INTRODUCTION TO DEVELOPMENT - 2014

A – Basics

Management Company (Operator): A company that manages hotels for owners typically in return for fees and/or a share of revenues. A management company may or may not have any of its own funds invested in a hotel that it manages.

Owner: An individual person or an incorporated company who owns and has the legal right under the land and hotel for relevant project and seeks the assistance from the Operator in terms of hotel management, brand licensing and/or hotel concept & design consultation.

Owner Representative (Owner Rep): Typically a person engaged by the Owner to represent and to protect their interests. The Owner Rep may be appointed during the design development process and/or hotel operation and will typically be the main point of contact for the Operator and/or hotel General Manager.

Asset Manager: Hotel asset management is the fiduciary responsibility of managing the lodging investment to meet the specific objectives of ownership. The asset manager's role is primarily to maximize the value of the hotel.

Pipeline: Future hotels / hotel supply yet to open. STR GLOBAL, and other entities such as tourism boards, track and publish this data.

Pre-Planning: Land has been secured but no architect has been selected.

Planning: An architect has been selected and plans are underway.

Final Planning: The project will go out for bids, or construction will start within 4 months.

Under Construction: Ground has been broken or the developer is finalizing bids on the prime (general) contract.

Recently Opened: Opened within the past 12 months.

Existing Supply: All hotels opened and operating.

Asset Light: A business model, strategy or approach adopted by hotel operators to move away from engaging in hotel ownership and focus on core strengths of hotel management and/or franchising.

 

B – Project Financing

Developer: The person / company who is investing and building the property, also known as the Owner.

Objective of the project: Can vary depending on the Developer; either more focused on a long-term asset that generates cash-flow or seeking a build-and-exit model where maximising short-term cash-flows in order to increase the value of the asset (i.e. sale price). Diversification from other asset classes/business and legacy/community can also be key.

Developer's Equity: Is the cash invested into the project by the Developer. This proportion of equity vis-à-vis the total project investment can typically range from 20-60%, sometimes even the whole project if the Developer is has the cash reserves or the debt financing is difficult to obtain and/or too costly.

Main Loan: Is the debt used to develop or acquire the property; typically it equates to 40-80% of total project value, although on average it is more likely to be 60-70%.

Mezzanine Loan: Mezzanine loan is typically used to secure any additional financing requirements, usually when there is an overrun on the pre-opening budget, and is often more costly than other forms of debt.

Real Estate Investment Trust (REIT): A fund or trust that uses the pooled capital of many investors to purchase and manage property. Typically they are listed and distribute the majority of earnings as dividends without taxation at the corporate level.

Feasibility Study (highly recommended): A market and financial feasibility study is usually done by an independent 3rd party consultant which will make the Financial Projections and Cash-Flow Forecast for the project based on market research. This study is done by the Developer to assess his estimated Return on Investment (ROI) and/or as collateral to help secure financing.

Financial Projections: The estimated profit & loss / income statement for the first 5 or 10 years from when the project is operational. Financial Projections normally include the Average Daily Rate (ADR), occupancy (%) and major operating department line items, giving the Gross Operating Profit (GOP).

Cash-Flow Forecast: To aid in the investment analysis, a Cash-Flow Forecast shows when money is deducted and received to prepare the availability of funds accordingly.

Return on Investment (ROI): The key measure / indicator of financial success is the ROI, which can be calculated in different ways when factoring debt and exit, but essential is the percentage increase on the capital spent. For example a typical hotel project may generate a 5-10% return.

 

C – Project

Concept: The idea/vision of the project that explains to all stakeholders (i.e. Developer, Operator and Consultants) what the end product is intended to be and how it positioned within its market. For example: “Upscale city hotel with contemporary design and unique features catering to predominately corporate travellers.”

Location (key success factor – “Location, Location, Location”)

Where the project is located and its key aspects including accessibility - to the site (such a vehicular flow) AND to the destination (such as airlift) - visibility (i.e. how prominent / noticeable), and surrounding landmarks and demand generators (i.e. buildings/businesses that create a reason to stay in the area).

Site: The plot of land the project is situated on and its key aspects including size, height / build up area restrictions (if any), topography and gradient.

New Build (Greenfield): When the project is being or will be newly constructed on what is also referred to as a Green Field (undeveloped land).

Conversion (Redevelopment): When a building is changed from another use (office, residential, etc.) to hotel.

Rebranding: The change of brand of an existing property that often involves changing the concept/positioning and Operator and thus requires a ‘deflagging’ of the existing brand/operator and transition rebranding period.

