ISSN 1940-204X Sea Pines Villa: Are They Ready For The Big One? Margaret N. Boldt, Ph.D., CMA Department of Accounting and Finance Southeastern Louisiana University INTRODUCTION to maintaining this schedule. Other similar businesses have found themselves in disputes with owners and/or guests Sca Pines Villa (SPV) manages and rents 42 vacation villas on over the rental company taking early possession of money, a barrier island near South Carolina. The island is a celebrated premature distribution to owners, and other inappropriate higher-end tourist destination, and business has thrived. From disbursements of escrowed rental monies. SPV has a April through October, SPV books rentals "boutique" style, with guests renting from three nights to three weeks. From mid-November through March, the bulk of rental activity is for monthly occupancies. For the last five years, SPV has enjoyed almost no vacancies except for scheduled deep reputation for both honesty and transparency, and company management believes their success is due, at least in part, to their diligent separation of funds and ensuring all parties are satisfied before disbursement. SPV carns revenues from villa rentals via several different streams. First, guests pay resort fees that cover gate passes to enter the resort, passes to health clubs and swimming pools, and other desirable guest amenities like bicycles and outdoor grills. The amount of the resort fee depends on what amenities the guest wants included with his or her stay and how many cars he or she would like to have while staying at the villa. Guests also pay a reservation fee. The amount of the reservation fee varies cleanings, remodels, owner occupancies, and the like. VILLA RENTALS Guests can book villa rentals by calling SPV directly, using SPV's website, or by going through one of several travel reservation websites where SPV properties are listed. Consistent with industry practice, SPV collects rental monies before the stay. While a small number of guests still with the size of the villa (number of bedrooms and bathrooms). Resort fees, reservation fees, and state and local occupancy taxes are collected with the rental monies and deposited into prefer to write a check, most pay by credit card. Regardless the escrow account. None of the money is received by SPV until the monthly release following the guest's departure. of the method of payment, all of the money collected is immediately deposited into an escrow account and cannot be released (by law) to ecither SPV or the villa owner until after SPV also carns finders fees equal to 20% of cach rental amount (before tax, resort fees, and reservation fees). The the guest has departed. To ensure compliance with all the local and state regulations, SPV has had a longtime practice of releasing money from cscrow once a month. The rental amount of the finders fees depends on the rental amount, which varies with the size and location of the villa, the duration of the stay, and the time of year of the stay. The money is held in escrow until the fifth of the month after the guest departs. For example, a rental for September 25 through October 3 is not released until November 5. While such a lengthy lag is very conservative, SPV is committed owners are responsible for paying the finders fees, and SPV receives this money out of the owners' distributions when the rental monies are released from escrow. IMA EDUCATIONAL CASE JOURNAL 1 vOL. 12, NO. 4, ART. 4, DECEMBER 2019 02019 IMA SPV has several different costs associated with villa to their success in an otherwise uncertain industry. SPV has rentals. Prior to each guest arrival, the villa is professionally developed a network of providers for services, including cleaning, landscaping, plumbing, HVAC repair, appliance cleaned and restocked with fresh linens. The cleaning company invoices on the date of service and is paid on the repair, and so on. These quality providers respond quickly to same day. Before cach rental, the villa is also restocked with SPV because the providers will be paid at the time of service. various consumable items like facial tissues, paper toweling, coffee filters, trash bags, and the like. Upon arrival, each Management believes the benefits of happy providers and owners, with complete transparency, far outweigh any guest also finds a "welcome package" in the main living incremental revenue received from charging an additional area containing samples of local foods and beverages, pass fee. Indeed, SPV has a waiting list of owners wanting them to manage their properties, and guests book up to 18 months information for pools, directions to the beach, rules about interacting with wildlife, and information about the island, in advance to stay in one of its managed properties. resort, and the specific villa he or she is renting. The supplies Money in escrow cannot be used to make contractor for the villas and welcome packages are generally purchased payments or purchases on behalf of owners, Thus. SPV as needed throughout cach month. SPV also provides a resort gate pass for each guest vehicle. The resort invoices for the gate passes once a month for the gate passes ordered the makes all these payments out of its checking account. When rental monies are released, SPV is paid amounts due to SPV with the remainder distributed to the owner. Occasionally, previous month. SPV also pays one monthly flat fee for all its usually in the winter months, an owner may owe SPV after guests to have access to a health club and gym. monies are released. Historically, SPV has allowed owners Finally, SPV pays various financial fees for credit card to defer payment until