IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Oliver Kotelnikov. Mr. Kotelnikov specializes in the sale of hospitality businesses for IBA and is a participating member of the Washington Hospitality Association.

State Legislation Supports the Hospitality Industry with HB-1798

Short-Term Rentals: A Legitimate Business or Just Cash on the Side?

The State of Washington has become one of the world’s premier tourism destinations.  And with something to offer for everyone, what’s not to love?  Visitors can explore the Pike Place Market, hike the trails of the beautiful Cascade mountains, fish the legendary salmon runs of the Columbia River, catch a concert at the one and only Gorge Amphitheater while touring the wine country, or take in a bike ride on the scenic Burke Gilman Trail before dinner at one of the many new restaurants.  Throw in a couple days on the San Juan Islands before heading home and you have a vacation of a lifetime.

Tourism is at an all time high, and so are the occupancy rates at our hotels.  With lodging in high demand year round, local residents have uncovered a business opportunity and a steady stream of extra income in renting out rooms in their homes or even their entire residences through a variety of online platforms.  With low overhead, and little to no regulation, private short-term rentals have grown into a thriving business model.

But when does the occasional rental of a room in your home for a few extra bucks become a legitimate business?  And if and when it does, should it be regulated as any other business?  The state of Washington seems to think so.  As evidenced by the recent adoption and of House Bill 1798, the legislation acknowledged that engaging in the business of providing lodging and accommodation services to the consumers has public safety implications and will be subject to new rules and regulations.  The passing of the measure is a big win for customers and businesses of the hospitality industry in the State of Washington.

The idea that oversight and regulation are needed where commerce and public safety intersect is not new.  The bill introduces the term “short term rental operator” and defines it as someone who rents out their entire home or more than three rooms in it for a period of more than 6 months out of the year.  The new compliance requirements for entities meeting this definition are very reasonable and still nowhere near as burdensome as what a bonafide hotel has to adhere to.

The short-term rental operator who offers dwelling units or portions thereof in the state of Washington must:

1. Obtain a business license, post it conspicuously and include it with all advertising and marketing materials.
2. Keep the rental unit up to code.
3. Provide contact information and respond to renters in a timely fashion.
4. Provide a floor plan with clearly marked fire exits and escape routes.
5. State the maximum occupancy of the unit.
6. Carry liability insurance on the property

The term “short-term rental platform” presumes various online marketers of private properties for rent such as Air B & B.  The platforms must, regardless of where they are located, comply with the new rules and regulations as set forth in the bill if they transact or contract with operators in the state of Washington.

Short-term rental operators will also be expected to pay all local, state and federal taxes associated with their transactions.  So while it’s easy to write the bill off as simply a way for the state to get a piece of the action and collect some extra tax revenue, additional benefits for the hospitality industry as a whole are many.

By mandating compliance from all entities across the board engaging in the business of providing lodging, the state levels the competitive playing field in the industry.  The large chain hotels may not prompt feelings of sympathy for their high overhead costs, but small, independent operators should.  A family owned “ground” B & B in Island County burdened with all of the administrative, tax and compliance costs of running a hotel deserves parity when competing against the private property owner accountable to nothing more than a check in the terms and conditions box of Air B & B.

The implemented  “short-term rental operator” category wisely differentiates between small and large operators.  It also provides a set of different, but size appropriate guidelines for each while still treating both as a business.  The additional category of “transient accommodation” implies the occasional renter and protects this group from the new regulations so long as they don’t engage in short term rentals as a business as defined by the bill.

This piece of legislation may also positively impact the industry wide labor shortage.  Many potential employees of the restaurant and hotel sectors are moving away from Washington due to lack of affordable housing.  Said one restaurateur: “ Business is great and there are plenty of customers for everyone.  It’s the qualified staff that we’re all competing for.  Many of the employees we are trying to recruit can no longer afford to live anywhere near these jobs that we’re offering.”  Part of the reason the demand for housing is so high is lack of supply.  The shortage was in no small part created by property owners pulling their rentals out of the long-term housing market and transitioning into short-term rentals to increase revenue.  The introduction of additional rules and regulations may reverse that trend and encourage owners to once again make their properties available to renters on a long term basis.

IBA is commonly recognized as one of the business brokerage market leaders in the United States in terms of knowledge, experience, and professional skill set.  All of the professional intermediaries on our transaction teams work hard to stay current on their marketplace. IBA professionally serves the following industries: https://ibainc.com/industries-served/

If you have questions relating to the content of this article, the market dynamics impacting transaction values in the hospitality industry business marketplace, or are interested in learning about the process involved with selling a hospitality business Oliver Kotelnikov would welcome the opportunity to talk with you.  Mr. Kotelnikov can be reached at (425) 454-3052 or oliver@ibainc.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.