From the desk:Short-Term Rentals / Airbnb

The co-host agreement gives the operator the permit. Who owns the business?

Reading a co-hosting agreement someone sent me for a two unit in a beach town, and there's a clause structure I want other eyes on.

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 I see: in a lot of these ordinances the permit is issued to a person or entity and is non-transferable, and it's frequently capped by zone. Whether that's true here depends entirely on the text of the local ordinance, which I've asked for and not received. If the permit sits with the operator and the town is at its cap, then a 60 day termination doesn't return the owner to a rentable property. It returns them to an unpermitted house in a capped zone with a lot of furniture in it. The operator walks with the customer list and the permit and can put it 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 doesn't feel it.

What I'd 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, I know.

What I can't decide is whether 22% plus the cleaning fee is even the market rate for this, or whether I'm negotiating the wrong number while the permit clause is the only one that matters.

Answer

2marcus_hale41CG4A

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.

2 replies

1luis_carrera Get yours

You're negotiating the wrong number, and I say that as someone who would happily spend three weeks modeling the 22%.

Run it though. If gross booking revenue is, say, $92k and the operator takes 22%, that's $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's inside the range I've seen quoted for full service in tourist markets. So the fee isn't 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. Price of that clause is not 22%, it's the entire property. I'd make the permit ownership a condition and be indifferent to the split.