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Should the Mix of OTA Room Nights Be…?

What Should the Mix of OTA Room Nights Be…?*

Response to the battle cry “lower the OTA percentage of room night mix” may reduce EBITDA.

Ultimately, improving EBITDA through shifts in channel mix is based on a holistic analysis and execution of total integrated channel mix strategy over time. The shift must be augmented with sales and marketing actions and associated costs to achieve it and sustain EBITDA. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

A simplistic (and potentially misleading) evaluation of decreased OTA room night mix impact is a reduction in OTA room nights (e.g., 1/3) replaced with non-OTA room nights.  This evaluation predicts a substantial (e.g., a 10%) increase in EBITDA.  Missing from the evaluation is how much it may cost to replace foregone OTA room nights with non-OTA room nights to sustain occupancy.  And, can the shift be achieved with positive EBITDA improvement, given increases in marketing and sales expense to achieve it?  In effect, some or all foregone OTA bookings must be replaced and there is some EBITDA neutral upper threshold sales and marketing expense level (e.g., 17%) to achieve it.

The answer to that question is complicated in general and even more complex for any one property.  It is also complicated by the interplay of property-level billboard and dilution effects.

The billboard effect is the impact display in OTA sites has on driving incremental transactions through hotel direct channels such as the reservation center and the brand website by being displayed, but not booked, in OTA websites.   In effect, the prominent presence in OTA display acts like a search engine, where the consumer views the OTA site but ultimately books directly with the property.  There is ample published research to suggest that there is such an effect**. The dilution effect is the diversion of transactions from a property that would have been booked through hotel direct channels but instead are booked in OTA channels.

We developed an EBITDA model to evaluate the interplay of various possible billboard and dilution levels effects to illustrate how those impacts change the results for various levels of increase and decrease in the mix of OTA transactions. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

See the table below for impacts of a 1/3 reduction and increase of OTA room night mix on EBITA, sales and marketing expenses and chain costs, (i.e., to achieve EBITA neutrality) when various billboard and dilution effects where present.  For example, the model showed that:

  • The number and percentage increase in non-OTA room nights can be much greater with, for example, a 33% reduction in OTA room nights when a property-level billboard effect is substantial (e.g., one non-OTA booking for every two OTA bookings foregone) and even greater with a relatively low dilution effect (e.g., 10% increase in non-OTA diluted room nights for each foregone OTA room night). Depending on values for these effects, a required level of non-OTA room night replacement can be substantial (e.g., nearly 40% greater).  As well, the EBITDA neutral threshold percentage level for increased marketing and sales expense growth can be much lower (e.g., 4.5% versus 8.5%) before EBITDA gains would be fully offset.
  • A major EBITDA loss risks exist if there is a substantial billboard effect relative to a dilution effect and foregone OTA room nights are not replaced. In this case, the impact on EBITDA can be substantial and negative (e.g., an 8% percent reduction).
  • Alternatively, that same 33% reduction in OTA room nights could be achieved with a slightly larger increase in non-OTA bookings (e.g., 13.5% versus 19.7%) and with a much higher EBITDA neutral threshold for a marketing and sales expense (e.g., 9.0% versus 4.5%), if the billboard effect was slight (e.g., one non-OTA booking lost for 4 OTA bookings foregone) and the dilution effect was significant (e.g., a 30%increase in bookings made direct for each OTA booking foregone).

Interestingly, that same analysis could be applied to evaluate the EBITDA effect of increasing the mix of OTA room nights.  For example, in the appendix, we show that if there were no billboard or dilution effects, increasing the mix of OTA bookings could increase EBITDA by 2.9%.

For chain properties, there is another dimension of this type of analysis.  Are there additional costs, direct or opportunity for chain-level efforts to reduce OTA room night mix? And, do these costs offset potential EBITDA gains for the property? The direct cost might include chain imposed assessments for that purpose.  Opportunity costs might include the shift of chain expenditures and/or investments to support the shift that might have had a more effective impact on property level EBITDA.  These might include, for example, the diversion of general promotional advertising and marketing expenditures to spending a mix change (book direct) campaign.

There can, of course, be a whole series of potential values for billboard and dilution effects (and the means to measure them) for a property and for specific circumstances such as quality classification, occupancy, ADR, channel mix, seasonality and so forth.  So, measuring them can be difficult and further complicated by the fact that the impact magnitudes are likely non-linear based on the OTA room night contribution percentages and changes thereto.  (NOTE: The model does allow sensitivity testing of such values on EBITDA. We selected a few values for illustration purposes.) Despite the difficulty, the impacts of these effects on EBITDA are significant. Therefore, owners and managers would be wise to evaluate the possible outcomes of their efforts to change the distribution of OTA room nights even if they employ some sensitivity testing of their values.

The practical implications are that changing the mix of OTA room nights requires a plan to replace them with non-OTA room nights and a need to know (or estimate) EBITDA-neutral threshold levels for sales and marketing costs needed to achieve the mix change. Moreover, including an analysis of the potential interplay of possible billboard and dilution impacts would be advised.

A dilemma for owners and managers is how to measure (or accurately estimate) property-specific billboard and dilution effects.  One approach is to do sensitivity testing for such values (as illustrated in the model) and cautiously change channel mix over time while observing impacts on OTA and non-OTA mix, EBITDA and marketing and sales expenses.  Another is to perform some A/B testing of increases and decreases in OTA participation to observe impacts on non-OTA bookings and EBITDA.

As well, asset managers might implement some operational means to observe over time patterns in guest channel booking behavior related to OTA participation, for example:

  • When checking in guests, ask if they have stayed at the property before and their primary channel source(s) for choosing the property. Do the same if they have not. If possible capture their email address. In all cases, track guests’ booking channels (or do so by relating rate codes used to channels). If they used an OTA channel, ask if they would be likely to use it again or book direct. Then track over time.
  • During guests’ stays solicit feedback on satisfaction and possible actions to improve their experiences. Better yet, use past stay experiences (e.g., through a customer relationship management system (CRM)), to take actions likely to improve guest satisfaction. At a minimum, resolve guest issues ideally in real time. Finally, celebrate successes and resolve mistakes over time; better yet, ask guests to do so as well, ideally via social media.
  • At check out and post stay solicit information about stay satisfaction and ask if they would be likely to book directly in the future. Better yet, capture their e-mail address in exchange for some future value for the next stay(s).

If all this sounds like effective asset management, it is.  Many successful property managers and owners are already doing this and have discovered many other ways to improve guest satisfaction and financial performance. What is different is the discipline to connect such actions (and guest reactions) with channel choices and guest stay frequency. Capturing this supports the assignment of economic values to reduced channel costs and/or increased guest stay frequency. The bottom line is for asset managers to practice effective CRM, measure its impact, celebrate its success, address its failures and encourage guests to do the same via social media.

Owners need to estimate the value of such actions on EBITDA as a guide to resource allocation for asset value growth.

* This model was developed and presented at the Cornell Center for Hospitality Research Summit, October   2017. Contact the authors Bill Carroll, Ph.D. wjc28@cornell.edu and Trevor Stuart-Hill trevor@revenuematters.com for more information about the model and the presentation.

** See CK Anderson, “The Billboard Effect: Online Travel Agent Impact on Non-OTA Reservation Volume,”

Cornell Center for Hospitality Research Report, 2009; CK Anderson, “Search, OTAs, and Online Booking: An

Expanded Analysis of the Billboard Effect,” Cornell Center for Hospitality Research Report, 2011.

ESTIMATED IMPACT ON REPLACEMENT (AND NON-REPLACEMENT) OF OTA ROOM NIGHTS ON EBITDA GIVEN MARKETING SPEND AND CHAIN COSTS

Cayuga Hospitality Consultants Announces Custom Solutions Division

Cayuga Hospitality Consultants Announces New Services Division

Cayuga Hospitality Consultants is pleased to announce the formation of “Cayuga Custom Solutions.” This new offering of hospitality consulting services is in response to the industry’s need for assistance in managing unique and complex business challenges.

Division chairman, Chuck Kelley says, “Clients have been requesting support in reconciling broad-based challenges. The need for a team approach is becoming more common as a means to meet client needs. By creating collaborative teams of hospitality consultants from within the Cayuga network, each with unique areas of expertise, we have been able to achieve expedient, constructive and effective results.”

As market and economic pressures drive owners, operators, and financial institutions to resolve issues quickly, and with expert-driven actionable and measurable results, the Cayuga Custom Solutions groups have stepped in and solved even some of the most seemingly impossible challenges.

The first example of a team offering is the “Preparing your Asset for Sale” task force.  This group has found a common thread in working with clients acquiring and disposing of assets – there are simply no two alike.  To respond, Cayuga Hospitality Consultants has developed individualized teams to assist with negotiating the processes of preparing for a sale, maximizing the value of the asset and strategic planning for a purchase.  Because any transaction can take on myriad objectives and realities, diversity in the team of advisors assisting can result in highest and best ownership objectives being achieved.

Kelley says some of the key questions his Cayuga Custom Solutions task forces focus on when owners are considering an asset sale are, “What are the ‘Top 5 Things’ you should be doing now to maximize value?  Where should your focus be – top line revenue, bottom line profitability, operations and customer satisfaction, condition of the physical asset, re-positioning to adapt to market changes?  All of the above?  And what resources might an owner need to prepare the asset for sale, and how would ROI on this resource allocation be calculated?”

