HFT1000 Quiz 2 Chapter 7 Managing a food or lodging operation Very different than other enterprises Types of business not in the food business o Corporations o Hospitals o Schools Some schools do their own food services with students growing things and raising livestock Other schools food service is run by Aramark or another food service those employees are not employed by the school but by the company Businesses may opt to contract O F B o Florida state vs warren Wilson Things that make this industry different There are perishable items service oriented employees short term Industry lately is looking for more employees who have a hospitality degree Lodging Place for people to stay Historically good investment Someone who invests may have no knowledge of the industry but want it as an investment If there was a Quality Inn that had 100 hotels they may own and operate 50 of those but the others they franchise A single person may invest and open their own Quality Inn and they may have complete knowledge of the field A group of investors then do the same but they don t know anything about the business so they bring in management from Quality Inn to do it They could ask a place like Cresent management to come in and put some money in of their own Lodging s key player s Operators o Cresent Hotels o Marriot Corporation Owners o 1 or many Lenders o Banks o Give you money to go ahead and open a lodging place Operators The organization that manages lodging or food service operations for owners are call operators Desire o Increased market presence share o Maintain control day to day operations o Long term stability The process Want to stay in those properties as long as possible Usually an investment company o buys the real estate o Then builds a lodging or restaurant property on the land o Then hires a different company operator to run the property Operator has the appropriate expertise to run it correctly The agreement between owners and operators is the contract thus this segment of the industry is called Contract Services Management There are two types of operators 1 Chain operators a Four Seasons originally owned all of their business now they have sold all of them except 1 all of their employees are four seasons employees Starwood hotel b Can be operated by one person or a group 2 Indpenedent contractors Chain operators Chain operators are affiliated with major hotel chains o Examples Marriot Starwood Hilton There have been many mergers between chain brands which has created mega brands o Therefore this group of major chains is becoming smaller each year o With mergers there is less number of chains The amount of parent companies if diminishing Independent Contractors Independent contractors are not affiliated with any specific brand They purchase brands and locations based on their assessment for compatibility with their objectives The hotel group o 25 properties Sheraton Microtel DT Hostmark Hospitality Group one of the largest o 250 properties o 40 states international o Hilton Sheraton Radisson Embassy Suites o They are contracting with the owner or investment group to run the hotel but they do not own it The Hotel Group o 25 properties o Sheraton Microtel DT Hotel Contract Management Separation or ownership operation o Expansive growth in the 1970s and 1980s Investors buy land all over the country o Not worry about the challenges Successful management companies o Grow their brand names o Expand into new markets with out Huge Capital Expenditures A win win situation for bot parties The contract parties There are 3 parties involved in hotel management contracts o Operators o Lenders o Owners Operators desire an increase in both market presence and market share maintaining control over the day to day management decisions and long term stability The most significant recent change in contract negotiation is the increased involvement of lenders and an increase in power of owners Lenders are interested in o Generating a rate of return o Protecting the investment Owners are interested in o Generating cash flow o Ensuring their investment grows in value The increase in of hotel operators has given owners bargaining power over the operators o Because of this there is a decrease in management fees and time for contracts The contract timing One key provision in contracts today is operator loan and equity contributions All contracts include a length of a contract Chain operatos o Initial 8 10 years o Renewals one or two 3 5 year renewals Independent contractor o Initial 1 3 years o Renewals one or two 2 year renewals Owners want shorter terms Operators like longer terms for stability The contract fees Management fees o Paid to the operators o Basic management fees have decreased in recent years o Incentive fees are more challenging to achieve Basic management fees of full service hotels average o Chain operators 2 25 of gross revenues without operator equity contribution 2 50 of gross revenues with operator equity contribution o Independent contractors 1 5 of gross revenues without operator equity contribution 2 5 of gross revenues with operator equity contribution Can benefit if management gives money at the beginning The contract Incentive fees Incentive fees are based on cash flow after debt service or return on equity In the past operator incentives were determined by gross operating profit This shift indicates that owners expect operators to contribute to the bottom line profit not just the revenue An important area in the contract is the operator system reimbursable expenses The contract Reimbursable Owners pay these fees Systems are provided by the operators corporation Property benefits from use of systems o Expenses range 2 4 of the gross revenue Independent operators o Expenses range 0 1 of the gross revenues They bring in advantages to the company for extra systems but they must be reimbursed for it The contract Performance Standards Usually performance is evaluated each year Measures include year to year growth based on the initial 3 5 year gross operating profit projection Grace period o Hotel first opens 1 2 years where performance criteria can be changed o New operator in existing property 6 months If the operator does not meet the performance criteria they are usually required to pay the owner the difference Owners usually include options for terminating the contract based upon continued poor performance The contract Termination Specific conditions upon which a contract can
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