GROWING PAINS: The Downfall of ‘Frontdesk’ STR Management Company – Pagosa Daily Post

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This morning, I read about the demise of the fastest-growing short-term rental (STR) property management company in the United States.

As a pandemic survivor, Frontdesk grew rapidly by attracting venture capital, and buying-up weaker STR property management operators.

Frontdesk’s arbitrage business model was to strategically acquiring real estate property units, including building leases and apartments, from struggling real estate investment companies.

Frontdesk’s business model of converting the long-term shelter purpose of acquired real estate property, by renting-out the units as furnished short-term properties, ultimately was proven to not be a viable strategic business model.

Recently, Inc. 5000 Magazine’s #1 fastest-growing travel company (in 2021), laid-off its entire 200-person workforce during a two-minute Google Meet.

Frontdesk leadership efficiently laid-off its entire corporate workforce after hosting more than 400,000 short-term vacation guests.

Early investors initially praised Frontdesk leadership for perfecting its differentiated business model of focusing first on lesser-known destination towns and cities, that are less competitive and sometimes overlooked in the short-term vacation rental market place.

The downfall of Frontdesk has now raises pivotal questions about the “at scale” viability of the real estate arbitrage business model.

This business model, leasing or buying shelter properties, and then subleasing them at higher rates, has shown promise and pitfalls.

The recent failures of Frontdesk suggests that while the arbitrage business model can be profitable under very specific market conditions, the arbitrage business model can also struggle immensely under local economic stress, increased local competition, and shifting local rental market dynamics.

The arbitrage business model demands significant capital for acquiring, leasing and furnishing real-estate properties, and is reliant on securing consistent local rental income streams.

And now, in addition, Colorado is considering “Bill 6” that would considerably change Colorado’s economics, and real estate landscape.

If passed, Bill 6 would classify residential homes (that are rented for more than 90 days a year on a short-term basis) as commercial lodging properties. In Colorado, the property tax assessment rate for commercial lodging properties is 27.9%. This is four-times higher taxation, as compared to the 6.7% property tax assessment rate now used for residential properties.

Many STR operators in Archuleta County have speculated that if and when renting-out real estate units on a short-term basis becomes problematic, then an economically viable “Plan B” exists to simply rent-out the same real estate property units on a long-term basis might exist.

Frontdesk’s failure to profitably convert long-term real estate rental properties into short-term rental properties begs the pivotal question that this local Archuleta County option may, in fact, not be a viable “Plan B” for local struggling owners of short-term rental properties.

Frontdesk’s failed arbitrage business model (after many years, significant investment capital, and hosting +4,000 vacation quests) lines up with recent opinions posted to the Pagosa Daily Post that if Bill 6 is allowed to become law, short-term rental expenses will exceed STR revenues, and STR property owners will be forced to stop renting (long-term or short-term) their real estate property.

It may very well be that local Archuleta County market conditions, impacting real estate owner’s use of the arbitrage business model, may not assist the Colorado legislation intent to increase the collection of property taxes necessary to help assist in the the creation of more affordable workforce housing.

Hank Lydick

Hank Lydick took ‘early’ retirement to build a home in Austin, Texas, and a cabin in Pagosa Springs, Colorado.

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