From engineering and CapEx review to structural assessment, financial analysis, operations efficiency, customer satisfaction, real estate and asset valuations, all facets of a sale require varied expertise and skills.  With more than 50 professional consultants all with deep competency in their unique services domains, Cayuga Custom Solutions allows for each assignment to be managed by a distinctively assembled team of experts.

Another common assignment request to Cayuga Hospitality Consultants is to field a team of experts, thus the “Task Force and Interim Staffing” coalition.  An open position for whatever reason can and will be a challenge for a business – lost sales, poor customer response, lack of leadership direction and/or declining profits.  With over 50 consultants available, Cayuga Custom Solutions helps owners and operators maintain business momentum.

“Whether a staffing need is during a larger event such as brand transition, property sale or acquisition, pre-opening or disaster recovery, or simply a short-term need as a result of medical/family leave or gap between hires, Cayuga Custom Solutions finds individual experts or teams of hospitality consultants able to meet virtually any project requirements,” division chair Kelley said.  “Our experts in hotels and resorts, spas and clubs, restaurants, commercial foodservice and casinos can meet virtually any task force or interim staffing need.”

For more information on Cayuga Custom Solutions or to present your complex challenge requiring an expert hospitality consultant or team of professionals, contact Chuck Kelley HERE or call 866.386.4020.

The Nine Circles of CapEx Spreadsheet Hell

The Nine Circles of CapEx Spreadsheet Hell

Most hotel owners will be receiving 2018 CapEx plans from their hotels in the next few weeks.  Most of those CapEx plans will be submitted on Excel spreadsheets.

This is a perfect time (maximum pain levels) to consider The Nine Circles of CapEx Spreadsheet Hell, and develop strategies for a move to CapEx Planning Paradise.

  • What is wrong with using CapEx planning spreadsheets?
  • What are the alternatives?
  • What specific steps should owners and operators take?

Avoid CapEx Spreadsheet Hell!

Introduction

Hotel owners spend an average of 7% of gross revenues on CapEx, every year; a very significant reinvestment of scarce owner’s capital. Most management contracts require the hotel operator to deliver a CapEx plan to the owner sometime between August and the end of the year. The description of this “CapEx plan” is usually vague; anything will do to meet the requirement. These CapEx plans are often prepared and delivered in the form of an Excel spreadsheet.

If your properties are still using spreadsheets to manage CapEx planning and administration for a single property, or thousands of projects for a large portfolio, you have needlessly set yourself up for a trip to CapEx Spreadsheet Hell!

hotel capex hell

The Nine Circles of CapEx Spreadsheet Hell

Using spreadsheets to manage CapEx will eventually lead owners and operators into each of the following Nine Circles of CapEx Spreadsheet Hell: 

Inefficiency

Regenerating CapEx plans every year as a stand-alone process requires hours of dedicated time. Management at the property, regional, and corporate level must identify, describe, scope, price, and prioritize each project at each property.

Hotel owners are faced with individual spreadsheets from each property and/or multiple management companies which must all be compiled into a common format for portfolio level review and analysis.

Inconsistency

Inconsistency in project titles, scopes, and budget estimates make it extremely difficult to estimate CapEx costs across the portfolio, compare costs between similar properties, and aggregate purchasing and contracting across the portfolio to drive the lowest pricing from suppliers and contractors.

In a recent CapEx submission for a portfolio of 180 hotels, “PTAC” replacement projects were listed (and “speled”) in 26 different ways. Some of the PTAC projects included tax, freight, installation, and disposal; some only the purchase price of the PTAC unit. Some project costs were based on national account pricing; some on last year’s purchase costs; some on local supplier estimates.

Inaccuracy

Spreadsheet numbers entered as text, formulas overwritten or corrupted, and errors in column ranges can cause errors in individual projects, as well as property and portfolio totals. Checking thousands of projects for spelling, math, and spreadsheet entry errors is both mind-numbing and time consuming.

Inattention

CapEx planning often conflicts with the preparation of annual operating budgets, and is usually considered a lower priority for management time. CapEx plans are often hastily assembled at the last possible moment.

This time conflict is exacerbated by the stand-alone nature of spreadsheet based CapEx planning.

Integration

Spreadsheets typically cannot be integrated with other systems that are used to purchase, administer, manage, and maintain capital assets.

  • Asset age and condition data from the Maintenance Management System (computerized or manual), must be transcribed into the CapEx planning spreadsheets.
  • Fixed asset accounting system records are typically not available at the property level where CapEx planning is taking place.
  • Reflecting CapEx approvals, funding, and procurement processes in hotel accounting systems becomes a manual transcription process.
  • Project management systems typically cannot be simply updated from approved CapEx plan spreadsheets.

Updating fixed asset and maintenance records when assets are replaced does not flow smoothly from a spreadsheet based CapEx planning process.

Integrity

Capital equipment data (age, useful life, maintenance history, cost, etc.) must be transcribed from equipment records into the CapEx planning spreadsheet. It is nearly impossible to maintain this integrity as it is transcribed from each individual equipment record to each individual CapEx project.

Often, properties resort to guessing or making up this data rather than finding and re-typing multiple data points for each project.

Data Entry and Reporting

CapEx planning data and reports need to be formatted differently at each stage of the process. Property level planning requires input fields that control consistency and automatically correct errors. Portfolio level review requires less individual project detail, but accuracy and consistency on project names, scope, costs, and timing.

Collaboration and Coordination

Good CapEx planning requires an iterative process that fosters collaboration between management staff at the property, regional, and corporate levels, subject matter experts, and Ownership. It is very difficult to keep track of the status of review, requests for information, plan revisions, approval, and execution when the plan is on a spreadsheet that must be edited and redistributed with each change, and at each step of the process.

Indecision

Spreadsheet based CapEx planning makes it difficult to confidently estimate CapEx expense, cash flow, and project timing. This lack of confidence leads directly to indecision at the Ownership level, delayed approvals, and difficulties executing CapEx in a timely and efficient manner.

Finding CapEx Paradise or “isn’t there an App for this?”

You wouldn’t consider using a spreadsheet to manage your contact list; manage depreciation schedules for fixed assets, or manage your guestroom inventory; you probably use software applications specifically designed for each of those functions.

Cost effective CapEx planning and administration technologies are available as standalone systems, as part of an existing system (accounting, maintenance management, etc.), or agile integrated systems that can connect across multiple systems, organizations, and levels.

Additionally, “Big Data” technology has enabled leveraging existing property level systems and process to provide a strong foundation for portfolio level CapEx planning, administration, and execution. Increasingly, data can be shared across systems seamlessly, eliminating redundant data entry, and providing for greater accuracy, reliability, and efficiency in CapEx planning, administration, and execution.

Here are the seven steps to find CapEx Planning Paradise:

Systems Based Continuous Process

Implement an integrated CapEx planning and administration technology that supports continuous planning.

Commit to developing and maintaining a ten year forward looking CapEx plan for each of your hotel properties, and put processes in place to ensure that projects are entered and discussed on a regular basis throughout the year.

Planning Consistency

Support your continuous process with standards that help bring consistency to your planning. Define what is considered CapEx, and which non-CapEx expenditures you would also like to include in the planning process (e.g. large periodic maintenance expenses).

Develop a dictionary of project categories, areas, names, and scope descriptions that supports consistent planning from year to year and hotel to hotel. Decide how budgets should be presented, and how budget add-ons should be calculated (e.g. design, tax, freight, fees, etc.).

Data Integrity

Design your system so that data resides in the appropriate system, and is available to the CapEx planning system as needed. That is, avoid replicating fixed asset data in the CapEx system if it is available in the maintenance management system or accounting system.

Transparency

Choose a system and process that provides transparency across linked systems and parties to the process. Management staff at the property, regional, and corporate office should have access to the same information as Ownership, asset managers, auditors, etc.

Transparency is critical to any collaborative planning process.

Long Term View

Ensure that the system captures all large and/or recurring CapEx projects; for example renovations, fire alarms, chillers, boilers, roofs, exterior paint, etc. Scheduling these projects out ten years provides a strategic long term view of the properties capital needs, and supports effective portfolio planning by Ownership.

Focused Review Process

Set up the CapEx system to support the review and approval process required by Ownership, as well as providing for incremental review of individual projects, and focused review of “classes” of projects. Rooms renovations require in depth review and planning; PTAC replacements do not.

CapEx approvals and administration should mirror this focused review. Senior management needs to review the scope of every renovation, but does not need to approve every replacement PTAC.

Portfolio Planning

The CapEx system and process should support portfolio level planning by both the Management Company and Ownership, and should allow aggregation of purchasing and contracting across the portfolio.

Summary

Having a strong CapEx planning system and process in place will help ensure that capital funds are only invested at their highest and best use, and that you will never again need to visit The Nine Circles of CapEx Spreadsheet Hell.

Take action:

  • Implement integrated systems.
  • Adopt a continuous planning process.
  • Insist on data accuracy, consistency, and efficiency.
  • Require a transparent process.
  • Take the long view.
  • Focus CapEx review and administration.
  • Negotiate best value through portfolio purchasing.

About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 30 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations.

His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering provided him with broad experience in all phases of hotel and resort planning, CapEx management, construction, engineering, and facility operations. Tom also served as the General Manager for The Prudential Realty Group’s northeast hotel portfolio, giving him a strong owner’s perspective on real estate development and asset management.

