Balancing Act: Owner-Operator relationships

Features, Hospitality Trends

Experts agree that smooth functioning of a hotel depends on this fundamental balance. Hotelier India brings you excerpts from a recent forum and comments from experienced hoteliers on how to ensure fair play in these relationships.

Bones of contention
Hoteliers agree that most of the differences are thrashed out at the management contract stage but even at this stage, there remain a large number of issues where the hotel owner and the management company tend to end up at loggerheads with each other.

Some of these include executive committee appointments, naming of the property and co-branding rights – which emerged as the single largest owner-operator issue in our poll on hotelierindia.com, territory restrictions, indemnity, implementation and re-implementation of changing brand specs and rights of refusal.

The most foolproof way of ensuring fair play remains getting a hospitality consultant to map the way forward but it continues to remain significant keep abreast with industry norms.

This is how we do it When it came to control over executive committee appointments, owners suggested that since the hotel is their investment, they should be able to select the general manager and chief financial officer – particularly the CFO so as to ensure a certain level of bilateral trust.

Accor head of development in India, InterGlobe CEO, Uttam Dave said at a HIFI 2010 panel discussion also featuring Fairmont Raffles senior vice president Asia Pacific James Kaplan and Economic Laws Practice partner Suhail Nathani, “We allow for the owner to control the selection of the financial controller but usually not for the general manager.”

A few years ago, owners were rigid on this point, but today most are open to allowing the management company its discretion on the appointments.

“Hyatt brought in its choice of executive committee appointments. If you’re relying on their management expertise, why not agree to welcome the experienced talent that they could bring in,” Hyatt regency owner Sandeep Gupta tells us. Gupta is managing director of Edenpark Hotels, promoter of Inovoa Hotels & Resorts, and executive director, Asian Hotels (West).

Dave said that in some exceptions Accor allows the owner to select between shortlisted candidates also for the general manager. Gupta seconds this saying that often brands do offer owners this courtesy.

Sarovar Hotels managing director, Anil Madhok comments, “As an operator, we’d like for our general manager and the owner to be on agreeable terms with each other but we’d expect the owner to have a justifiable reason for rejecting a general manager and other executive committee appointments.”

Kaplan said that it might be fair to give the owner three opportunities to select a general manager and if none of them work out to the brand’s standards, the brand should take a call on appointment henceforth.

On a fair implementation of brand standards to an already existing property, the management company opinion is that implementation is obviously necessary but they wouldn’t enforce a change immediately if the owner had just built or undertaken renovation but would rather give the owner a reasonable amount of time to rework the property.

Where owners face difficulty here is constantly changing brand standards. “Owners become uncomfortable when brands define their brand standards as ‘what we say it is at the time’,” related Kaplan.

On retail profits, an audience member at the owner-operator forum suggested, “Where retail takes about 10% of the floor space, the operator should get a share in the rent earnings. If the floor space is over 25% of the total, then it becomes commercial space and the owner should manage and keep the rent earnings.”

Kaplan suggested that an easy way to sort this out is that if the retail space falls within the hotel such as near the lobby etc, then the management company should have a share and if it falls outside of the hotel, then the owner should have the entire share.

Nathani said that often the question is about brands in the retail space: “Operators often want to have a say in the profile of brands being brought in since the retail area falls in the same complex.”

On the subject of indemnity, Madhok suggests, “As an operator, we suggest a host of insurance that should be undertaken and it is up to the owner to take precautions. It’s fair that the owner indemnifies the operator and vice versa but in cases of wilful negligence, it would differ from case to case.

If it’s a building collapse because inferior building material were used it’s not the operator’s fault; if it’s something the operator could have prevented, then the operator should be held responsible.”

Similarly during the panel discussion it was noted as an example, “If the floor is wet near the swimming pool and people are likely to slip and the operator neglects the need to put up a ‘wet floor’ sign, it’s obviously his fault.”

Financial consequences remain an area where owners and operators need to find a balance, especially in situations where it’s the owner’s asset that is damaged and the operator’s reputation gets damaged.

When it came to naming the hotel, brands were fairly adamant that owners understand the need for giving priority to branding.

“As management companies we do realise that there is brand equity in the local or family name but when it comes to booking on the internet, operators like to keep the brand name and not confuse it as it could affect bookings,” said Kaplan.

Madhok points out that the thought process is that the operator could change or pull out but the physical hotel should have some branding that will last forever.

Gupta’s take is, “If you’re marketing a local brand for the local or domestic market, the owner should be given the option to use his own name but if you’re targeting the international traveller, it’s best to go with the management company’s name and branding.”

Exclusivity and rights of refusal saw owners point to the fact that with many brands coming in, they were not just going to sit on plots of land waiting for brands to select the next location.

Mahajan & Aibara Consultants’ Homi Aibara who was in the audience at the panel discussion said, “I would certainly not entertain a request for exclusivity when representing my owner-client.”

On the subject of territory restrictions the panel suggested that the subject needs to be relooked in owner-management company negotiations as today micro-markets exist in traffic-heavy cities so management companies should be allowed to go ahead without territory restrictions within the same city.

Small Luxury Hotels of the World CEO Paul Kerr in an interview with Hotelier India called this his, ‘single largest problem’ and added, “We have to say no to new members in some cases. It makes expansion quite difficult.”

Kaplan said that some refined owners do buy the micro market argument. Kerr too related that Small Luxury Hotels of the World is yet to encounter this problem in India due to the presence of micro markets.

Gupta suggests that a 10 km radius territory restriction is fair but other brands within the same chain should be allowed since they target different segments.

Another suggestion is occupancy related: Dave said “Upon crossing 70% occupancy for three years, I don’t think it’s fair that the owner restrict the operator.”

Madhok gives the example of his own brand saying that Delhi has so many micro markets that Sarovar has 12 properties there – under various brands.
Kaplan however acknowledged that since such discussions are driven on pride and economics, territory restrictions tend to become more difficult in the luxury space due to being pride focused.

Madhok cautions, “A management company should be credible and tread carefully from an ethics point of view considering that you don’t want to mar your reputation in the owner’s community.”

Identifying an acceptable transferee also emerged as something that needs to be looked into. Madhok says, “It makes sense to include a compensation clause in the management agreement with regard to this.”

Gupta says that usually transfer of ownership would not pose a problem except in situations where the property could be sold to capital investors who are also operators.

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