Lease Agreements vs Management Agreements - Report Example

Lease Agreements vs. Management Agreements Table of Contents Table of Contents 2 Introduction 3 Findings and Discussions 3 Conclusion 7 Referencing List 9 Introduction Resorts are believed to have existed since the Roman Empire. However, it was not until the eighteenth century that they began gaining considerable recognition. From this time, resorts gained popularity firstly in Europe; they then spread to America and other parts of the world. Over the last few years, resorts have grown significantly, perhaps due to growth of tourism and hospitality industry. Today, resorts play a significant role in the global hospitality industry. In fact, some schools of thought maintain that the only reason for resorts is to accord customers a place where they can relax after the hustles and bustles of the day. It gives them a place to take a break with families, friends and relatives. Perhaps the major objective of resorts is to allow a new experience for users (Lockyer 2013, p.56). Many people are beginning to realize the importance of taking a break and rewarding their efforts. This could explain the tremendous growth of resorts over the years. Since their original days, resorts have endured the ever-dynamic trends by adjusting to fit the new needs and wants. This has led to creativity and innovation in coming up with new concepts of resorts. As such, major hotel products are infiltrating most parts of the world. As a result, in the last ten years, main hospitality companies have witnessed significant transformation. To this end, tourism and hospitality companies have taken on a more ‘asset-light’ perspective so as to retain a competitive advantage (Lockyer 2013, p.56). ‘Asset-light’ approach assists companies to reduce the financial burden and spur future financial growth through dividing properties between hotel operation management and ownership (Lockyer 2013, p.56). Through ownership, hotel companies obtain higher profits on capital; through management, the hotel companies develop better ways of hotel operations. This helps to influence selection of future brands. Today, there are several contract types for hotel processes that combine elements of owners and investors (Lockyer 2013, p.56). This paper critically evaluates two different ownership styles: the Lease and Management Agreements. The paper further examines these two different perspectives to highlight their influence in the future of hospitality and tourism industry. Findings and Discussions Lease and Management Agreements refer to two distinct approaches employed by companies in order to manage the resorts. Throughout this section, the two approaches are exhaustively examined. Lease and Management Agreements are ordinary methods that managements of resorts use to supply services, especially those pertaining to the management (Chen et al. 2012, p.25). As such, there is the need for cooperation between owners and operators. A lease refers to the interest that a tenant pays on the land for the agreed duration. Through lease agreement, a hotel company is to be held responsible for all monetary burdens. Consequently, the hotel company becomes the tenant and takes up all operations such as financial obligations and responsibilities. The company operating the hotel receives all proceeds after paying the agreed upon rent. Most hotel companies prefer lease agreements and sign such contracts with the landowners in order to reduce associated with fixed rental income (Chen et al. 2012, p.25). In this regard, the hotel proprietor only plays a passive role so that the operators are fully in control of all the daily operations and activities. Within resort and hospitality industry, lease agreements are mostly on long-term basis. This is because the hotel companies do not want to risk losing their assets in a particular market. The lease agreement approach is the one employed by most resort companies across the world. Where the property performs commendably, the hotel company receives all the benefits. However, when the company performs poorly, there will be an overall negative impact on the company. Again, there are a number of rent structures that as dictated by the risk an investor would be willing to take (Chen et al. 2012, p.25). The risks are paid for before an investor can receive all proceeds. On the other hand, a Management Agreement refers to the agreement where the resort owners contact a different management company to run the daily operations of their hotels. The process of agreement management involves the management company or the investor handling the entire financial operation; it is charged with the responsibility of recruiting employees as well as maintaining the properties (Brotherton 2012, p.106). Management Agreements are significant contracts as they contain set rules that determine the long-term relationship between hotel owners and hotel operators. The hotel owner receives all profits. They are tasked with paying management fees to the management companies. Usually, this fee comprises around 2-4% of the entire revenue, representing the base fee. Additional incentives can be employed to increase Gross Operation Profit. Additionally, other factors that are worth considering as part of Management Agreement include a term of 30-50 years, incentive fees of about 10% of the GOP as well as entire responsibility on the proprietor for all spending, employee, and spending costs (Brotherton 2012, p.106). Perhaps, the overriding objective of a Management Agreement is to maximize profits for the owners and the management companies. Again, it is perhaps significant to reconcile the interests of the managing company with that of the owner in order to achieve successful management contract since the two parties would obviously have different interests and ways of doing business. Hotel company owners usually want a guarantee of cash and return on capital while operators would be looking for long-term assurance of the continued resort operations (Brotherton 2012, p.106). Reconciling both the objectives of the owners and the operators helps create a win-win scenario for every party that is involved. This paper will critically evaluate the lease and Management Agreements. The commonalities and differences between the two agreements