a later month when there are excess processing, internet payment processing, and payment processing through the various travel websites. All of these rental monies. Allowing deferment has never been an issue, because SPV has always had ample cash. fees are due once a month and are based on the amount of payments processed. Generally, guests pay a deposit when OTHER REVENUES they make the initial reservation and then pay the remainder of the rental sometime during the month preceding their stay. Hence, financial fees payments are highly correlated with the following month's total rental receipts (rental SPV receives small amounts of revenue from a few other sources as well. It earns a small amount of interest each month on the funds in its checking account, though it is prohibited from receiving interest income on the funds in escrow. SPV amounts plus resort fees and reservation fees). also retains a small fee when a guest cancels (unless the PROPERTY MANAGEMENT cancellation occurs within a few business days). The state provides a small discount when guests use an online payment Each villa's owner pays SPV a small flat fee each month for "key portal and pay all of the occupancy tax due for the preceding keeping" services. Key keeping includes meeting contractors month by the 15th of the month following departure. and local service providers at the villa, addressing guest complaints and issues, putting out the owner's personal items before they arrive and locking them up after the owner leaves, preparing the property for storms, and other miscellancous OVERHEAD AND ADMINISTRATION SPV also has several administrative costs that are essentially services. The key keeping fee is paid out of owner fixed with respect to rentals and number of units (unless disbursements when rental monies are released from escrow. the company was to expand considerably). These monthly payments include salaries and employment taxes for four employees, auto expenses, computing and internet service, office supplics, business licenses, telephone, postage, and insurance. The accompanying Table summarizes SPV's receipts and payments. SPV contracts with independent contractors and local businesses for deep cleaning, maintenance, and repairs. The company also shops for and purchases replacement furniture, linens, appliances, and decorator items on behalf of the owners. SPV provides a copy of each invoice to the owner and is reimbursed when rental monies are released from escrow on the fifth of the next month. SPV does not charge the owners or the contractors for this service. SPV management believes that this arrangement has been a key IMA EDUCATIONAL CASE JOURNAL VOL. 12, NO. 4, ART. 4, DECEMBER 2019 WHAT IF? units if they reccive some money up front to cover the cost of contractor supplies and labor. After consultation with three of its most used contractors, SPV estimates that having US$3,000 SPV management has become increasingly concerned over how they would handle a major disaster. Their location is per unit (US$126,000 total) in cash would be sufficient to begin immediate repairs. In addition, SPV believes that US$50,000 susceptible to hurricanes, and they want to be prepared. Their policy states that guests can receive a refund or apply would be ample to provide for payroll and other continuing costs and sustain the business. their rental to a future date if the island closes for any reason. Furthermore, they are not only concerned about losing the fees from lost rentals during a closure, but also about their ability to pay for repairs on behalf of the owners to make ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) villas rentable. IMA", the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA" (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices, IMA has a global network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org. A recent survey of villa owners indicated that 13 of the 42 villas do not carry insurance that would cover hurricane damage. In addition, state and federal agencies do not provide relief for these properties because they are not primary residences. Thus, it would fall to SPV to pay the bills up front and collect from the owners and/or be reimbursed out of future rentals. Of course, not all units would sustain major damage. SPV also has a high-limit business credit card that can be used to pay for the vast majority of upfront costs. Local contractors, however, are more likely to prioritize work on damaged SPV Table 1. Summary of Receipts and Payments for Sea Pines Villa Receipts (all receipts occur on the 5th of the month) Resort Foes Amounts vary with amenities provided Reservation Fees Amounts vary based on the size of the villa rented Finders Foes 20% of the rental amounts (excluding resart fees, reservation fees, and taxes) Raimbursement fram Purchases and Contractor Payments on Behalf of Owners Amounts vary based on payments made to contractors during the preceding manth Miscellaneous Amounts vary but average about $150 per month Payments Villa Cleaning Service Averages $90 per rantal Supplies and Welcome Packages Averages $10 per rental Resort Gate Passes Averages $30 per rantal, paid the month following the rental Health Club and Gym Passes $500 per month Financial Processing Foes Averages 2.25% of the foilowing month's total rental receipts (rental amount + resort foes + reservation fees) Purchases and Contracters an Behalf of Owners Varies with the mcnth and the desires of the owners SPV Administration and Overhead $21.900 per month Note: All monetary values are represented in US dollars. IMA EDUCATIONAL CASE JOURNAL 3 VOL. 12, NO. 4. ART. 4, DECEMBER 2019