The Emperor Has No Clothes: What We Learned About Hotel Brands During the Pandemic | Pillsbury – Gravel2Gavel Construction & Real Estate Law

Branded hotel managers are not bad people, but they’re sometimes bad managers if profitability is your objective. If you noticed that operating margins improved when brand standards were relaxed during the pandemic, and when the brands were forced to reduce corporate charges, you’re not alone. The brands will suggest that these were temporary measures reflecting their concern for their owners. But there were some important lessons learned during the pandemic—including some that are not often spoken about at hotel conferences—that astute owners and their asset managers should not soon forget.

Lesson 1: Some brands have been overcharging for above-property systems and services that do not generate incremental returns.
If the brands cannot demonstrate that above-property programs directly improve hotel profitability, they shouldn’t charge you for them. And when a brand’s corporate program costs reduce net operating income, it should reimburse the owner—or face termination. Incurring charges for programs and services that do not generate incremental profit is inefficient and grossly negligent.

Lesson 2: Some brands are using corporate charges to be in the business of managing hotels, rather than to provide goods and services directly for the benefit of the owner’s hotel.
They do that by allocating their own costs, including headquarters facility expenses, into corporate charges that get billed to the hotel. When the brand manager builds a state-of-the-art corporate office tower, for example, it’s fair to ask who is paying for it. Even if your contract allows for a brand manager’s corporate overhead to be charged through to the owner as a hotel operating expense, there are limits—especially when the hotel is operating at a loss or is barely afloat.

Lesson 3: Some brands made demands on owners to fund working capital shortfalls to fund their own operating expenses.
When the hotel is laying off hotel personnel, removing rooms inventory and closing food and beverage (F&B) outlets because of insufficient revenues, it is not appropriate for the brand manager to use working capital to fund its corporate payroll and overhead. The brand manager was hired to efficiently operate the owner’s hotel, not to keep the hotel open merely as a conduit to channel owner capital contributions into keeping its own lights on.

Lesson 4: Some brands either cannot or will not account for how they’re spending owner’s money.
When times are good, there’s sometimes a penchant not to push back against the brand manager as operating expenses (and corporate charges) nibble away at net operating income. But when times are bad, every nickel counts—and given their obligation to maintain books and records reflecting operating expenses (among other things), one would think that brand managers could timely and fully account for what the owner is paying and why. That’s not often the case with some brand managers, however, who make it extremely difficult for owners to understand what they’re being charged and what brand manager costs are baked into those charges. If they cannot validate charges, then owners should not have to pay them.

Lesson 5: Some brands need to be reminded that furniture, fixtures, and equipment (FF&E) reserves are owner’s funds.
When business dries up, as it did because of the pandemic, brand managers are not being magnanimous by “relaxing” brand standards and “allowing” owners to use FF&E to fund operating shortfalls; that’s what any prudent business manager would do. In the wake of the many changes to market demand and standard operating procedures forced by the pandemic, not to mention the financial pains owners continue to suffer, any brand manager that doesn’t revise its brand standards and revisit FF&E budgets is unworthy.

Owners often are disinclined to speak truth to their brand managers. The need for cooperation and support, the desire to keep open the prospects for doing new deals, and the social realities of being in hospitality all militate against blunt honesty. But the pandemic revealed many things about the industry, one of which is that some brand managers put their interests ahead of those of the owners—even if it places the hotel into a death spiral. For those owners fortunate enough to be gaining altitude, it would be wise to remember some of the hard lessons learned. Perhaps start by speaking openly to the brand manager about what it’s charging and why. If your operator won’t give you a straight and fulsome answer, then there’s a good possibility they’re up to no good.

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