will be looked at. This approach helps the reader to infer the both the positive and negative aspects associated with lease and Management Agreements. In the end, the reader is able to forecast the influence that the two types of agreements have on the progress of the hotel industry. A critical study of the both types of agreements reveals that with regards to ownership, some factors will tend to benefit the operator more (Blanco et al. 2011, p.26). In some cases, the operator tends to benefit more. Through comparing and contrasting lease and Management Agreements, the hotel owners can reach a consensus concerning some of the factors that will have an impact on the future development of their hotel companies (Brotherton 2012, p.106). Again, by comparing and contrasting the two types of agreements, one is able to deduce the effects of the agreements on the owner, as well as the operator. As previously discussed, under the lease agreement, the resort company is the ‘operator’ since they utilize the leased land to build their own trademark hotel where they also double as managers. Landlords of the leased land are not involved with any financial or operational responsibility. What is more, they obtain money as fixed-rent. Under the lease agreement, the landowner has no power over hotel. This implies that in case the resort is profitable, the property owner does not benefit. The operator, in this case the resort company, is charged with all daily operations such as paying expenses, employees as well as meeting other maintenance costs (Witt et al. 2013 p.159). Where the resort is not profitable, the resort owners incur all the financial risks. However, when the resorts make good profits, then the resort company has an overall advantage over the landowner of the leased land. On the other hand, under the Management Agreement, the hotel company is assumed to be the owner, but the management company takes care of all management issues and carrying out of daily resort company operations (Blanco et al. 2011, p.382). In this case, the resort owners are responsible for meeting all financial and operational costs. The owners receive profits as well as retaining ownership benefits, while the management company is paid a fixed fee that had been agreed upon in a contract signed between the owner and the managing company. In this regard, the managing company has a relative disadvantage (Witt et al. 2013, p.15). The operator or the managing company just receives a constant salary for taking care of all the hotel operations. However, the managing company does not benefit in case the hotel is profitable. The operator retains all management and operational controls of the resort. In terms of financial benefits to the resort owner under lease and Management Agreements, one concludes that the impending upside profit is restricted with a direct lease; while there will be a severe downside risk. Regarding operators, for lease agreements the operators have greater financial risks in comparison to the Management Agreement, since they have financial downside risks. Whereas the average duration of the lease agreement is usually 15-25 years, Management Agreements last 30-50 years (Witt et al. 2013, p19). This shows that there is a long-term commitment with regards to the Management Agreement. For both lease and management agreements, there are many benefits and risks for the parties that are involved. Perhaps it would be important to analyze the impact that lease and Management Agreements have on future progress of the hotel industry. Looking at modern trends among various tourism and hospitality industries, a number of hotel companies have begun shying away from lease agreements. Perhaps this scenario can be attributed to aggravating economic conditions, which have led to considerable financial costs on the resort companies (Witt et al. 2013, p.159). Previously, lease agreements were an important aspect of hospitality contracts but because of economic predicament, leases became unsustainable and spurred many financial hiccups for resort companies. A case in point is the Spanish operators Barceló Hotel & Resorts; they had to cancel their lease agreement with Puma Hotels for their hotels in Britain. The cancelation of the lease was prompted poor economy. As a result, the hotel lost about $15 million so that it was practically impossible to continue with operation (Walker et al. 2013, p.162) This case shows that lease agreements are prone to ailing economy, therefore prompting the hotel companies to be skeptical about lease agreements. Perhaps it would be worthwhile to argue that leases remain attractive for low-risk investors. However, for development of resorts and hotels, Management Agreements play a critical role in future development of hospitality industries. Hotel industry analysts believe that lease agreements would still be beneficial to owners and operators; resort owners will continue experiencing steady financial flows while the operator will still maintain their managerial role, and carrying out the daily operations of the resorts. They will have their own unique management techniques (Walker et al. 2013, p.126). The equivalent benefits with regards to the resort owner and operator will no doubt make the lease agreement an attractive approach for future development of resorts. Conversely, the Management Agreement is a less common approach with regards to location; however, main resort companies are beginning to accept the Management Agreement, particularly when getting into new markets or when introducing new brands. The impact of the management on the hotel industry has a critical role for hotel identities for future integration into new markets. For example, the Hilton group of hotels reached a management consensus with Palm Groove Beach Hotels in an agreement that would see that latter manage the initial Conrad Hotel and Resort in India (Bohdanowicz et al. 2011, p.801). Perhaps this Management Agreement shows the commitment of various resorts to go global and maintain their huge presence in the global market. The case of the Hilton hotels shows that Management Agreements are just as equally attractive as lease agreements. It offers a precedent for a positive reputation that would in turn help various resorts to expand in the future and acquire new