Navigating the Evolution of Lodging… and Multifamily Investment

Over the last decade, we have seen the rise of concepts like AirBnB that offer "short-term rentals" or "STR's," meaning a tenant can rent a home for as little as one night - compared to long-term rentals (i.e., an apartment building that leases to a tenant on an annual basis). STR's became somewhat of a grassroots phenomenon once landlords realized charging 'per night' is much more profitable than charging 'per month.' As a result, investors started acquiring apartments and homes specifically to rent out on a nightly basis.

Entrepreneurs also realized the opportunity to scale STR’s, and as a result, we have seen the rise of concepts like Sonder and Mint House. These concepts rent blocks of apartments in luxury buildings (or entire buildings) with the intent of renting each apartment on a nightly basis instead of annually, often offering a niche. Mint House, for example, markets itself specifically to business travelers who may be out-of-state Mondays through Thursdays in the same location for months or years at a time.

In response to this new “hotel replacement” trend, the hotel industry exercised a legislative self-help campaign with varying levels of success from city to city on preventing STR's in favor of hotel rooms: in Nashville, for example, landlords have free reign; in Denver, however, STR's were outlawed except when in a host's primary residence. The exception in Denver is when a STR operator can get a lodging license for their property. But a lodging license requires zoning that would otherwise permit a hotel and an R-1 occupancy rating, which is the same rating required of hotels. In essence, Denver requires STR concepts to operate as a hotel and in this roundabout way, the hotel replacement has become another hotel company.

As multifamily investors question whether they should lease to STR operators, consider the following –

• Turnover: If one tenant leases a large block of apartments within one property, the leases will end at the same time and cause cash flow issues for the landlord, right? STR operators are usually willing to stagger the end dates of each tenancy in order to ease this burden on the landlord.
• Creditworthiness: STR operators are often startups, so leasing a large percentage of the building to one tenant poses a credit risk to the landlord, right? In response, STR’s have become accustomed to offering large deposits or surety bonds.
• Financing: Perhaps the biggest hurdle is complying with the terms of financing on a building that may preclude block leasing. STR operators have become accustomed to this common landlord concern and are devising financing strategies for their landlords to allow their use in the property. Put the burden of finance compliance on the STR operator  

Contact Alexander Becker   720-707-1539    abecker@rec-colorado.com

‍