 

D – Product

Type/class of hotel: A hotel is classified according to its size, location, target markets, levels of service, facilities, number of rooms, etc. into a star/scale ratings i.e. 3 star hotel or midscale, 4 star hotel or upscale, 5 star hotel or luxury, etc. There is no standard method for classifying a hotel, each country follows different methods depending on the local norms and codes, however globally STR Global Chain Scales is most commonly used.

Serviced Apartment: A property which consists of fully furnished and equipped units with amenities similar to a hotel, available for renting out on both short and long term basis. Unlike the hotel, a serviced apartment typically provides limited facilities and services.

Condominium: A property which may or may not consist of fully furnished units with amenities similar to a serviced apartment, normally to be sold to individual owners. Common area facilities within a condominium are then shared between each individual owners.

Strata Type: A type of co-ownership whereby apartment units are owned by different individuals. These units may or may not be placed under a rental pool for the operator to rent (although all dealings with the individual investors are to be handled by the developer).

Gross Floor Area (GFA): Is typically, although can vary from country to country, total floor area or buildup area inside the building envelope, measured in either square meters or square feet. This area may or may not include parking, basement and/or roof top and sometimes can be confused with net leasable area.

No. of Keys: A number of rentable units available in a property. In some cases, a two or three bedroom suite that can be rented as separate bedrooms can be calculated as two or three keys respectively, when counting the overall number of keys for a property, hence the reason for using keys as opposed to rooms.

Area Program: An area summary and specifications of each facilities within a property, generally calculated by measuring in square meter or square feet. For example, size of each units/rooms, area of F&B outlets, area of Banquet/Meeting rooms, Back of House (BOH) area, etc. This is used by the operator to direct the architect on space allocation.

 

E – Agreements

Hotel Management Agreement (HMA): An agreement records the long term relationship between the owner and the operator of a hotel (typically over 10-15 years). The nature of the relationship is the operator manages the hotel on behalf of the owner.

Manchise Agreement: An agreement that identifies a business model which combines traditional hotel management and franchise operations into a tailor-made contract that offer a flexible alternative to HMA’s. The agreement core is to establish brand concepts, operating procedures, marketing mix and training procedures within the hotel. After a stipulated period, the owner will then be able to operate hotel under a franchise arrangement.

Franchise Agreement: An agreement in which a well-established business consents from operator/licensor to provide its brand, operational model and required support to owner/licensee for them to set up and run a similar business in exchange for a fee and certain share of the income generated.

Licence Agreement: An agreement in which the licensor grants the licensee a copyright, knowhow, patent, trademark, or other intellectual property and the right to produce and sell goods. Such agreements usually limit the scope or field of the licensee and whether the licensee will pay royalties or some other consideration in exchange.

Lease Agreement: An agreement to the use of a property for a period of time on a fixed and/or variable rental fee basis. The agreement does give more control but not provide ownership rights to the lessee; however, the lessor may grant certain allowances to modify, change or otherwise adapt the property to suit the needs of the lessee. During the lease period, the lessee is responsible for the condition of the property.

Marketing Agreement: An agreement for marketing services between owner and operator. The specific marketing services covered under the agreement would be defined in the agreement e.g. promotion sector of the marketing discipline which can include services from advertising, public relations, media planning and sales delivery/distribution.

Technical Services Agreement (TSA) / Technical Consultancy Agreement (TCA): An agreement to provide technical input towards any new-build hotel project, the operator agrees to provide certain planning, equipping, design and opening services to the owner for a technical services fee. Agreement ensures that when completed, the hotel will comply with the brand standards and be operationally efficient.

Heads of Terms' Sheet: A non-binding document outlining the main issues relevant to a tentative partnership agreement. Heads of agreement represents the first step on the path to a full legally binding agreement or contract, and serves as a guideline for the roles and responsibilities of the parties involved in a potential partnership before any binding documents are drawn up. Also called “Key Terms” or “Term Sheet”

Memorandum of Understanding (MOU): MOU is a formal, but typically not legally binding, agreement to express a convergence of will between the parties, indicating an intended common line of action and timelines towards signing legally binding agreement(s). The MOU is also synonymous with a letter of intent (LOI) and usually includes a Heads of Terms’ Sheet.

 

F – Agreement Terms

Operator Key Money (if any): A payment made by a hotel operator to secure a hotel management or franchising agreement. This can be structured as an upfront cash payment, deferred fees for the operator, loan etc. Important terms and conditions may include the repayment schedule (if any), link to performance metrics, guarantees by hotel owner, usage for specific purposes i.e. property improvement plan or FF&E etc.

