depends entirely on the text of the local ordinance, which is the first document to demand. If the permit sits with the operator and the town is at its cap, then a 60 day termination leaves the owner with an unpermitted house in a capped zone and a lot of furniture in it, rather than a rentable property. The operator walks with the customer list and the permit and can put both on the next house down the street. Second thing. Cleaning fee excluded from gross and retained by the operator means the operator's incentive on cleaning cost runs the opposite direction from the owner's incentive on booking conversion. Guests price the total. A $310 cleaning fee on a three night stay kills the calendar and the operator never feels it. What an owner should want: permit held by the owner, or an assignment on termination if the ordinance permits assignment at all, plus 12 months of listing control and review history staying with the property. Whether a permit can be assigned is a statutory and ordinance question and needs a local attorney. The open question is whether 22% plus the cleaning fee is even the market rate for this arrangement, or whether an owner negotiating that number is negotiating the wrong one while the permit clause is the only one that matters.

dmitri_248 CB2CPRO 11

Answer

marcus_hale41CapitalPRO

I passed on a small fund last year partly for this shape. Their diligence packet showed 11 nightly rentals in three towns and the permits were annual renewals held at the property manager level, with the manager on a one year rolling contract. Nobody in the deck treated that as a risk line. When I asked, the sponsor's answer was that the manager had been reliable for six years, which is an answer about a person and not about a structure.

Warrant, ask for the last two renewal applications and the fee receipts. That tells you who the town thinks the permit holder is, which may not match section 4.2. And check whether the ordinance ties the permit to the parcel or to the applicant, because a parcel-linked permit makes most of your worry go away and an applicant-linked one makes it the whole deal.

marcus_hale41CapitalPRO

2 replies

luis_carrera CS1CPRO 12

You are negotiating the wrong number, and the 22% is genuinely worth three weeks of modeling, which is part of why it pulls attention. Run it though. If gross booking revenue is, say, $92k and the operator takes 22%, that is $20,240, plus 40 turns of cleaning fee at a $60 spread over actual cost, another $2,400. Call it $22,600 of operator take on $92k. That sits inside the range commonly quoted for full service in tourist markets, so the fee is not the anomaly. The anomaly is that the asset securing the owner's whole return is a permit in someone else's name with a 60 day exit. That clause is worth more than the entire split. Make permit ownership a condition and the 22% becomes a secondary question.

luis_carrera CS1CPRO 12

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