Concerned about your hotel development during COVID-19? A lesson from hotel broker Michelle Matthews

OPINION:

In unprecedented times the accommodation industry faces a massive downward trend in occupancy and income, and like most businesses that are considered as “non essential”. 
However, tourism is a major contributor to the Australian economy and now more importantly owners/operators and landlords must look ahead and how they position themselves when restrictions are lifted and holiday makers, business and leisure can recommence.

This is the opportunity to consider your developments and its best use, the location, demographic, brand proposition and structure. Does your hotel need to be rebranded, refurbished or needs to sell as a result of Covid19? Or does your development upon feasibility conduct support a new build of hotel accommodation which subsequently requires Hotel Operator Selection? If yes, is your answer then it is the best time now to determine and carry out the necessary steps. 

Hotel Operators are seeking sites and have the time now to use their resource to determine if their brand marries up with your asset. Typically this would involve a full comprehensive campaign with an appropriate consultant that would seek all operators nationally and internationally to express their interest. This is not limited to a new development it may mean that your existing asset requires to be rebranded to get the best use and distribution which also involves refurbishment. 

Operators will work cohesively with the owner to ensure the brand is delivered aesthetically and within the DNA. Whilst this creates and leads into refurbishment now is the best time given that there is no concern of operating and disruption to the operations of the business.

I have also broken down into three structures that hotel assets are generally set up and also requires consideration on what suits you best as an owner and your own risk profile as each one does vary.

1. Hotel Management Agreement

This is the preferred model by most Hotel Operators, they manage the property on your behalf with agreed commercial terms that are negotiated through and prior to any commencement. 

Typically management agreements can be fixed for the first option of 15 years or 10 years with further options of 3 x 5 or 2 x 15 years or 3 x 10 year options.

The operator’s remuneration is by way of fees, generally made up of a guaranteed base amount, calculated as a percentage of revenue from the hotel business, and a performance incentive element paid if gross operating profit exceeds an agreed threshold.

The owner is still responsible for the working capital and delivery of the product of the agreed brand to its appropriate standard. Generally there are Furniture Fittings & Equipment Reserve to ensure that the product doesn’t get diluted over time and can maintain its standards.

2. Lease

both the owner and the tenant like to see an extended lease and similarly to a Hotel Management Agreement and sometimes longer i.e. 40 years. Ideally no party would like to see a lease less than 25 years, and in my opinion when the lease reduces and gets to a 20 year term the best practice is to renovate your lease terms again. The length of your lease underpins the value of your business and vice versa for the landlord. 

3. Management Rights

This structure is normal practice in states such as QLD however we are increasingly seeing this structure come into new developments as developers are selling the management rights business off the plan. That being said it is best to seek appropriate advice if this is the best strategy and each state has different laws. Management Rights have two components, the exclusivity to operate a hotel letting business via short term serviced apartment or hotel rooms, and to conduct the caretaking. The other is associated real estate assets required to operate the business such as reception, office and or restaurant. 

However you look at it is in my opinion that as a hotel owner, developer or landlord if any of the above mentioned was earmarked, strategically planned for the future or was put on hold, maybe reconsider your options as much as accommodation is closed for business the behind the scenes are still very much open for business and the opportunity still presents itself to explore your options as its night an overnight result it takes time and planning.