After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Service, Profit or Both? It’s All About the Balance

Prioritizing Service Excellence, Profit, or Both? 

Here’s how to balance that fine line between customer satisfaction and making money.

Most commentary on hotel service excellence expresses some or all of these themes: Exceeding customer expectations, anticipating guests’ needs, being responsive, creating the impression that someone cares, memorable moments, the difference is service, and so on. I couldn’t agree more, but it is very difficult to measure the impact of these themes in a vacuum. Yet at times it seems that it is all about the service and that other priorities will take care of themselves.

In the past, I discussed service expectations vary by hotel and customer as well as by other conflicting priorities. Let’s examine a few facts regarding hotel types and available resources:

  • Select-Service: A rooms product with limited F&B and other amenities. These properties typically operate with .5 of a Full-Time Equivalent (FTE) per available room and a handful of managers/supervisors.
  • Full-Service Commercial: Guestrooms, restaurants, lounges, function space and so on. These properties typically operate with .8 to 1.0 FTEs per available room and, depending on size, 20 to 30 managers/supervisors.
  • Resort: Depending on the level of amenities – mainly F&B, Golf and Spa – these properties will typically operate with 1.2 to 1.4 FTEs per available room and 30 to 40 managers/supervisors.
  • Luxury: Potentially all of the above plus a Guest Services Department with management staff. These properties will typically operate with 1.5 or more FTEs per available room and 40 to 50 managers/supervisors.

(Please don’t hold me to the numbers or exacting product descriptions, but for the purposes of this discussion they are in the ball park.)

The other reality is the level of experience and seniority of the personnel at these different types of properties. The higher you go up the food chain the more seasoned and capable the team is. The point is you simply can’t deliver similar styles and levels of service across all hotel types. Nor do you want to; you simply won’t have the same resources or experience levels.

Secondly, in this asset-light environment the operator is charged with balancing the priorities of the brand and the ownership, which in simple terms are:

  1. Brand: The brand company wants to maintain the integrity of the brand, maintain loyalty of the brand’s customers, maximize their fees and continue growth.
  2. Ownership: Ownership is more interested in cash flow from operations and return on investment. The question is: do they want sustained profitability or a short-term boost so they can flip the asset?

To be successful, the operator must understand his or her customer expectations, consistently meeting and slightly exceeding those expectations – never below and never too high. Operators must balance the conflicting goals of ownership and the brand by providing just the right level of service so guests continue to come back and provide good cash flow to ownership, which should therein encourage owner’s to reinvest in the property and the brand.

Picture the select-service hotel that decides to add room service to compete with the full-service hotel down the block. How about the full-service hotel that cuts back on the bell staff to improve short-term profitability? Or the luxury-tier operator who is so focused on being an ‘hotelier’ that they miss the profit motive.

In the early days of brand segmentation, this type of behavior was prevalent and it still exists today, though in more subtle forms. This is also why an up-and-coming manager in a full-service hotel may not transition well to a select-service hotel or vice versa – at times they have difficulty leaving the values they learned growing up behind.

The reality is the customer you brought over from the select-service to the full-service model by manipulating service offerings and reducing prices is not really your customer. Sooner rather than later you will need to go back to the status quo and you will quickly lose that customer who was there on false promises that weren’t true to the brand. You are far better off focusing on the consumer segment attracted to your hotel type, building a strong foundation of loyal customers as a result of consistently staying true to the brand promise and meeting expectations.

No matter what type of hotel we operate, we have to deliver the basics well and add to the service delivery relative to the customer expectation and brand promise. You really can’t expect the select-service staff to anticipate guest needs or create memorable moments – just the basics please. At the full-service commercial hotel, you have a few more facilities available, but in reality your prime customer – likely the business traveler – wants the basics and responsiveness to special requests. At a resort or luxury-tier hotel, customized service delivery to individual needs and making the customer feel special are the factors that will create value.

We all need to remember we are running a business. For the business to run successfully over the long-term and for you to stay employed, you need to meet customer expectations, keep the brand integrity in line and maintain strong cash flow to ownership. The operator’s job is the most difficult; it’s a balancing act and it can be a steep drop in either direction if you step the wrong way. Service excellence is an integral part of your success and it can be the differentiating factor. The point is that you can’t win with service alone; you have to get the other parts right as well.

This article originally appeared in Hotel Interactive

Chuck KelleyChuck Kelley is a Partner with Cayuga Hospitality Consultants a network of independent consultants specializing in hospitality/lodging https://cayugahospitality.com/consultants/chuck-kelley/. He spent 32 years with Marriott International, beginning as an Assistant Restaurant Manager and worked his way up to Executive Vice President responsible for Marriott’s Caribbean/Latin America Region. Along the way he held positions as Director of Restaurants, Director of Marketing, Regional Director of Sales and Marketing, General Manager and Country Manager Australia. A graduate of the University of Hawaii, with a BS in Travel and Tourism Management. He is an active member of the Baptist Health South International Advisory Board and previously served as Chairman of the Caribbean Hotel and Airline Forum for the Caribbean Hotel and Tourism Association. He served with distinction in the US Army in Vietnam having earned a Purple Heart and Bronze Star for valor in combat.

Hospitality CapEx Math 101 – Useful Life

Highest and Best Use – CapEx – Part II

CapEx Math 101 – Useful Life

There are four important concepts that hotel owners and operators need to know about CapEx useful life.  Applying these concepts is crucial to good CapEx decisions and achieving highest and best use of owner’s capital.

The four important concepts of CapEx useful life: 

  • Maximize Useful Life
  • Match the Investment Horizon
  • Consider Risk, Obsolescence, Technology, and Taxes
  • Do the Math

 

Useful Life

Many hotel capital assets just do their job year after year, with minimal inputs of operating expense.  Examples of these assets include roofs, exterior walls and windows, water distribution systems, and fire and life safety systems.  These assets are great examples of the most basic rule of CapEx useful life:

Maximum Actual Useful Life = Maximum Return on CapEx $

The longer the actual useful life of a capital asset, the lower the costs become per unit of use.  In simple terms, a $900,000 roof that must be replaced after 15 years costs about twice as much per year than if the roof’s life is extended to 30 years.

Although it is easier to think about reducing CapEx costs “per year”, extending useful life is beneficial only in delaying the capital expense required to replace the asset.  There is really no “per year” benefit; only a delay in expenditure of the total replacement cost.

Here is a simple cash flow analysis:

thumbnail of TR1

This analysis is oversimplified to illustrate the point, but clearly demonstrates that there is an advantage to maximizing the useful life of this roof.  The 15 year roof costs $1,972K ÷ 30 yrs. = $66K/yr.  The 30 year roof costs $1,072K ÷ 30 yrs. = $36K/yr.

 

Maximizing Useful Life

How do you maximize the useful life of capital assets?  The concepts are pretty simple, and can be applied to most capital assets.

  • Buy the right capital asset to begin with, and
  • Take good care of it.

Here are some ideas for the roof example:

Design, Specification, and Installation – For both the initial investment, and any subsequent replacements, it is the owner’s responsibility to ensure that the roof is properly designed, specified, and installed.  This is the opportunity to make good decisions about expected useful life, warranties, maintenance requirements, price, and value.

thumbnail of TR3

Inspection, Maintenance, and Repair – Roof warranties generally require documentation of inspections, maintenance, and repair before the warranty will be honored.  Although it is the operator’s responsibility to ensure that the roof is properly inspected, maintained, and repaired, it is in the owner’s best interest to confirm that this work is being done, and that systems are in place to track and document the work.

The obvious intent of the warranty’s inspection, maintenance, and repair requirements is to extend the useful life of the roof at least until the end of the warranty term.  These same measures will continue to help extend the life of the roof beyond the warranty term.  It is absolutely possible to extend the actual useful life of a roof 5 to 15 years beyond the warranty period with regular inspection, maintenance, and repair.

There is also the “maintenance paradox” to consider.  Well maintained assets are less likely to require repair, and are less costly to maintain over the life of the asset.  Poorly maintained assets require more repair work, are more expensive to maintain, typically have a shorter useful life, and are more likely to fail catastrophically.

Finally, it is important to note that extending useful life only applies to existing capital assets, and is almost entirely under the control of the hotel’s operator.

Buy right, and insist that capital assets are well maintained.

 

Operating Expenses

Capital assets often require ongoing labor, energy, water, maintenance, and repair expenses.  In some cases, these annual operating expenses approach or exceed the cost of the capital asset itself.

Capital asset operating expenses typically increase over time.  As assets age, they often operate less efficiently and require more maintenance and repair.  While operating expenses complicate the analysis of maximized useful life, they do not alter the basic math.  For major capital assets, it is important that owners quantify these operating costs, and balance them against the capital replacement costs.  Well-functioning capital assets should only be retired when the operating expense balance tips in favor of replacement.

Extend Useful Life until replacement life cycle costs are below current operating costs.

 

Investment Horizon

Would you replace the $900K roof in the earlier example if you were planning to sell the property in two years?  Probably not.

Say the roof had failed, and there was no choice about replacing it.  Most owners would choose the least expensive replacement they could find, with the only requirement that it last at least until after the expected sale date of the property.  Let the new owner worry about the roof!

