HTM 150

Accommodations Operations

Above Property
Organization
People often think of the complex organization of hotels with their various positions and
departments, but many people are unfamiliar with the often-complex organization above the
property. Owners of hotels have many choices regarding the setup and management of their
hotels. The various aspects of above property organization will be discussed below.

Independent of Brand Affiliated

One of the first decisions a hotel developer must make when developing or purchasing a hotel
is whether or not to affiliate with a hotel brand. Hotels that are unaffiliated with a brand are
called independent hotels; hotels who are part of a brand are referred to as brand affiliated
hotels or branded hotels. In the United States, a majority of hotels are brand affiliated.
Independent hotels make up a larger portion of hotels worldwide. Smith Travel Research (STR)
conducts census of all hotels worldwide. STR separates brand affiliated
hotels in two categories—chain affiliated and franchise. Below are the U.S. and worldwide hotel
statistics for chain managed, franchised and independent hotels as of the end of 2016.i

Operation U.S. Props U.S. Rooms WW Props WW Rooms

Chain Management 4,226 869,535 25,792 4,416,744
Franchise 27,821 2,718,835 40,970 4,258,999
Independent 21,113 1,454,382 105,321 7,558,0181

Brands and Chains

There is a distinction between a brand and a chain. In hotels terms, a brand is a parent company
such as Hilton Worldwide, Marriott International, or Choice Hotels. Hotel brands may have
several Chains. Marriott for instance operates over 30 chains such as: JW Marriott, Ritz-Carlton,
St. Regis, Sheraton, Courtyard, Residence Inn, and SpringHill Suites.

Ownership Entities
A hotel may have a single owner, multiple owners, or may be owned by a company.
Ownership entities can vary greatly and can be complex. Hotels owners may or may not have
expertise in the hotel industry. Owners of hotels purchase or develop hotels with two primary
motivations; first, they wish to receive the ongoing cash flows generated by the hotel’s
operations and second, they wish to retain the hotel for a period of time and later sell it at a
profit.

Franchises
Most hotel brands sell franchises. Hotel developers work with hotel brands to acquire a
franchise agreement. The individual, group, or company who purchases the franchise with the
intent of building or otherwise developing a branded franchised hotel is called the franchisee.
The hotel brand selling the franchise is called the franchisor. Franchise agreements are legal
agreements between franchisees and franchisors. The franchise agreement spells out the terms
of the agreement between the two parties. The franchisor uses the franchise agreement to
ensure that the franchisee meets their expectations. The franchise agreement defines the
brand’s required building and design elements in the construction or conversion of an existing
hotel. The franchise agreement also defines the standard operating procedures and other
standards that must be adhered to by the franchisee. All of the franchisee, marketing fund,
loyalty program, and other fees are agreed upon in the franchise agreement. In order to acquire
a franchise, a hotel owner must pay an upfront development fee and make ongoing fee
payments. These often range anywhere from 8% to 16%. Thus there are costs and benefits to
acquiring a franchise. The table below contains some of the hotel owner’s costs and benefits of
acquiring a franchise:

Benefit
Pooling of marketing resources across
many properties
Increased patronage from loyal brand
customers
Access to proprietary resources, systems,
and technologies
Improved customer brand recognition
Support from the brand team
Cost
Costly upfront franchise agreement fees
High ongoing franchise royalty and other fees
Rigid development and renovation
requirements
Required adherence to brand standard
operating procedures

Management Companies
Oftentimes hotel owners lack the knowledge or resources necessary to manage their hotel. In
other situations, equity partners or lenders may require hotel owners with insufficient industry
experience to abstain from directly managing the hotel. In any case hotel owners often hire
third party companies to manage the hotel on behalf of them. Often the owner of the hotel will
hire the brand itself to manage the property. Marriott for instance manages numerous
properties that are not company owned. Management companies hire the hotel’s management
team who in turn hires the employees. Management companies typically have a robust
company structure to support the hotels.

Asset Management Companies

Large equity fund managers often will hire an asset management company who develops
hotel properties, negotiates and enters into franchise agreements and hires management
teams. The advantage to this model is that equity fund managers need not have any
expertise in the hotel industry and instead rely on the expertise of the asset management
company to act on their behalf.
i
2017 STR.