Operator Investment (if any): An investment made by a hotel operator to partake in the hotel development project. This is usually structured in the form of shareholding within the hotel owning company. One of the main considerations in the investment relates to the security of the hotel management agreement which is typically linked to the tenure of investment period.

Performance Test: The process of determining the effectiveness of the operator’s performance in running the hotel business. The commonly used performance tests are (i) GOP budget test and (ii) RevPAR against competitive set test; both are typically set over a certain period of time (2-3 years) and are curable.

Owner’s Priority Payment (Owner’s Priority Return): This is an agreed amount of monthly/annual priority payment to the Owner for a certain period of time (typically 5-10 years) that is paid to the Owner from the hotel cash-flow after all operating expenses but prior to Operator fees (Base and/or Incentive), subject to hotel achieving sufficient income. Usually linked to Owner’s debt interest payment.

 

GOP Threshold: An agreed GOP amount for the hotel to achieve on an annual basis in order for Operator fees (Base and/or Incentive) to be applicable. This is common for rebranding projects but must be subject to past performance, potential of the hotel, new competition and market trends/forecasts.

GOP Guarantee: An agreed GOP amount for the hotel to achieve on an annual basis which in the event of shortfall the Operator guarantees (either in the form of a bank or parent company guarantee) to “top-up” the difference, capped at a certain amount. In subsequent years when the GOP is above the guaranteed amount the Operator then “claws back” any top-up.

Competitive Set: A selection of a group of other competing hotels which the subject hotel measures its own performance. The competitive set provides a context to understand the subject hotel’s main performance metrics; namely, occupancy and average daily room rate and typically includes 5 other hotels.

Market Share: A metric to determine a hotel’s penetration of the market demand. This can be calculated by dividing the amount of room nights sold by the subject hotel with the total room nights sold by the subject hotel and hotels in its competitive set.

Owner’s Approval Clause: This typically forms part of the hotel management agreement which stipulates a hotel owner’s approval rights and consent on key issues pertaining to the operation of the hotel. The issues can include management positions of the hotel, capital expenditure, budget, concessions etc.

Termination Clause: A provision or provisions within the hotel management or franchising agreement establishing the circumstances which allows either the hotel owner or hotel operator to terminate the hotel management or franchising agreement. This clause is commonly linked to performance of the respective parties, change in ownership of hotel, breach of agreement etc.

Gross Operating Profit (GOP): GOP is defined as the hotel’s gross operating revenue less gross operating expenses.

Adjusted Gross Operating Profit (AGOP): Adjusted Gross Operating Profit (AGOP) is typically defined as Gross Operating Profit less Operator Management Fees & FF&E Reserve. As per Uniform System of Accounts.

Earnings Before Interest, Tax, Depreciation & Amortization (EBITDA): This is defined as the hotel’s AGOP less Owner (i.e. not operating) expenses. Sometimes referred or known as the Net Operating Income (NOI).

Revenue per Available Room (RevPAR): This is a performance metric in the hotel industry which is calculated by multiplying the hotel’s average daily occupancy with its average daily room rate. This may also be calculated by dividing the hotel’s total room revenue by the room inventory and number of days in the period.

 

G – Project Development

Delegation of Authority: Delegation of Authority is the formalised subdivision of authority and sub-allocation of powers downwards to a subordinate to achieve effective results whilst keeping certain controls.

Budget Development: Budgets are developed usually on annual basis in order to constantly monitor progress towards goals, assist in cost control, and predict cash flow and/or profit and loss.

Bank Account and Payment Approvals: One or more accounts opened by, or on behalf of, the Owner to facilitate cash inflows/outflows and accumulated FF&E reserve amounts. Such accounts are operated and managed in accordance with the set accounting policies. 

Costs Controls: An internal and/or external mechanism to manage and/or reduce business expenses; cost control helps in analyzing whether the costs are reasonable and affordable.

Quality Controls: Quality control is a procedure or set of procedures intended to ensure that a product or performed service adheres to a defined set of quality criteria or meets the requirements of the client or customer.

Project Manager: An internal or external professional, either an individual or seconded from a company, who holds the responsibility and authority for leading a project from its inception through planning, execution to completion; coordinating and pushing respective parties/consultants.

Architect: A professional appointed for the conceptualisation, design, detailed design and supervision of/advice on construction. The architect concept is the overall conceived, central or unifying idea or theme for the form and function of the building within the consented built-up area/envelope.

Main Contractor (or General Contractor / Prime Contractor): A company appointed by the Owner for the actual construction of the project. Provides warranties for the construction works and collateral warranties on works undertaken by their appointed sub-contractors.

