Extended stay: Hot, hot, hot

Restaurateurs: Report the Tips and Hold the Audit An October federal court ruling has put on hold the Internal Revenue Service's program of auditing restaurateurs' credit-card receipts to calculate employees' tax liability. In a case brought by a family-owned restaurant group in Florida, called Bubble Room, the Washington, D.C., Court of Claims ruled that Congress has not authorized this audit method for calculating appropriate tipreporting amounts. Restaurateurs who have paid back taxes as a result of such an audit can file for a refund. That refund is due because the restaurant owners (not the employees) have had to make up the back taxes when an audit has shown an underpayment. The verdict reportedly gave Bubble Room, for instance, a $32,000 refund. The industry shouldn't pop a cork yet, however, as the ruling will probably be appealed. If the ruling stands, the IRS would have to audit servers one by one to find undeclared tips. When the indirect-audit method went into effect in 1995, the IRS saw reported tip income rise to $5 billion, from an average of $3 billion per year for previous years.The IRS estimates that some $9 billion in restaurant and bar tips goes unreported, according to the Wall Streetdourhal (Christina Duff,"IRS Can't Audit Restaurants' Receipts," October 25, 1996, p. B7). A separate IRS program, called "Tip Reporting Alternative Commitment," was not affected by the ruling. Under the program, restaurateurs take the initiative to educate employees about their responsibility for reporting tips and encourage them to report all of their tip ineome.--G. W.

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Extended Stay: Hot, Hot, Hot Extended stay will remain one of the lodging industry's busiest segments, according to a detailed analysis by SchroderWertheim. In a December 1996 report, Schroder Wertheim predicted a compound annual growth rate for the segment exceeding 35 percent through the year 2000. A big reason for the segment's prospective growth is that it has only recently been "discovered" by the hospitality industry, although it has been formally in existence for more than two decades. The bulk of the growth in extended stay will be in economy properties, according to Schroder Wertheim, in part because the up-market segment is already well developed and the mid- and lower-price segments barely exist. The extended-stay segment comprises guests who are staying in a property for five nights or more. Gaps in the extended-stay supply will soon be filled.The analysis projects that supply will expand from the 1995 total of 46,525 rooms to well over 230,000 at the end of 2000. SchroderWertheim believes that extended-stay demand is larger than people might expect because much of it is currently served (albeit not perfectly) by conventional hotels and all-suite properties.The analysis points to figures developed by D.K. Shifflet, which estimates that 729,000 rooms are filled each day by people staying five nights or longer.That is about 11 times greater than the current supply, or, taken another way, current extended-stay hotels fulfill just 7 percent of estimated demand. Giant s u c k i n g s o u n d . Not surprisingly, several hotel chains have rushed to fill this vacuum, including such well-known names as Choice (MainStay), Marriott (now operating Resi-

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IBRNELLHOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

dence Inns and adding TownePlace), and Promus (Homewood). SchroderWertheim predicts, however, that the little-known Candlewood, a mid-tier concept, will enjoy the greatest growth, in part because of its alliance with Doubletree. Moreover, the brokerage anticipates that players like Hilton and I T T Sheraton may eventually enter this market by purchasing an independent chain. Operators of conventional hotels may have to enter the extendedstay market in self-defense, as Schroder Wertheim anticipates that the growth in that segment is likely to come at the expense of conventional hotels. Profit potential. One of the attractions of the extended-stay segment is its low developmentand operating-cost structure-with its attendant potential for strong margins. Most extendedstay properties have limited public space--a small lobby (or none at all), no restaurant, and no conference facilities. Business comes from referrals or corporate contracts, so the properties do not need to be located on high-price, high-visibility lots.The ability to construct prototype units in each location also cuts development costs. Expenses for both labor and supplies are minimized, since extended stays mean that rooms do not necessarily have to be made up fresh each day. MainStay typifies this approach, with its automated check-in facilities and its food-court-style food service. Not only that, but having longterm guests helps to eliminate "empty weekend" syndrome so common in many hotels. The analysis concludes: "We believe this is a real market, and a sizable one at that, which should provide substantial growth opportunities for companies with the right product and with strong management."--G. W