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07/21/2009

Luxury Hotel Operators & Investors View Current Conditions Differently

The Four Seasons hotel chain has spent a lifetime developing and maintaining the power of their brand. Now with the tough economic times (less occupancy & less income) at hand, some of the investors who own the hotels are very concerned about spending too much money to keep up appearances by the management (operator) of the hotels.

Hotel operators like Four Seasons, Marriott and Hilton, typically receive about 3% of a hotel�s income for management fees. From another 17% of revenue they pay all the costs of operating the hotel including employee wages and benefits, utility bills, food and beverage costs, marketing, reservations system, and a host of other items.

Operators also dictate the owner/investor�s spending on capital improvements such as carpeting, wall coverings, televisions, furniture, linens, towels and other operating supplies and equipment. In total, about 12% to 14% of a branded hotel�s gross income is controlled by the operator. This formula becomes problematic for owners when hotel income drops, as the owners still have to make the loan payments on the hotel property.

Based on what is going on with resort hotels today, there is no way the property can cover debt service. So investors are looking to get rid of the operator; thus a lot of the expenses. One dilemma with Four Seasons is that their contracts are among the toughest for property owners to break. (Four Seasons expect that properties they manage will remain Four Seasons for 100 years.)

The issue revolves around what each entity views as most important. The owners are all about the bottom line. Four Seasons operators are all about brand integrity. In one situation the two sides are in U.S. District Court � the owners want to terminate their agreement with Four Seasons for failing to operate in a financially efficient and cost-effective manner.

More tension between owners and operators is likely as the hospitality industry struggles through its most troubled period since the Great Depression.



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