Sub-Contractors: Specialist engaged by the Main Contractor to take on a portion of the contract for, and on behalf of, the Main Contractor or another Sub Contractor, and to perform a specific task as part of the overall project. Services provided to the project are normally paid for by the originating Main Contractor.

Interior Designer: A professional appointed to provide total creative and technical solutions within the hotel, to achieve an interior environment in keeping with the overall conceived concept.

Other Project Consultants: Additional professionals appointed to provide specialist knowledge and support within a specific discipline, such as structural engineer, sound engineer, life fire safety protection engineer, lighting designer, kitchen designer etc.

Conceptual Designs: Conceptual design is the very first phase of design, in which drawings are very rough sketches in order to give an idea and get approval on the concept before moving to detailed schematic designs.

Schematic Designs: The design scheme that seeks to detail the conceptual design of the project including scale and relationships between building components. At the end of the schematic design phase the project is ready for tender and construction.

Design Reviews and Approvals: Periodic reviews, refinements and approvals - built upon the scope, design, scale, quality and relationships amongst the various components of the project.

GM on Board & Pre-Opening Offices: Preparation for the new hotel opening is conducted within a ‘pre-opening phase’ spearheaded by the GM, which last for a duration from 6 months to 12 months depending on the hotel type/size and subject to any delay. In accordance with the planned date for the hotel opening, a fully equipped pre-opening office is established within or in close proximity to the hotel.

Licences and Permits: Legal approvals, consents, permissions and certificates formally issued by local authorities/municipalities relating to land use, design, construction, occupation, and operation (especially safety), together with any operating restrictions/restrictive covenants.

Pre-Opening Budget: Providing cost estimates for the various activities in the period up to opening of the hotel, eg. Wages, office expenses, training and launch advertising campaigns. The Pre-Opening Budget is an amount classified as capital expenditure, and the actual expense is usually amortized onto the income statement over a period of one to three years. 

Amortization: Amortization is the systematic allocation, over a specific period of time (usually over the period of the economic benefit), of a balance sheet capitalised item or expense, onto the income statement for accounting and tax purposes. This is determined by the Owner based on local practice.

Furniture, Fixtures, and Equipment (FF&E): Movable FF&E having no permanent connection to the structure of the building. For accounting purposes, these items are generally capitalised and depreciated over the assets lifetime.

Operating Supplies and Equipment (OS&E): OS&E encompasses a wide diversity of products from china, glassware, silver and linen to staff uniforms.

Completion Date: The date following inspection and ‘snagging’ of the hotel, when all the works described in the building contract have been carried out, and the hotel is free of any material defects/imperfections and ready, for all practical purposes, to be used as a hotel with occupying guests.

Insurances: Any hotel should maintain insurance with adequate coverage of risks such as; Building and Contents, Business Interruption, and Public Liability.

Working Capital: It measures the amount of money required to meet short term liabilities/obligations, and therefore how much in liquid assets a company has available to trade and develop its business. It is calculated as the value of all debts and obligations for the current period, subtracted from the value of all cash and assets that might reasonably be converted into cash in the current period.

Handover & Commissioning: The process of assuring that all systems and components of the hotel are designed and installed according to the contract and operational requirements, and formally handed over to the operator.

Operator Moves In: When the Operator takes over the operation of the hotel.

Soft Opening (Date): Following the grant of all necessary licences and permits, the period, from the Operation Commencement Date until the Grand Opening Date, when the hotel begins to operate with little promotion, to allow testing of operations, procedures and facilities. Although low-key, with the hotel rooms inventory not usually fully operational, the soft opening affords the opportunity for media and customer previews.

Corrections-Punch List: A punch list (also referred to as a ‘snagging list’) is prepared and issued by the appropriate certifying authority, typically the architect, contract administrator or employer’s agent. The faults identified should be rectified, as soon as reasonably practicable and prior to a certificate of practical completion being issued.

Grand Opening (Date): A publicized event at which the hotel announces its official opening to the public and typically when all the facilities are complete. A ribbon cutting ceremony is a common ritual, symbolically opening the facility to the public, and a party atmosphere may be promoted.

Asset Register: An accounting method used to keep track of the fixed assets. The maintained register shows the purchase cost and current value of the assets, the date of acquisition and other details necessary to compute for depreciation and tax purposes.

Closing of Books: Closing entries, also called closing journal entries, are entries made at the end of an accounting period to zero out and reset all temporary accounts, and transfer their balances to permanent accounts.