Conversely, if this hotel was a “core asset”, and you intended to hold the property for the next twenty or thirty years, you would be well advised to purchase a premium quality new roof with the lowest total life cycle costs.

Coordinating capital asset useful life with the owner’s investment horizon requires good judgement about how these decisions will be factored into the sales price.

  • Will the prospective buyer discount the purchase price by the full cost of replacing the worn out roof?
  • Should you replace the 30 year old chillers two years before sale, and get the value of the increased operating cash flow from energy and maintenance savings?
  • Will the full revenue benefit of a guestroom renovation be reflected in the sale price?
  • Will a deferred renovation be discounted in the purchase price by the buyer?

Balance CapEx useful life with owner’s investment plans.

 

Risk

Operating risk is an important consideration in useful life decisions.  Fire suppression, life safety, and security system replacement decisions all carry a substantial element of risk.  Failure of one of these systems in an emergency can potentially put a hotel out of business, but replacement is expensive, and has no positive affect on revenue.

Some capital assets also carry regulatory risk.  For example, although smoke detectors may continue to function for 15 or 20 years, they have a regulatory useful life of only ten years.  They “must” be replaced after ten years by regulation.  The regulatory risk penalty is a fine or injunction.  The safety risk is a guest or employee death or injury in the event of a fire.

Certain mechanical and electrical systems are critical to the operation of the hotel, and their failure can have a profound effect on the business.  For example, a full service Marriott hotel in Virginia suffered the failure of all three of its heating and domestic hot water boilers at the same time.  Unfortunately, the failure occurred during the winter, and during a period of high group occupancy.

Had the boilers been replaced in a planned fashion, they would have cost the owner only $275K.

Because of the failure, the owner paid a premium for the replacement boilers, expediting fees, overtime expense for installation, fees for temporary boilers, and substantial rebates to groups using the hotel.  The hotel’s reputation was also damaged in a very competitive market, reducing future revenues.

The additional one-time costs associated with the failure were roughly twice the cost of a planned boiler replacement.

Consider operating and regulatory risk.

 

Obsolescence

While extending the life of some capital assets indefinitely would be ideal (e.g. a hotel’s roof), maximizing the useful life of obsolete assets may require replacing them before the end of their functional life.

For example, 30+ year old chillers in perfect operating condition are not at all unusual in well-maintained hotels, but these machines may be as much as 25% less energy efficient than current technology.  Energy savings alone can often justify early replacement of this equipment.

Replace obsolete equipment.

 

Technology

New technology can eclipse the useful life of a capital asset.

In the early ‘80’s, hotels still had electro-mechanical telephone systems that required an operator to place long distance telephone calls.  The charges for the long distance call were printed out by the phone company on a dedicated “HOBIC” teletype machine located in the hotel’s front office, and then manually posted to the guest folio (an actual printed piece of heavy paper or cardstock) using another electro-mechanical machine.

Regulatory changes, and advances in computer technology completely replaced all of this equipment, required no direct labor expense, and improved accuracy and timeliness of transactions.  Computerized telephone systems, call accounting systems, and integrated hotel property management systems reduced operating expense and increased revenues.  Front office staffing requirements were halved.  System “maintenance” was handled remotely at substantially less expense.

New technology completely changed the operation of the telephone department and front office of the hotel, and also required significant new capital asset investments.  Of course, all of the old telephone equipment was still perfectly functional, and could have continued to operate for years had its useful life not been eclipsed by new technology.

New technology has driven similar changes in customer relationship management, property management, lighting, lock systems, energy management, accounting, and maintenance management.

Embrace new technology.

 

Depreciation and Taxes

There are three depreciation and tax questions related to useful life.

One: What happens if you replace a capital asset before it is fully depreciated?

  • EBITDA is not affected.
  • Owner’s capital is required to purchase the replacement capital asset.
  • The owner’s P&L must reflect for both the undepreciated costs of the retired asset, as well as the first year’s depreciation of the replacement asset.
  • Owner’s profit goes down by the excess depreciation expense.
  • The owner avoids income tax on the decreased profit.

Two: What happens if you replace a capital asset when useful life equals depreciation life?

  • EBITDA is not affected.
  • Owner’s capital is required to purchase the replacement capital asset.
  • Depending on the exact details of the replacement timing, there may be two depreciation payments in a single tax year (one for the old asset, one for the new), or one for the old asset one year, and one for the new asset the following year.
  • Profit goes up or down by the change in depreciation expenses.
  • The owner pays more or less income tax on the change in profit.

Three: What happens if you extend the useful life of a fully depreciated capital asset?

  • EBITDA is not affected.
  • Cash is not required to fund purchase of the replacement capital asset.
  • Since there is no longer a depreciation expense for the asset on the owner’s P&L, profit goes up by the amount of the avoided depreciation expense.
  • The owner pays income tax on the increased profit.

Note that in all three cases, cash flow from operations does not change, owner’s capital cash requirements change in timing but not amount, and depreciation expense changes in timing but not amount.

Any resultant changes in taxable profit will change the timing of taxes paid, as well as the amount of taxes paid due to changes in tax rates or bracket.

Changes in useful life affect the timing of depreciation, taxes, and capital investment, but generally not the amount.

 

Doing the Math

See how you do on this quick math test:

Which would you pick (actual prices on Amazon)?

 

☐  Palmolive Dishwashing Liquid, Original (1.32 Gallon) @ $20.49

 

                    ☐  Palmolive Dishwashing Liquid, Original – 32.5 fluid ounce (Twin Pack) @ $5.66

 

My mother-in-law can do this math in her head faster than I can pull up a calculator on my phone.  Although I can estimate the unit costs for each container in my head, it takes a calculator to bring the answer to 4 decimal places of precision.

  • The big container costs ……………………………………. $0.1227 per ounce
  • The Twin Pack costs ………………………………………… $0.0871 per ounce

Even though there is a 40% per ounce price difference between the big jug and the twin pack, it doesn’t really matter which container of soap you buy; it isn’t a material expense.  However, while overspending on a bottle of soap is no big deal, choosing the wrong capital asset, or paying more than you need for CapEx may affect the financial success of the hotel.  The larger the CapEx, the more material the effect on the owner’s financial success.

Once you start considering useful life, inflation rates, revenue effects, energy costs, labor expense, tax effects, and so forth in your CapEx analysis, the math quickly becomes too complex for even my mother-in-law’s capable brain.

  • Simplify and state your assumptions and alternatives
  • Quantify and include all cash flows
  • Itemize other decision factors; risk, obsolescence, etc.

Incorporating these factors in a flexible analysis spreadsheet will allow you to test your assumptions about useful life, operating costs, and timing, and to directly compare the costs of alternative CapEx investment strategies.  An example analysis is attached.

Do the Math, test your assumptions.

 

Summary

Understanding how useful life affects CapEx costs and decisions will help owners achieve highest and best use of their capital dollars.

  • Extend useful life

  • Maintain & repair

  • Keep an eye on operating expense

  • Consider risk

  • Retire obsolete assets

  • Embrace new technology

  • Don’t worry about taxes & depreciation

  • Do the math and test your assumptions


About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 30 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations.

His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering provided him with broad experience in all phases of hotel and resort planning, CapEx management, construction, engineering, and facility operations. Tom also served as the General Manager for The Prudential Realty Group’s northeast hotel portfolio, giving him a strong owner’s perspective on real estate development and asset management.

After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Contact Thomas Riegelman

The Relationship Between LEED Hotel Design and Guest Satisfaction

An approach of environmental design in LEED hotels by comparing visual and verbal experiences.

A study in emotional design and its relationship to LEED certified hotel design and guest experience.

For: Department of Design and Environmental Analysis, Cornell University. 3423 Martha Van Rensselaer Hall, Ithaca, New York

Abstract

The goal of this paper is to highlight those actions that can change the experience of the customer during their stay by the design in the guestroom. The research carried out choice hotels located in the United States and Europe in order to find out and compare strategies of each one.

The research covered ten case studies, which were chosen by obtaining LEED certification. Once we obtained their design actions developed for getting indoor air quality, the research compared which of them were influential on the customer experiences during their stay by reviewing TripAdvisor reviews and pictures of customers.

The results show us how the LEED certified hotels have a relation between the design action of LEED and the customer’s experience in rooms. In addition, the paper reveals a group of emotional codes in terms of comfort, relaxing and visual relations between built and natural environments.

Introduction

The hotel’s rooms represent almost 70% of the total built surface of the hotel (Forster Associate, 1993). This percentage may change depending of the type of hotel (skyscraper, hotel of 4-7 floors or tourist resorts). 10% of customer purchases are driven by guestroom design (Dubé L. & Renaghan L.M., 1999) and 9% were driven by the following attributes: HVCA, aesthetics, overall size, cleanliness, comfort, kitchenette, work equipment and entertainment. In Dubè`s research, the customer gave their opinion during the stay or at the point of purchase decision. That means that the experience was not finished, leaving the possibility to change their opinion during the rest of stay. In any case, some of the attributes defined in 1999 by Dubè continue to be useful for defending the hypothesis that emotional guestroom design is more important than functional guestroom design, such as, size, comfort and entertainment.

During the last decades, architects and interior designers have been studying the guestroom through functional design features (Rutes, W.A., Penner R.H., &, Adams, L., 2001). The relation between optimal dimension, amenities and room types is the goal for architects to design a guestroom. Technical and constructive aspects are important too for designing, interchangeably the type and room’s dimension (Rutes W.A., FAIA, & Penner R., 1985).

