The Current Condo Hotel Model is Broken

We believe that if we asked ten different condominium owners (each from a different condo resort or condo-hotel (condotel)) where units are marketed for rent to travelers (transient guests), we would find that at least eight (if not all) of them would express unhappiness with the quality of the operation of the services at the condo resort or condotel. We also believe that they would claim that the upkeep of their respective condos (and/or the gross rental revenue stream) are below what they would find to be otherwise achievable with different management. However, the management company may not be exclusively at fault. The traditional condominium rental management and condotel model wherein the rental management splits the gross rental revenues with the unit owner – usually about 60% for the condo owner and 40% for the condo rental manager – is a broken business model. Regardless of the split – which varies (e.g. 50-50, 65-35, 70-30, etc.) depending on the rental rates in the respective market (for ease of reference, we will refer to it as the 60-40 model), it creates a misalignment of interests between owners and managers.

The problem may be compounded by the reality that there are indeed some bad management companies. Whether it is due to a lack of professional integrity, a lack of competence, or both, not all management companies are created equally. However, the leading cause of misery among owners of condominiums that are for rent as lodging to transient guests is the misalignment of interests caused by the 60-40 model. In this model, the management company makes its money on whatever margin remains between its share of the rental revenue and the operating costs of the rental program. This creates an incentive for the management to skimp on the operation, leading to a business with low quality staff with little to no training wearing very bad uniforms (or none at all) and cheap, low grade operating supplies. It also creates an incentive to skimp on the marketing effort to fill the condos at the highest rate possible.

We personally know first-hand of two condo resorts and condotels that, as of my writing this, do not have a general manager and have not had one for over a year due to the management company’s unwillingness or inability to provide a customary salary and benefits. These same management companies are also delinquent in remittance of occupancy fees and sales tax to the local authorities which in most states becomes the exclusive liability of the unit owner and an encumbrance on the condo should the owner wish to sell it. Not surprisingly, the guest experience at these resorts has been very poor as they each rank poorly on TripAdvisor™ and other third party travel websites.

“The Hotel Model”

We’ve succeeded numerous times in winning over owners, such as at a condo resort in the Orlando, Florida market by offering this new business model for condo resort and condotel rental management. We refer to it as the Hotel Model. In the Hotel Model, we approach the condo property as we would a hotel, charging only a relatively small management fee based upon both a percentage of gross revenue and a percentage of net income to the unit owners. While the percentages vary depending upon both the historic and anticipated future revenue and income streams, it is usually no more than 5% of gross and 5% of net. 

The 5% management fee on gross revenue and the operating and marketing expenses are deducted from the gross rental revenues and the remaining net rental proceeds are distributed to unit owners.  An owner’s share of the net proceeds is the same as the owner’s unit’s percentage of gross rental revenue received by the rental program in the same period. Since the management is earning a portion of the management fee based upon net income, the management’s interest is now aligned with that of the owners’ – maximize revenues and control expenses.

For resorts or condotels with revenue-generating amenities or resort fees, it is important to note that this model entitles the unit owners to all of the gross revenues, not just the rental revenues.  Typically, the management company kept income from ancillary sources at the resort creating a whole other set of conflicts of interest between the management and the condominium owners.  The new bottom line for management under the Hotel Model is not how much income can management squeeze out of the owners’ assets for itself, but that management now clearly works for the owners and in the owners’ best interest.

Furthermore, since there is little to no risk of the management company operating at a loss, there is no incentive for cutting corners on unit upkeep and overall quality operation of the rental program and no reluctance to implement an all-out, first class marketing effort. These attributes help to increase the condominium units’ value and guest satisfaction. And, of course, owner satisfaction!

The Indigo Road Projects