Hotels are complicated buildings because they house multiple functions from food to baths to sleeping and meeting areas. They also house dense concentrations of human beings in unfamiliar settings, which can create significant risks. As a result, hotels are subject to an array of government regulations through building codes, OSHA requirements, fire safety requirements, ADA (requirements to accommodate people with disabilities) and others. With the requirements come inspections and permits.
Sometimes the requirements kill the deal – they simply cannot be met within a budget that permits profitable operation. However, in most cases, navigating the regulations and requirements is a well-documented predictable process. It inevitably has infuriating and frustrating hurdles. It is enormously helpful to have experienced local experts on your team. Then, for the most part, the result is a stronger safer asset and standardized operation.
Building Permits and Building Codes
Building permits are typically obtained by the architect or contractor. There is a cost for the permit and the time to handle the process is reflected in the fees from your architect or contractor. So permitting should be an item in your contract with the architect or contractor. If you have particularly good relations with people in your local building department, you may want to be involved in the process. But your architect or contractor should take the lead because they will be implementing the permit, calling the inspectors, and working with the department through completion.
Building permits are the legal authority to undertake construction work in your local government jurisdiction. Without going through permitting, you cannot get a Certificate of Occupancy and therefore cannot operate the hotel. Since some elements of construction, like painting, cover other elements, like wiring inside the walls, it is critical to get the permits at the beginning of any construction project so each step can pass inspection. The alternative is likely to involve expensive re-dos, like tearing out those newly painted walls so the wiring can be inspected.
Permits enable the government to ensure that the structure is legal, safe and meets code. All construction above a given dollar amount requires a building permit from the local government. In some jurisdictions this is relatively simple, in others it is extremely complex.
Permits cover each aspect of a project from site – building, MEP (Mechanical, Electrical and Plumbing), elevators, and fire safety. Fire safety, often with an inspection from the Fire Marshal, requires meeting codes about smoke detectors, fire rated materials, and alarm systems.
Once a contractor pulls a building permit, their work is inspected at specified stages and signed off by a government inspector. Your contractor or architect will pull an overall permit and there may be separate permits for specialties like MEP, roofing and other specialties and separate inspections from the fire chief.
Inspection signoffs are recorded on a card kept at the construction site. As the owner, you will want to keep an eye on construction progress and inspections. Basically, you want to track things like getting the electrical inspection signoff before the walls are closed up and the paint goes on. It can be a requirement in your construction contract to have specific inspection signoffs as triggers for partial payments.
Renovation building permits usually allow the hotel to keep operating. For large projects and new construction, the hotel may be required to have the permit signed off (completed) and a CO (Certificate of Occupancy) issued before the hotel opens for business. To accommodate this during a renovation, sections of the hotel may be closed pending a CO while the overall operation continues to run. The hotel cannot operate until the inspections are complete and the local jurisdiction issues the CO.
Fully closing a hotel is complex because it can trigger a requirement to bring a hotel fully up to current codes. That may not be physically possible within an existing building. It may also trigger insurance, franchise and other issues. It is common for local jurisdictions to recommend closing the hotel and it is equally common for construction managers and contractors to negotiate for a building permit without going to this expensive extreme.
The final building permits should be signed off by the local government before you release final payment to the contractor.
When you apply for a building permit, the building department’s review of your plans requires adjustments for everything that does not meet local codes. Because the codes are detailed, complex and sometimes at the discretion of someone in the building department it is common for there to be issues to resolve or things that go wrong. Your goal, and your contractor’s goal, is to minimize these, keep them small and resolve them quickly. Building department review changes are typically worked out between the architect, contractor and building department. Anticipate some reasonable changes to your plans as they go through plan review.
Your architect, engineers and contractors deliver work that meets the building codes for your community. Each community has its own codes, but most are variations from a family of codes developed by the International Code Council (ICC) including the International Building Code (IBC), International Fire Code (IFC), International Plumbing Code (IPC), International Mechanical Code (IMC), etc. They also use codes such at the ASTM International American National Standards Institute (ANSI), NFPA for fire alarms and sprinklers, etc.