On this line of spatial and technical aspects, U.S. Green Building Council organization is promoting sustainable actions to offer professionals a guideline, in order to get a sustainable certification for the building. Leadership in Energy and Environmental Design (LEED) is the title of the certificate and is becoming a kind of marketing brand in the hospitality industry. We still do not know how the LEED certificate may impact on the business benefits (Walsman M., Verma R. & Muthulingam S., 2014). However, LEED certification continues to be the most proper certificate for sustainable designing in the U.S. hospitality industry. Some of the most important chain hotels in the world, such as, Marriott, are promoting the LEED certification in their hotel by creating the first LEED Volume Program. So far, this company has thirty hotels with awards and has introduced the first LEED green Hotel Prototype.

LEED certification is based in point schedule by six categories (sustainable sites, water efficiency, energy & atmosphere, material & resources, indoor environmental quality and innovation. In this research, we will put the focus on the indoor environmental quality aspect because by studying its parameters of design, the researcher can understand that this is the more related category regarding the design and customer’s experience inside the guest room. These parameters are increasing ventilation, thermal comfort-design, and daylight and views, among others.

If LEED certification gives us the benefit and certainty during and after the hotel’s construction for being a sustainable hotel, that benefit is opening new lines of research for knowing the customer’s experience in a LEED certification hotel. Could a LEED hotel increase the customer experience? Or does a green hotel not always mean a successful experience for the customer? Professionals in the hospitality industry are convinced that the most important thing is the customer experience. Three of the head officers of the most important chain hotel in the world defended that idea during the lecture series in the fall semester of 2014 at the School of Hotel Administration at Cornell University. Mr. Ronald T. Harrison said, “the most important for Marritot is people; Mr. Kevin Jacobs said during his lecture, “we are passionate about delivering the best experience to our guest; and Samantha Sugarman showed the goals for facilities and design analysis in Four Seasons hotels, which are “specific style of design, don’t dictate a style, every hotel has their style and want great experience.” All of them considered the customer experience as the principal concern in the hospitality industry.

So far, we know that LEED certification has become a metric for sustainable hotels in the U.S. and the chain hotels are focusing on the customer experience for improving their benefits. The scientific researchers conducted studies about the customer experience and its impact in the hospitality industry; in addition they applied different methodological approaches.

The volume of customer reviews on the TripAdvisor website for the final purchasing decision, represents an important tool for potential customers (Melián González S., Bulchand Gidumal J., & López Valcárcel B., 2014). The electronic word-of-mouth called eWOM (Cantallops A.S., Salvi F., 2014) is more effective than communication marketing in the hotel sector (Litvin S.W., Goldsmith R.E., & Pam B., 2008; Gretzel, U., & Kyung Hyan Y., 2008).

The eWOM can be manipulated for anyone, and the authenticity of the comments can be false (Mayzlin D., Dover Y., & Chevarlier J., 2012). The impact of the TripAdvisor reviews directly affects the reputation of the hotel and changes the booking of hotels (Anderson K., 2012). Due the possibility for false reviews and a decrease in the percentage of real reviews, the researcher applied a methodology for increasing the indicator about the truthfulness of costumer’s reviews. Thus, the study continues using the impact of reviews on TripAdvisor as a source.

TripAdvisor gives the customer the possibility to insert their reviews and upload pictures of their travel before or after their stay at the hotel. The pictures taken inside the guestroom become irrevocable proof that the customer stayed at the hotel and give us information of their behaviors and memories (Harper D., 2002). In addition, it is a form of evidence that the reviews were written after the stay. Pictures in the form of postcards have been used in tourism for representing an ideological discourse in modern tourism (Albers P.C., & W.R. James, 1988) representing icons, customs or landscapes of the places to visit. The new technologic trends in smartphones and cameras give the customer the possibility to capture any moment during the stay. Often, customers use photography to spark strong memories, among others reasons (Pullman M., & Robson S., 2007). Thus, the researcher studied the pictures taken inside the room, knowing that the pictures uploaded represent positive or negative memories from the customer’s experience. Regarding what kind of pictures the customer takes during the stay, the research concluded those highlight important design elements. In other research where a photographic approach was applied through websites, researchers discovered the subject of the pictures reflecting the customer’s behavior (Donaire J.A., Camprubí R., & Galí N., 2014; Chalfen R.M., 1979). This research is focused on what they captured and not how they were made.

The current research is carrying out a new approach based on emotive design for the hospitality industry, putting in evidence the customer’s comments and pictures as the new approach for the hospitality design. Often, architects and interior designers are able to design hotels without any background knowledge about the customer’s experience. The hospitality industry, based in the guest experience, must focus more on the emotive design in hotels and public spaces (Lo K.P.Y., 2009, 2011; Masoudi A., Cudney E., and Paryani K., 2013; Pullman M., & Robson S., 2007; Jüttner U., Windler K., Schaffner D., and Maklan S., 2013).

The emotional design in guest rooms means working on designing for emotive status, such as, functional, satisfactory or memorable experience (Lo K.P.Y., 2007). Each status is defined by different emphases on its design (Barsky J., & Nash, L., 2002). It is, therefore, how we can achieve a memorable experience in LEED hotels. LEED certificate represents the top level for sustainable actions for buildings in U.S. That means that the hotel or chain of hotels wants to communicate a clear message to its guests. Having a message or theme is one of the conditions to achieve a memorable experience.

The research analyzed those designs that the customers emphasized through comments and pictures on TripAdvisor’s website. Using this approach we will be able to recognize positive or negative design aspects in LEED hotels.

The emotional design has been studied and put into practice by other disciplines that use object or symbols (Norman D.A., 2002, 2004; kim H., & Lee w., 2014). The hospitality industry is becoming a trend sector for applying new methodologies in interaction with the human behaviors. Recently, researchers are searching new approaches for understanding the customers’ behaviors using eye tracking (Robson S., & Noone B., 2014).

This research highlights the opportunity for using the emotional design in the hospitality industry because it is a sector based in human experiences. The success of guestroom design must be understood as those spaces are able to offer many experiences to the customers. The idea of designing many rooms within a room (Siguaw A.J., & Enz C.A., 1999) is the basis for thinking that a guestroom is not only a functional space or a satisfactory experience. The real loyalty of customers in a guestroom of a hotel is when the expectation of the room design is exceeded and memorable experiences are reached through it (Skogland, I., & Siguaw, J. A. 2004). If that emotional guest room is applied in LEED hotels improving its commitment with the environment and energy, we can break old concepts in the hospitality industry and add value to guestroom experience in hotels.

Material and methods

In order to obtain results that can be used or put into practices by professionals in the hospitality industry, the material and methods applied were collected directly from resources used by professionals or real customers.

The stages used to obtain material and the methodologies applied in this study were mainly based in two phases. In every one of them, the goals were different, which means each phase used different methodologies. The first stage of the study was representative, collecting data from different sources. The second stage focused on creating groups of emotional design codes in LEED hotels.

Discerning visual design codes.

All the photographs in bathrooms and bedrooms were codified according to the parameters of tangible or intangible elements and their spatial relation (visual and physical). The total of elements coded in bathrooms and bedrooms were 32.

According to this study of the customers’ visual impact, we could identify three types of user experiences. Those experiences are based on the tangible element of bed as a “sleeping” experience, the bathtub jet/shower sauna as a “relaxing /spa” experience, and the physical space of living room as a “living / welcoming” experience.

If we think in experiences (sleeping, relaxing/spa and living) and not just in spaces or elements distributed in a functional way, we are actually changing the traditional concept of hotels. A hotel room design geared towards an emotional design would improve the current strategies of many hotels that only use technology (free wifi or tv flat screen) as added value in rooms. (Gilmore J. H., & Pine II B. J., 2002).

The research highlighted the importance of getting a memorable experience while the sleeping, relaxing in the living area and taking a shower.

Verbal codes in memorable experiences.

The next phase was to figure out which customer’s comments made reference to those elements identified as keys to getting a memorable experience in the previous step, and which comments represented a positive emotion.

We studied the comments of 217 TripAdvisor users, obtaining a total of 291 codes between bathrooms and bedrooms. These codes gave us more information about the elements studied previously by the visual impact, and others features which were not photographed. In order to discover how positive the experience was, the study was able to detect those memorable experiences by identifying related adjectives with the elements studied.

If we compare the results between the elements of visual impact method and customers’ comments, we can conclude that the bathtub or soaking tub and the views to outside are the elements to consider in the design of the bathroom that will most likely result in a memorable customer experience.

A visual connection between the bathtub and the bed, an outdoor bathtub, a flat shower separated from the bathtub, or a vanity with two sinks are some of the elements in bathrooms that increase positive emotions (see table 9).

Comparatively, the elements in the bedrooms were beds, views to the outside, furniture and the living room area. The artificial light and natural light were not analyzed due the low percentage of customers’ comments. Nevertheless, the results of the elements studied were high enough to find out how customers achieve memorable experiences in bedrooms.

In the living area of bedrooms, the fireplace element was the most commented by customers with 5.5% of customer’s positive emotions, using adjectives like excellent, fantastic or lovely. 5% of customers appreciated décor or a modern style as a way to make them feel like they were far away or made them feel at home.