markets. Another example is Marriot that also did enter into the agreement with Far East Consortium in Melbourne and opened their debut Ritz-Carlton in Australia (Walker et al. 2013, p.227). Of course, the goal was to make the hotel more visible globally and improve its reputation. From these examples, one can deduce that the Management Agreement has a lasting commitment of building a lasting commitment to creating brand commitment and spurring tourism activities through increased competition (OFallon & Rutherford 2011, p85a). Researchers in hospitality and tourism observe that resorts and hotels, which use Management Agreement, stand to experience additional growth in terms of profits, as well as recognition and reputation. With business owners wanting more control over their properties and an influx of passionate managers, hotel management agencies will undoubtedly improve profitability, making it a win-win for owners and operators alike (Walker et al. 2013, p.95). Perhaps more significantly control of management will be a significant topic for every operator, hotel owner, lenders, and all stakeholders in future, as prompted by reaction to the ever-dynamic market patterns. Therefore, Management Agreement will continue being a significant factor during contracts for future development of resort or hospitality industries. Currently, a number of resort companies are shifting their approach as the lease, and Management Agreements have a huge influence in the economy of the hotel (OFallon & Rutherford 2011, p.49). In order to sustain the ever-changing rates, demands, property values and occupancy, many main hotel companies have opted for what can be called a ‘share’ approach that combines both the lease and Management Agreements. Arguably, the share approach helps in striking a balance between hotel ownership and operation. A few years ago, Accor communicated a change in their strategy; the strategy had two parts. The first part of the plan involved operating some 14 retail hotels (lease agreement); the other was to continue with hotel ownership since they reckoned that it would have huge positive impact regarding the expansion of the hospitality and tourism industry. In the course of the last few years, various variations of ‘hybrid’ leases that combine both lease and Management Agreements have been witnessed. Under this arrangement, the operator does pay a fixed rent. In return, they are given many management incentives fee (OFallon & Rutherford 2011, p.73). This approach equally benefits the owners and the operators. What is more, the resort owners are guaranteed of a return on their investments. It can, therefore, be observed that the two types of agreements are beneficial towards operators as well as the owners. Therefore, it is important to use both approaches for the future expansions and recognitions. As discussed earlier where the case of Accor was mentioned, the share approach is part of a strategic vision and lasting commitment to ensuring visibility and global recognition (Tang & Tang 2012, p.122). The share approach, where both lease and Management Agreements are used, is the perhaps the most favorable method for resorts seeking for expansion and recognition. In as much as managing core brands is significant, allowing other operators to manage one’s resort makes management of resorts easier so that the hotel owners have more time to focus on the main hotels. Perhaps major hotel brands will find the share approach most convenient. The example of Marriot and the Ritz-Carlton also shows just how effective management of hotels can be if both approaches of lease and Management Agreements are adopted (Tang & Tang 2012, p.14). Combined, the lease and Management Agreement strategies can play an integral role in the future development and expansion of resorts since it reduces operation costs and encourages commercial growth. Conclusion Lease and Management Agreements are significant factors concessions in resorts. They represent effective ways of managing hotels by striking a balance with the resort owners and the operators. They represent two perspectives of management operations. Hotel Company entirely manages their business under lease agreement while the management company completely manages the resort under Management Agreement. In the past, lease agreement was the most preferred by resort owners. However, due to demands of the modern day of setting shop in other areas, Management Agreement is increasing becoming the most preferred by major hotel companies such as Marriott, Intercontinental Hotels, and Hilton. For a better compromise, hotel companies now find is useful to merge these two types of agreements such that now there is what is popularly known as share or hybrid agreement that combines both concepts. This concept enables both the owners and operators to share operational costs. It also enables that profits are equally shared. It is thus a win-win for the hotel owner and the operator. Most hotel companies such as Accor find the hybrid approach convenient in managing their core brands and improving visibility as well as enhancing expansion. Since the resort is a continuously growing industry, such agreements have become acceptable to most companies. By sharing financial benefits and operation risks equally between the owner and the operator, the shared approach becomes a win-win for everyone. The paper has critically evaluated and discussed each of the two approaches and the shared approach becomes the most preferable in terms of boosting relations, sharing risks and improving corporate image of the resort companies. Referencing List Blanco, A. C., Oehmichen, A., & Frood, S. ,2011, European hotel development–Focus on budget hotels. Journal of Retail & Leisure Property, 9(5), 373-379. Bohdanowicz, P., Zientara, P., & Novotna, E.,2011, International hotel chains and environmental protection: an analysis of Hiltons we care! programme (Europe, 2006-2008). Journal of Sustainable Tourism, 19(7), 797-816. Brotherton, B. (Ed.)., 2012, International Hospitality Industry. Routledge. Chen, R. X., Cheung, C., & Law, R., 2012, A review of the literature on culture in hotel management research: What is the future?. International Journal of Hospitality Management, 31(1), 52-65. Israeli, A. 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