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Owners and operators reach era of mutual enlightenment


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Viability's Guy Wilkinson writes a monthly column for Hotelier Middle East Magazine. This article originally appeared in October 2010.
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Owners and operators reach era of mutual enlightenment

  1. 1. 18COMMENT Owners and operators reach era of mutual enlightenment Viability director Guy Wilkinson explains that hotel owners are becoming increasingly knowledgeable about their investment, and says operators would be wise to be aware of this Operators will argue that it is not unreasonable for them to expect to be trusted to use their experi- ence and systems ‘unaided’ by the owner, who it is equally reason- able to assume is not a hotelier and does not know how to run a hotel himself. This is where differences can emerge, and regular readers of this column will be familiar with my views on ‘know-it-all’ owners. Nevertheless, the truth is that own- ers have become much more knowl- COLUMNIST edgeable and professional over the past decade and it is increasingly n this region, where property dangerous for operators to assume I ownership was partially libera- lised only a few years ago, most hotels are still owned by local nationals and — at the luxury level at least — managed by interna- Operators need to be aware of the bigger picture when it comes to their owner’s business, says Guy Wilkinson. IT IS INCREASINGLY DANGEROUS FOR that their owners are technically uninformed. The most sophisticated local owning companies are begin- ning to employ professional hotel asset managers, who go well beyond tional or regional chains on behalf OPERATORS TO ASSUME THAT THEIR the traditional role of owner’s rep- of companies. This is how their relationship works in a nutshell. OWNERS ARE TECHNICALLY UNINFORMED resentatives by remaining up to the minute not only on all aspects of Under the terms of a typical hotel the operations, but of course prin- management contract, the opera- cipally, on the performance of the tor, being recognised as an expert own fees first, and then transfer any management contracts contain a hotel as a real estate investment. in his field, is given the entire re- remaining profits to the owner on a so-called ‘non-interference’ clause Thus, the wheel is coming full cir- sponsibility of running the hotel on regular basis. which effectively binds the owner cle and such specialists are now fac- the owner’s behalf. Having agreed The owner is expected to pay for not to meddle in the day to day run- ing the same kind of challenge as the the terms for monitoring and as everything, from start-up costs to ning of the hotel. Owners and their hoteliers had before — of explaining much as possible, setting measur- working capital, including topping advisors (such as myself) find them- and interpreting the technicalities able targets for the operator’s per- up the hotel bank account when- selves particularly uncomfortable of their business, so that hoteliers formance, the owner is expected to ever necessary. By the same token, with these statements, and we try can see the bigger context. A hotel effectively sit back and watch as it is the owner’s right to keep all the our level best to remove or at least is ultimately a real estate asset, to be the operator spends whatever of profits from the hotel operations, tone them down. We also like to bal- invested in, held for a set period and, the owner’s money is necessary to less the equivalent of about 8 to 10% ance them out with strongly-worded at an appropriate time, disposed of. equip, staff and open the hotel, and of gross revenues, which are pay- liability provisions, adding clauses Thus operational decisions have a then to manage it on a day to day able to the operator by way of differ- that commit the operator to provide ‘bigger picture’ of which a hotelier basis. At monthly and annual junc- ent kinds of fees. This division of the detailed management reports, and may not be fully cognisant — but tures, the operator will render ac- upside is considered a fair deal, as by introducing ‘performance tests’ needs to become familiar with. HME counts to the owner for comment, the owner takes all the investment that allow the operator to be pena- as well as providing an annual risk and is therefore seen to deserve lised if he fails to achieve profitabil- budget for approval. the majority of the reward. ity. The penalties mean the operator The money earned by the hotel However, the success of such an must forego his incentive fees (from is lodged in an account that opera- arrangement demands more than profits) for an agreed period follow- Guy Wilkinson is a director of Viability, a hospi- tors usually insist is accessible only the simple signing of contracts; ing two years of underperformance, tality and property consulting firm in Dubai. by them, who will then pay the hotel in reality, it depends a lot on faith and if the situation is not remedied, For more information, e-mail: operating expenses including their and good communication. Most the owner terminates the contract. October 2010 • Hotelier Middle East