Conclusions

The study analyzed LEED hotels in Europe and in the U.S. to figure out if the design of sustainable actions and customer’s satisfaction had a relation between them. The room was the space chosen to study the correspondence between sustainable design and satisfaction. Using a method based on the photographs taken by real customers we coded all the elements with a visual impact in bathrooms and bedrooms. Once we categorized them, we could find out which of them had higher visual impacts. In the bathrooms, the bathtub or jetted tub, the mirror and the vanity, which had 14.6 %, 14.6% and 14% respectively, were the elements highlighted by customers.

In addition, the design of the bathroom with a bathtub beside a window facing the outside with a wonderful landscape, garden, or urban scene was considered by customer as a positive emotion, making it a memorable experience in almost 20% of clients. In bedrooms, high visual impact was mainly concentrated on four elements: the bed, furniture, natural light and views with 13.7%, 20.3%, 20.4% and 15.65% respectively. A comfortable bed and an attractive view to the outside were the most rated by customers.  All these elements were coded in order to identify and categorize them according their own features, such as, tangibility, intangibility, visual relation, physical relation or technology.

Once the results were studied, we discovered that there was a correspondence between sustainable design criteria and customer satisfaction. The data suggested than a customer’s experience may change in the hotel if some of these criteria are not present. The natural light and views are those two essential elements for obtaining a LEED certificate in IEQ category with high visual impact.  The views to the outside in bathrooms represented 9.1% and natural light represented 9.7%. These percentages in bedrooms are higher, in which the view was 15.65% and natural light was 20.4% of customers. The IEQ category in LEED certification establishes two criteria regarding views and natural light, which are EQc8.1 Daylight and views – daylight 75% of spaces and EQc8.2 Daylight and views – views for 90% of spaces. Both criteria provide building occupants with a connection between indoors spaces and the outdoors through the introduction of daylight and views.

If the photographs show what elements have a visual impact to the customers in the guestroom during their stay, the second aim was to find out if a sustainable design has the ability to make customers feel positive emotions in rooms. The research suggested that design in rooms could produce positive emotions in customers. In addition, according the study, the customers could get a memorable experience through the design (Lo, K.P.Y., 2007).

To get information about the positive customer emotion and design, we studied all comments posted on TripAdvisor website. All comments with positive adjectives were classified and put in relation with the design’s elements studied previously. A main outcome of this method was that customers experienced most of the positive emotions and memorable experiences in three different elements of the room (one in bathroom and two in the bedroom). These elements were the bathtub, bed and fireplace.

However, the study also discovered that without comfort and views to outside, the customers did not achieve a memorable experience. 19.6% of customers described their experiences in the bathtub with views to outside as an amazing moment. More than 45% of customers thought that the size and comfort of the bed was very important to get a memorable experience. This percentage increased when the room offered views to the landscape, representing 38.6% of positive emotion in bedrooms and 19.6% in bathrooms .

The strong correspondence between the customer rating in rooms of LEED hotels on TripAdvisor website reinforces the hypothesis that sustainable actions are related to customer satisfaction. This result and the outcomes previously shown highlight the possibility of considering a new indicator of sustainable design that is able to measure positive emotion in hotels.

Moreover, this study shows a code series that compares elements of design and the emotional charge of customers in hotels. The challenge of this research is discovering all emotional codes through the design in hotels, in order to build an indicator and emotional guidelines of design able to predict the customer’s experience. In this study, we focused on visual impact and comments codes of design and customer experience. Nevertheless, we realized during the process that a code series related with human well-being, physical perception of spaces and use of technology also existed., It would be interesting to study these elements as well, in order to be able to predict memorable experiences in hotels by using an emotional design.

To view the paper in its entirety, including illustrations, tables and references, please click below .

 

This paper originally appeared in ARA Journal of Tourism Research 6-1, (2016).


About the Author:

Ivan Alvarez Leon is a former member of Cayuga Hospitality Consultants

Highest and Best Use – CapEx Planning

Most hotel management companies and hospitality asset owners are at the front end of CapEx planning for 2018 and beyond.  Most participants in this planning will ask themselves, at one point or another; Is CapEx planning a horrible waste of my time?”

For any smart hotel owner, and any smart management company, CapEx planning is absolutely worth doing, and absolutely worth doing well!

What’s a CapEx and Why is CapEx Planning Important?
It depends…….

BusinessDictionary.com offers the following definition:

“An amount spent to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period.”

Hotel owners, operators, brands, and accountants all tend to have different perspectives on the definition of capital expenditures (CapEx), but most definitions of hospitality CapEx are based on the tax law/accounting treatment of fixed assets.

The accounting perspective is the most straightforward. Accountants are interested in compliance with GAAP (Generally Accepted Accounting Principles), and the easiest fixed asset and tax accounting process.

The operator’s perspective is slightly more complex. Typical management contracts include incentives for increasing revenues and operating profit. Any CapEx that raises revenue or reduces expense is likely to be a financial benefit to the operator; regardless of the cost of the CapEx.

For example, when an operator replaces (CapEx) a broken piece of equipment, rather than repairing it (operating expense), the “savings” go right to the profit line and potentially earn incentive compensation. In similar fashion, an operator increases “profit” if they reduce maintenance cost (OpEx), even if that lack of maintenance reduces the useful life of the hotel’s equipment (CapEx).

The brands are also in an interesting position regarding CapEx. Brands have a strong financial incentive to increase hotel revenue (they collect more franchise fee), but they do not participate in hotel capital costs. Brand required renovations and improvements increase fee revenue at no cost to the brand. It is easy to require something if you don’t have to pay the bill!

However, the hotel owner’s perspective is probably the least ambiguous, since they are the ones paying the CapEx bill.

Here is the definition of a capital asset from a prominent Mid-Atlantic hospitality REIT:

“A new physical asset with a normal service life of at least one year, a minimum unit cost of $500 (including taxes, freight, installation, and fees), and an aggregate cost of at least $1,000.”

Owners are typically concerned with four major types of cash flow over the life of their hotel investment;

  • Purchase price,
  • Operating profit or loss,
  • CapEx, and
  • Sales price.

Owners want to minimize cash outflows and maximize cash inflows. Purchase price and CapEx are the only flows directly controlled by the owner, and it is almost always the owner’s practice to spend the least amount of money on CapEx possible. It is critically important to Owners that they get the “highest and best use” out of each CapEx dollar.

The owner’s definition is the only one that really matters, and for long-term success, operators, brands, and accountants should understand the owner’s definition of CapEx, and align their CapEx planning and execution with the owner’s objectives.

Does CapEx matter?

Of course CapEx matters, particularly to hotel owners.

Capital expenses are a material ongoing cost to all owners of hotel properties. According to the ISHC CapEx 2014 Study, capital expenses average over 7% of a hotel’s gross revenue, every year. There is variation in these percentages by property type, age, location, and ownership, but in every case, CapEx is a material expense to hotel owners.

It is also a fact that most Hotel owners are perennially short of capital funds. Optimal use of capital is crucial to the long term financial success of any hotel real estate investment.

What’s important?
“Highest and best use of owner’s capital”

Highest and best use of owner’s capital is the most important objective of hospitality Capital Expenditure planning.

However, this high-level objective doesn’t always help in developing specific strategy and tactics for capital investments. It is more useful to focus on some of the more specific planning objectives when building a good capital plan.
Here is a short list of important CapEx planning objectives (in priority order) that will help achieve “highest and best use of owner’s capital”:

  • Provide advance notice of property/portfolio capital funding needs.
  • Plan both property level and portfolio level investment cycle, acquisitions, and sales.
  • Optimize property market position and revenue potential.
  • Optimize property operational efficiency.
  • Lower property risk (service disruption, equipment failure, life safety).
  • Harmonize property stakeholder’s interests; owner, asset manager, operator.
  • Optimize CapEx project execution.
    • Fiscal control
    • Low overhead costs: management time, administration, accounting
    • Best value/pricing for purchases, contractors, project management
    • Minimal disruption of service and operations,
    • Maximize the return and minimize the cost of CapEx.

Any CapEx planning process that does not satisfy these objectives will fail to meet the overall objective of “highest and best use of owner’s capital”.

What should Owners and Operators do?

Take action!

Hospitality asset owners and operators should take the following three steps to improve the CapEx planning for their properties.

1. Communicate investment objectives

Hotel owners need to understand their own portfolio and property objectives, clearly articulate those objectives, and communicate those objectives to their asset managers and operators.

Core assets have very different CapEx planning objectives than assets that may be held for only two or three years. Successful properties in strong markets will have different CapEx priorities than failing properties that are about to be sold. It doesn’t make sense to replace individual pieces of FF&E in a property that is being scheduled for a complete renovation, while it does make sense to replace FF&E in properties where renovations will be delayed.

Communicate well, and asset managers and operators will be able to deliver CapEx plans that reflect the owner’s investment objectives.

2. Require a high standard of CapEx planning

Asset managers and operators charge a substantial fee for their services. Owners should demand that they earn their fee when it comes to CapEx planning.

