| How Condo Hotel Rental Revenue is Split |
The exact terms of the revenue split vary from development. However, when it’s all said and done, it doesn’t really matter what the revenue split is. All that matters is what your cash flow looks like at the end of the month. Of paramount importance is whether your cash flow is breaking even or at least making financial sense each month.
Some developments will provide owners with a 50% revenue split, but because the average nightly rates and average occupancy are so low, the property will cash flow negatively each month. On the other hand, another condo hotel might only provide the owner with a 35% rental revenue split, but that owner might end up being cash flow positive, because the hotel’s average nightly rate and yearly occupancy are exceptionally high. So, don’t ever put too much stock into what the rental revenue split is. The terms of the split don’t affect your bottom line each month.
As previously stated, most condo hotel rental management companies will provide the owner of a condo hotel with a split in the range of 40% - 50%. It’s not uncommon to find the higher end luxury hotel brands lowering that split to 35%. But again, don’t think that the 35% split is a drawback. Luxury brands charge much higher nightly rates and tend to have much higher occupancy, so your ability to cash flow could be much better.
To understand how the rental management company determines what rental revenue percentage split to use, you must look at their overall hotel operation. The hotel operator must bring in enough revenue to operate the hotel at the high level of service that the paying guests expect. Much of this will depend on the hotel’s particular brand and market position. For example, a guest staying at a five star Trump Towers property will understandably expect more than a guest at a non-branded three star property.
If the operator of the hotel collects too little rental revenue, the hotel cannot be maintained at the expected level of quality and service, and they run the risk of not operating a profitable business. On the other hand, if the operator gets too much rental revenue, the unit owners will have less revenue to pay off their monthly mortgage. A fine balance must be struck to accommodate all parties.
When determining the rental revenue splits, no one formula can apply to every condo hotel property. Each property is completely different and must be assessed on its own merits. However, all the industry experts agree that the manner in which the revenue split is derived must be logical to all parties and also be substantiated through a financial
formula that makes sense to both sides.
Todd Peterson is the President and founder of the popular real estate site, PremiumCondoHotels.com
Visit http://www.PremiumCondoHotels.com to learn more about the condo hotel industry.
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