Destructive events are a given in the hotel business. After attending to the safety of guests and staff, a hotelier’s next priority should be to assess the extent of the damages and start the process of recovering lost income.
Hoteliers routinely protect against significant loss of income in the wake of the unexpected by including property insurance as well as business-interruption insurance in their disaster recovery plans. But to get the full compensation they’re entitled to, they need to make sure that their business damage claims document every aspect of any damages sustained.
Accounting for Lost Occupancy
Occupancy is the starting point for a properly calculated business-damage claim. This is not as straightforward as it may sound. For example, hoteliers need to take into account details such as seasonal adjustments. Did the hotelier have to close during the peak season? Were there high-profit events that needed to be cancelled?
One way to calculate lost room nights is to look at occupancy figures during the same time period in previous years. Though simple, this method may not take into account increased occupancy rates year-over-year or past downturns in occupancy due to special circumstances that are no longer applicable, such as last year’s Zika virus scare.
Loss of potential occupancy should be calculated on a percentage basis. For example, if a 100-room property is left with only 50 rooms available, but typically operates at less than 50 percent occupancy, the lost-rooms revenue would be negligible or non-existent. But if, on the other hand, that same hotel usually operates at 85 percent occupancy, the hotelier can claim lost revenues for 35 of the 50 rooms now out of service. Assuming a $100 average daily rate for those 35 unavailable rooms and a down time period of 30 days, 1,050 room nights, or $105,000 in room revenues, would have been lost.
But that doesn’t consider expenses that aren’t incurred when rooms are vacant—direct costs such as guest supplies and travel agent commissions. If those costs normally add up to about $10 per room night, hoteliers need to subtract $10,500, reducing a claim for lost room revenues to $94,500.
Ideally, expected occupancy rates should be determined on a daily basis. Immediately after a disaster, the number of rooms lost might be as high as 100 percent. As power is returned and infrastructure repaired, a limited number of rooms may be rentable, with more inventory gradually becoming available as buildings or floors are returned to service.
Considering Associated Losses
While room rates are important, a hotel could significantly undervalue its losses if associated factors are not also considered. What about revenues from income-producing amenities such as on-site restaurants and bars and spa services?
It’s a good idea to look at industry statistics to see how these indirect losses are estimated. For example, income loss from the sale of food and beverages can be derived by determining the ratio of covers per meal to rooms sold over the same timeperiod. For example, if the hotel typically serves 1.25 dinners per occupied room and 35 rooms were unavailable, 43.75 dinners were potentially lost each day. Assuming an average food sale of $27.50 and a beverage sale of $9, the hotel would have lost food sales of $1,203 and beverage sales of $394. Assuming a gross cost of 50 percent for food and 33 percent for beverages, the gross profit lost in this case would be $602 for food and $264 for beverages, or a total of $866 per day. Again, any offsetting departmental costs not incurred when rooms are vacant must also be considered.
It’s a complicated business. It might be useful to subscribe to a service that compares key metrics between comparable properties and also shows occupancy percentages year over year for within a competitive set. However, while these metrics could be very helpful in filling out claims after an event such as a fire that did not affect comparable properties in the area, they’re not so useful for evaluating occupancy after a disaster such as a storm or flood that inflicted similar damage on other properties within the hotel’s competitive set.
Preparing for Recovery
While it’s impossible to predict when or where disaster will strike, there are steps hoteliers can take to facilitate recovery and mitigate their losses.
Because business damage claims are driven by financial metrics, it’s important to keep up-to-date records of both financial and operating history. The knowledgeable hotelier most likely has easy access to this information because it allows for better management of the hotel on a daily basis. But proper storage of this material is also important. In a catastrophic event, records kept on site without backups are vulnerable to irreparable damage or loss.
The recovery of information systems should be a part of any disaster-recovery strategy. This takes a bit of foresight, but there are several options. The simplest policy involves offsite storage of data, and the ability to upload financial data and applications to another computer. Cloud-based storage systems may also offer protection of vital data. The best approach is to critically evaluate a hotel’s needs to find the solution that works for that particular property.
Finally, to guard against lost opportunities, it’s important to have an independent third party evaluate the damages incurred. Loss revenues, direct costs, indirect costs, marginal costs—the list of items that can significantly impact a claim—is long and complicated. A third-party accounting professional can provide an outside forensic evaluation that will help identify losses easily overlooked in the emotional and operational turmoil of a disaster’s aftermath, and help recoup the resources hoteliers need to get their hotels up and running again.
About the Authors
Steven A. Moses is a partner at Miami-based accounting firm Gerson, Preston, Klein, Lips, Eisenberg & Gelber. Steven F. Klein is the firm’s corporate managing partner.