Good CapEx planning requires three important elements:

  • Systematic process
    CapEx planning should be supported by computer software systems integrated with accounting, purchasing, maintenance, and asset management systems. A systems supported approach makes it less expensive to maintain good data about the past, present, and future capital needs of the property, and provides continuity through management and personnel changes.
  • Long term perspective
    A ten year forward looking CapEx plan will provide adequate advance notice of all of the property’s CapEx requirements. At minimum, CapEx plans should include the owner’s remaining “hold” period for the asset if less than ten years. Long term planning contributes significantly to both the completeness and the accuracy of the planning effort as scope and budget detail is added to projects as they become closer in time.
  • Completeness
    The CapEx plan should include everything that the property will need to continue operating the business efficiently and effectively: PIP’s, renovations, building exterior projects, building systems, major overhauls or upgrades to equipment or systems, Brand required upgrades, etc. The more inclusive the plan, the easier it is for ownership to make the larger property and portfolio investment decisions, and the less likely that ownership will be surprised by an unexpected funding need.

Set a high standard, and don’t accept incomplete or poorly done CapEx plans.

3. Make it a conversation

Operators and asset managers are closest to the guest, most aware of their competitive set, and have the most specific knowledge of property condition. They are also most aware of how guest satisfaction, market position, and property condition change during the year. Take advantage of this knowledge to inform CapEx planning.

The planning effort will be more effective if it is part of daily operations rather than an annual “exercise”. Make CapEx a specific part of property operations reporting, even if major projects are being executed by third-party project managers. Discuss CapEx project status and planning during every owner and asset manager meeting.

Let these conversations drive adjustments to the CapEx plan during the year, and support better investment decisions at both the property and portfolio level.

Summary

1. What’s a CapEx?

Whatever the property owner defines as CapEx.

2. Does CapEx matter?

Yes, a lot. Particularly to hotel owners.

3. What’s important?

Squeezing the most value out of every capital dollar;

“Highest and best use of owner’s capital”

4. What should Owners and Operators do?

Know their investment objectives, communicate, demand a high standard of management and planning, and keep a lively conversation going throughout the year.


CapEx Part II – Hospitality CapEx Math 101

Understanding how useful life affects hospitality property CapEx costs and decisions will help owners achieve highest and best use of their capital dollars.

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CapEx Part III – The Nine Circles of CapEx Spreadsheet Hell

Having a strong CapEx planning system in place will help ensure that capital funds are only invested at their highest and best use.

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About the Author:

Thomas Riegelman offers an extraordinary range of expertise in facility and asset management, with over 20 years enterprise level executive experience managing multi-unit hotel, resort, and military housing operations. His 19 years with Hyatt Hotels Corporation as VP of Technical Services and VP of Engineering, and General Management role with Prudential Realty overseeing their Northeast hotel portfolio provided him with broad experience in all phases of hotel and resort planning, CAPEX, construction, engineering, and facility operations. After graduating from the Cornell University School of Hotel Administration with a concentration in hotel planning and design, he earned an MBA in Finance from the University of Chicago Booth School of Business. Tom also attended the Ecole Cordon Bleu in Paris.

Tom is the principal in charge, and personally supervises all consulting engagements by RA Associates.

R-A Associates provides management consulting services focused on creating and sustaining the long term value of hospitality real estate assets.

  • Property Planning and Design,
  • Facilities Operations, and
  • CAPEX.

Contact Thomas Riegelman

A Lodging Industry Consultant’s Nightmare

The Consultant’s Nightmare

At what point in the client inquiry do you begin to realize that this is another call for free advice? Or the client really does need your help, but has no idea what a good consultant typically charges and will certainly gag when he/she finds out?

How do you as a lodging industry consultant sell what the client needs, but doesn’t want to pay for? How do you go from inquiry to lead to agreement to dollars?

What are the alternatives?

  • Provide a little pro bono advice in hopes that this will lead to something?
    • Probably not a good idea, because advice is what you sell and giving free advice rarely if ever leads to getting paid.
  • Charge what the client is willing to pay?
    • Discounting your services sets a precedent you don’t want.
  • Quote a nominal fee plus a percentage of future upside?
    • Might be good and might not be as you are dependent on the client’s performance not yours.
  • Define the value for your services in the client’s terms? Show or calculate an ROI on your services?

If you can ROI your services in the client’s terms you stand an excellent chance of capitalizing on the opportunity. Start the conversation with a couple of questions. What would be a desirable outcome? Is there value if we can help you get there now vs. trial and error over time?

If nothing else the client will clearly define his/her expectations, but it will also provide you with the parameters to calculate the ROI on your services. Let’s look a few basic examples for my fellow lodging industry consultants:

  • Improved food cost of 2 points. Over a 12 month period that would result in $____ in department profit.
  • RevPar increase of 5% – increase in rooms department profit of $____
  • Energy audit and recommended actions – potential of $____ in savings over a 12 month period.
  • Average F&B check improvements
  • Shift the rooms mix to higher rated segments and improvements in ADR.
  • Channel distribution – reduction in commissioned business by X%. Savings will flow through to the bottom line.
  • Task force – fill the gaps and avoid lost revenues. Even if the Task Force is more expensive than the full time equivalent there is ROI potential.
  • Pay for short term resources on as needed basis vs. hiring full time when the need is temporary.
  • Pay me now or pay me a lot more later when the problem escalates.

Bottom line is that if a lodging industry consultant can show the client how you can have a positive impact on his/her business and put it in dollar terms you will greatly improve your chances of getting hired. You need to remember, however that there is a fine line between demonstrating expertise and giving away too much free advice. Know what to say and what to hold back – don’t add to the Consultant’s Nightmare!!

 

About the Author:

Chuck Kelley is a Partner with Cayuga Hospitality consultants a network of independent consultants specializing in hospitality/lodging https://cayugahospitality.com/consultants/chuck-kelley/. He spent 32 years with Marriott International, beginning as an Assistant Restaurant Manager and worked his way up to Executive Vice President responsible for Marriott’s Caribbean/Latin America Region. Along the way he held positions as Director of Restaurants, Director of Marketing, Regional Director of Sales and Marketing, General Manager and Country Manager Australia. A graduate of the University of Hawaii, with a BS in Travel and Tourism Management. He is an active member of the Baptist Health South International Advisory Board and previously served as Chairman of the Caribbean Hotel and Airline Forum for the Caribbean Hotel and Tourism Association. He served with distinction in the US Army in Vietnam having earned a Purple Heart and Bronze Star for valor in combat.

The Million Dollar Question – Cocktail Profitability and Recipe Deviation Cost

Million Dollar Question

When is the last time you examined the relationship between production cost and recipe deviation rates or calculated cocktail profitability? It’s probably been a long time, if ever. Everyone is quick to tell you what they think about cocktail profitability, but reluctant to disclose why. Reluctant disclosure is pure speculation influenced by opinion. Unfortunately, speculation is the foundation for failure in the bar business.

Two things are certain. Money is the byproduct of success, and accidentally succeeding in the bar business does not occur.

High volume nightclub operators, restaurant tycoons and the best bar owners all have one thing in common. They embrace bar math because it empirically proves cocktail profitability. I constantly tell clients, “Don’t tell me what you think. Show me the numbers because numbers don’t lie.” Regardless of your role in hospitality, seniority level or executive title, abandon what you think it costs to create a cocktail and do the math. Bar math begins with calculating cost per ounce and portion cost. Cost per ounce (CPO) determines how much an ounce of liquor costs. Calculating requires dividing the wholesale liquor bottle cost by its total ounces. For example;

·         Liter = 33.8 ounces

·         Liter Bottle Cost ÷ 33.8 oz. = CPO

·         750ml = 25.4 ounces

·         750ml Bottle Cost ÷ 25.4 oz. = CPO

 

Vodka Bottle Cost Bottle Size Ounces CPO
Smirnoff $24.98 LTR 33.8 $0.74
Smirnoff $15.47 750ML 25.4 $0.61

Portion cost (PC) examines the relationship between cost and serving size. Calculating portion cost requires establishing cost per ounce (CPO) then multiplying by serving size (SS).

·         Liter = 33.8 ounces

·         Liter Bottle Cost ÷ 33.8 oz. = CPO

·         Cost Per Ounce × Serving Size = PC

·         750ml = 25.4 ounces

·         750ml Bottle Cost ÷ 25.4 oz. = CPO

·         Cost Per Ounce × Serving Size = PC

 

Vodka Cost Size Ounces CPO SS PC
Absolut $26.23 LTR 33.8 $0.78 0.25 $0.20
Absolut $26.23 LTR 33.8 $0.78 0.50 $0.39
Absolut $26.23 LTR 33.8 $0.78 1.00 $0.78
Absolut $26.23 LTR 33.8 $0.78 1.25 $0.98

These calculations are phenomenal barometers for gauging cocktail profitability. However, gauging profitability and achieving it are radically different Achieving profitability requires application. Cocktail production is the most powerful application in the bar business, but systematic cocktail production per recipe is the most profitable.

A great cocktail is always profitable because it does not fluctuate. Taste and cost to manufacture remain constant. Systematic production ensures consistency. The most profitable way to make a cocktail is right the first time. By right, I mean per recipe based on beverage cost. For example, a seven ingredient Adios costs $0.89 to manufacture.

