In my many years in the hotel industry, I have seen a number of new challenges. I have weathered economic uncertainty, and I have seen consumer preferences seemingly change on a dime. If there is one thing that has been consistent, it is the growing complexity of the financial and regulatory structure that all hotel owners and operators must operate within.
By complexity, I’m referring to the increase of taxes and regulations in the hotel industry. Today’s revenue-management strategies have evolved to such an extent that they seem more like something a big Wall Street bank would engage in. At the same time, the layers of taxation have multiplied to the point where it can feel difficult to keep track of your obligations.
Consider the fact that hoteliers are required to pay hotel taxes, state and tourism taxes, liquor taxes, income taxes, FUTA, SUTA and USE taxes, rental taxes and income taxes. Taxes, therefore, consume approximately 15% of every dollar of revenue. And with brand inspectors, rating inspectors, health inspectors, the Immigration and Naturalization Service and assorted government agencies all requiring or requesting detailed and time-consuming compliance reports, the logistical demands placed on hoteliers are formidable, to say the least.
I would be lying if I said that navigating today’s complexities did not occasionally prompt me to recall the industry’s Wild West origins: a time when you could rent a bedroom free and clear to the first weary traveler to plunk down cash on the bar in exchange for a key. No inspections, no audits, no lawsuits, no taxes and no insurance necessary. The biggest worry was some rowdy cowboys (and perhaps a stray bullet or two). Those days of freewheeling and accountability-free operation are long gone.
Unless, of course, you are Airbnb.
Uneven terrain
Founded in 2008, San Francisco-based Airbnb is an online marketplace where property owners can connect with (typically short-term) renters. The net effect of Airbnb—and other similar short-term rental companies that use the Internet as a platform—is to allow owners and renters anywhere to make their house or apartment into a for-profit accommodation. It is easy to see why this is an appealing business model, and the extraordinary growth of Airbnb is a testament to the concept’s popularity. The company has expanded globally, reaching hundreds of countries and facilitating informal hospitality solutions for millions of guests.
While there is much to be admired about the ingenuity and entrepreneurial dynamism behind Airbnb, a less-than-level playing field has given this crowdsourced hospitality model a number of structural advantages over traditional hotels.
Airbnb hosts do not pay taxes and do not have to meet health, safety or disability compliance standards. Compared to a standard hotel, the financial, logistical and regulatory burden is virtually nonexistent. This is not just an issue of fairness; there are very good reasons why these standards are in place. As Airbnb continues to expand, and the popularity of the “fauxtel” model continues to exert its influence on the marketplace, the financial implications for the hotel industry could be dramatic and unwelcome.
In addition to the financial considerations, there are safety concerns to be considered. Impromptu rental residences typically do not maintain updated safety measures, and do not have the resources to respond to guest emergencies. Legitimate hotels, by comparison, treat guest security as the No. 1 priority and have consequently adopted a wide range of security protections: electronic locks and digital key cards, security cameras, voice recognition software, etc.
Insurance and liability is another area where Airbnb and other similar concepts have an inherent advantage. Hoteliers must protect themselves with significant amounts of insurance (at last renewal, my own company was maintaining 17 different policies covering hundreds of potential risk areas—with new and emerging risks such as terrorism and cybercrimes joining the list). There are also plenty of sincere concerns about where the ultimate responsibility lies for unhygienic or unsatisfactory guest experiences.
It is not just hotel companies that are raising legitimate questions about this new trend. Neighbors, landlords and travelers have voiced serious concerns about the practice. You can’t help but wonder how the general public is going to feel about coming home to see their weekend “neighbors”—a rotating series of strangers—toting in luggage, wheeling coolers down the hall, and generally treating what is often a shared residential environment like … well, a hotel.
While the hotel industry continues to see stringent oversight and regulations, “lodging entrepreneurs,” continue to operate with comparative impunity. According to some, this business model is more than just a little irresponsible; it actually violates statues under federal, state and local jurisdictions.
Thus, unsurprisingly, a number of legal challenges have sprung up, perhaps most notably in New York, where a high-profile lawsuit has called the legality of the Airbnb model into question. While definitive legal sanction and a clear long-term verdict has yet to come, it makes sense for hotel professionals to continue to speak up about the real threat that the Airbnb model poses to the hotel industry.
Keep in mind, this is not just a blip on the radar screen; this is a potentially game-changing trend with possibly profound implications for established hoteliers. Airbnb was recently valued at $10 billion—and that is anything but small time.
Robert Habeeb is president and COO of First Hospitality Group, Inc., is a national, experienced, and established hospitality management, and development company serving the investment and real estate industries. Since 1985, FHG has been an award-winning pioneer in the hospitality industry. FHG has successfully developed, marketed and managed over 16 brands and 50 properties throughout the Midwest. Visit www.fhginc.com.
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