The ADA (Americans with Disabilities Act) requires all commercial buildings and facilities in the United States to comply with the ADA Standards for Accessible Design. The United States Access Board www.access-board.gov is the independent federal agency that promotes equality for people with disabilities. It develops and maintains criteria for the built environment and continually adds and modifies guidelines and standards which it releases every few years.
ADA standards are not always possible or practical to implement as written for an existing building. There are wide variations in interpretation of the standards and the standards change from time to time. The Access Board does not provide interpretations. There are attorneys who specialize in filing lawsuits in bulk against hundreds of companies seeking remuneration for real or supposed infractions.
For a business owner, this can be a challenge.
Your architect and your brand standards are your guides to complying with the ADA. Your architect should sign off on a set of plans that is ADA compliant. Your government’s plan review for your building permit will include an ADA review. Occasionally your architect or reviewer will bring you an issue where one reading of a standard could require a massive expense (like moving every bathroom wall or cutting the number of rooms in the hotel in half) but other readings could indicate less drastic solutions. These are alternatives that you, the reviewer, the architect and the contractor will figure out together.
Occasionally, ADA requirements kill the deal and the owner must move on to other opportunities. Usually, it is possible to work through ADA requirements. It can take time and cost money so it is important to address early in the process.
Your hotel will have a collection of licenses and operating permits which management will renew annually. Some will come with annual or periodic inspections and ratings or scores. Some inspections carry a fee, either from the local government or from a service provider. For instance, your fire equipment is likely to be serviced by a company that charges a regular fee. As the owner, you want to know all licenses and permits are maintained. This is something your bookkeeper can track for you or it can be part of the regular reporting from your management company. When there are ratings or scores, you will want to review the results and bolster any that slide. Some permits, inspections and licenses are:
- Business license
- Tourist accommodation (hotel) permit
- Pool permit and inspection
- License to serve alcohol (and/or beer and wine)
- License to sell beer and wine at an on-site shop (gift shop or suite shop)
- Restaurant license (an inspection and version of this is even required for hotels that only serve continental breakfast)
- Elevator permit and inspection
- Retail license
- Fire compliance inspection
- Laundry inspection
- Backflow inspection (part of the plumbing and waste system)
Hotels incorporate several businesses that may pay taxes. In many jurisdictions, there are separate reporting systems for each tax. Your hotel manager and bookkeeper will handle the reporting and tax payment.
Most of these taxes are collected at the time of sale and accrued on your balance sheet. For most, this is an automatic pre-programmed function of your Property Management System (PMS). Then the bookkeeper files the report and pays them when due. Tax collections are not revenue. These are charges that the hotel collects from customers on behalf of the government. As a result, they do not appear on your hotel income statement (P&L). These collections go into your bank account and are recorded on your balance sheet as a liability. They are a liability because they are money you hold that is owed to the government. From a cash flow perspective, you will want to be sure that money held for the government is available to disburse to the government when due.
As the owner, you keep an eye on the process by making sure that the payments are made (funds aren’t building up in the balance sheet accounts) and that any government notices get a prompt and appropriate response. These taxes vary depending on the services your hotel offers and the taxes levied in your jurisdiction. Typical taxes include:
- Hotel occupancy taxes (bed taxes): state and local sales taxes on room revenues (charged in some states and some localities, but not always both)
- Hotel retail sales tax: state sales taxes on room revenues
- Restaurant sales taxes: state sales taxes on restaurant sales
- Alcoholic beverage sales taxes: Federal and state specific excise taxes on sales of alcohol as well as local taxes in some jurisdictions
- Retail sales taxes: state and sometimes local sales taxes on sales at gift and other shops (forty-five states and the District of Columbia collect statewide sales taxes; local sales taxes are collected in 38 states but not necessarily in every jurisdiction)