Bottle Bottle Bottle Recipe Portion
Adios Cost Size Ounces CPO Ounces Cost
Taaka Vodka $7.99 LTR 33.8 $0.24 0.25 $0.06
Taaka Gin $6.99 LTR 33.8 $0.21 0.25 $0.05
Ron Rio Rum $6.99 LTR 33.8 $0.21 0.25 $0.05
FC Triple Sec $6.99 LTR 33.8 $0.21 0.25 $0.05
FC Curacao $6.99 LTR 33.8 $0.21 0.25 $0.05
Sprite $81.98 5 Gallon 640 $0.13 3 $0.38
Sweet & Sour $52.58 5 Gallon 640 $0.08 3 $0.25
Adios Beverage Cost $0.89

Recipe deviation rates destroy cocktail profitability. A bartender’s unwillingness to prepare cocktails per recipe is financially debilitating. Witness the profit destruction incurred by ingredient substitution and over pouring. The $0.89 production cost inflates to $2.40.

Bottle Bottle Bottle Cost per Serving Portion
Adios Cost Size Ounces Ounce Size Cost
Absolut $26.23 LTR 33.8 $0.78 1.5 $1.17
Taaka Gin $6.99 LTR 33.8 $0.21 .25 $0.05
Bacardi Silver $15.68 LTR 33.8 $0.46 1 $0.46
FC Triple Sec $6.99 LTR 33.8 $0.21 0.3 $0.06
FC Curacao $6.99 LTR 33.8 $0.21 0.3 $0.06
Sprite $81.98 5 Gallon 640 $0.13 4 $0.52
Sweet & Sour $52.58 5 Gallon 640 $0.08 1 $0.08
Adios Recipe Cost Per Ounce $2.40

Recipe deviation rates cause production cost inflation. Rising cost equal profit loss. Over pouring and ingredient substitution yield a -$1.51 loss. Losing -$1.51, per Adios compounds faster than polished steel. Selling 1,060 Adios annually, with a 20% recipe deviation rate, yields -$320 loss.

Adios Loss Sales Forecast Deviation Rate Adios Sold Loss
-$1.51 1060 20% 212 -$320
-$1.51 1060 30% 318 -$480
-$1.51 1060 40% 424 -$640
-$1.51 1060 50% 530 -$800

At first glance, a -$320 annual loss seems inconsequential, but appearances are deceiving. This loss only reflects one cocktail with a 20% deviation rate. Reality sets in when you realize your product mix reflects 90 cocktails. The million-dollar question is “how many cocktails are going across the bar for a loss and how do you fix it?”

Hiring a bar consultant is the answer.

About the Author:

RideoutWith more than 20 years of hands-on operating experience, Preston has a proven track record of success for developing sustainable bar business models, bartender training, cocktail creations, cost control and profitability, Preston is the author of a number of books, manuals and articles pertaining to bar operations, profitability, standard operating procedures and achieving excellence in customer service.

Preston’s expertise is highly sought by casino executives, distillers, bar owners, architects and nightclub management companies. His consulting methodology is transparent, simple and straight forward. Preston identifies problems, creates operating systems and provides long term sustainable solutions.

 

Hotel Management Agreements – Agency Relationships

In 1991, a California court, applying California law in a hotel management agreement dispute, in the Woolley Embassy Suites case (Woolley v. Embassy Suites, Inc.  227 Cal. App. 3d 1520) sent a startling message to hotels. At the time, those of us who follow these kinds of cases thought the holding was a one-off, quirky decision that is not likely to be followed and may be overturned in subsequent decisions.

It held that a hotel management agreement is not only a commercial contract that sets out the rights and obligations of the parties, but it also gives rise to an agency relationship. In that relationship, the management company is the agent and the hotel owning company is the principal. As such, under common law agency principles, the court held:

a) The owner has the power but maybe not the contractual right to terminate the agency relationship at any time, although it may face a contractual monetary damage claim if the management agreement was wrongfully terminated;

b) Once terminated, a court lacks authority to re-instate via equitable relief; e.g., an injunction ordering the owner to reinstate the management company the hotel management agreement because of its characteristics as a personal services contract;

c) The agency would not be terminable if it is “coupled with an interest”; e.g., the management company did not have a “present property interest” in the Embassy Suites hotel, but was just providing a service for a fee.

Then came another California case in 1993 with a similar holding: Pacific Landmark Hotel, Ltd. versus Marriott Hotels, Inc. that also extended to hotel management agreements the common law agency principle that the agent; i.e., the management company, owes to the principle; i.e., the owning company, a fiduciary duty that at law is likely to be a much higher standard of care, akin to what a guardian owes a child. This standard of care is not what one would find or even expect to find among the terms of a commercial contract such as a hotel management agreement. 

At this point, these holdings seemed idiosyncratic to California law where “cutting edge” legal concepts are spawned, but many do not survive or spread. But this was not the fate of the agency analysis of hotel management agreements. Instead the concept expanded to other states whose laws govern hotel manager/owner contracts. The cases are too many and too nuanced for analysis in this article. But notably, New York law, that governs many hotel management agreements and other commercial contracts, also came to include the principle that hotel management agreements are revocable agency appointments. E.g., the Federal District Court holding in the “Turnberry Case” – FRR TB, LLC versus TB Isle Resort, LP – where New York law governed the hotel management agreement, although the Fairmont resort was in Florida.  

So, without detailing all the intervening cases, about which much has been written, the legal “agency” principle now seemed entrenched. Like it or not, although a hotel management agreement these days is the result of a long and tough negotiation between two very sophisticated parties, perhaps Marriott or Hilton on the one hand as “manager” and a huge publicly traded REIT or insurance company on the other hand as “owner”, the owner enjoys the added common law benefits arising from the “agency” analysis. The owner may still invoke agency principles as overlaying and superseding the provisions of the agreement and (i) exercise the power of termination, (ii) allege violations of the fiduciary duty, typically for self-dealing not in the best interest of owner, and (iii) resist any attempt by the terminated management company to seek judicial reinstatement of the agreement. If as a matter of contract law the exercise by the owner of its power to terminate the management agreement was wrongful, that owner may face a contract damage claim; i.e., a claim for a monetary judgment for wrongful termination. But to a judgment-proof owner, this threat may be meaningless and to the management company, a lawsuit for monetary damages is time-consuming and costly with an uncertain outcome.

In 2005, Marriott responded to all this “mayhem” by petitioning successfully the Maryland Legislature to pass a law that became Section 23-102(a) of the Commercial Law of the Code of Maryland. That statute provides that “[i]f a conflict exists between the express terms and conditions of an operating agreement and the terms and conditions implied by the law governing the relationship between a principal and agent, the express terms and conditions of the operating agreement shall govern”. The statute also provides that a court may grant “specific performance”; i.e., an injunction – for an anticipatory or actual breach or attempted or actual termination of a hotel management agreement even if an agency relationship exists between the parties. Id. § 23-102(b). The statute clearly is aimed at negating the common law overlay that gives owners the power to terminate a management agreement and that denies to the manager the remedy of court-ordered reinstatement. Instead, the law provides that the terms of the negotiated agreement between the parties governs their respective rights, without added help to the owner from a common law overlay. This really seems to be what many of us might expect. Hence Marriott and other hotel companies now seek to have their management agreements governed by the law of the State of Maryland, no matter where the hotel is situated.

But then the New York courts added an odd twist. In Marriott International versus Eden Roc, an appellate court in New York, reversing the lower court, decided that the hotel management agreement in question “is a classic example of a personal services contract that may not be enforced by injunction”. Further, the court held that the agreement “is not and agency agreement”. Now that is confusing. So at this juncture, in New York, the law was that hotel management agreements may not constitute an agency appointment or give rise to an agency relationship, but even so, they are terminable by the hotel owner. IN addition, these agreements may not be enforced by injunction because they are personal services contracts. So much for the prior analytical clarity, wrong though it may have seemed to many of us who follow these cases.

But it does not end there. In a recent 2017 case, Chelsea Grand, LLC versus Interstate Hotels & Resorts, Inc., a Federal District Court in New York, applying New York law, held that Interstate Hotels, as the hotel manager (“operator”), does NOT owe a fiduciary duty to the hotel owner. The result seems right to some of us, but the analysis is very strained. The court concluded that because the management agreement between Interstate Hotels and Chelsea Grand Hotel did not create an agency, even though the management agreement expressly states that the manager – “operator” – is owner’s agent, there is no fiduciary duty. But the management agreement in question contains the following language.

3.2 The operator (Interstate) as agent for the owner to perform enumerated tasks;

5.1 “…the operator shall act solely as agent of owner”, but will not be construed as a “partnership or joint venture between owner and operator”;

6.1 Operator shall act solely as agent for the account of the owner, but will not be in default if there is a lack of funds from the operator of hotel or as otherwise provided by owner.

So, where does all this leave us? Owners and management companies alike are left in a very murky legal environment where hotel management agreements are accompanies by an overlay of contradictory and uncertain principles of common law. Somewhere out there may be a case that will clarify all this. It likely involves a dispute between an owner and a management company where the owner purports to terminate the agreement, perhaps without even giving notice or complying with other contractually mandated requirements, such as allowing the management company its contractual right to cure the alleged default. And there is a judge out there who will hold that the hotel management agreement was carefully drafted by capable lawyers and negotiated zealously by both parties. Then maybe the court will leave the parties to the bargain they freely negotiated that is embodied in their commercial contract, without resort to common law agency or personal services principles. In my view, that will add certainty and clarity and leave the parties to the deal they cut, with no added help from the common law to one or the other.

This article appeared EHotelier Insights

About the Author:

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.