Luxury, Food and Beverage Return Madrid to Center of Spanish Hotel Recovery
Since the arrival of Four Seasons to Madrid in late 2020, a new wave
The owner-operator format remains the most common operating structure globally. It offers the highest degree of control, as every component of the P&L sits under the owner’s direct responsibility.
However, bearing in mind the two main entry barriers to the hotel sector are scale and technology, this model only maximises profitability and valuation under exceptional circumstances:
Otherwise, in most cases, the owner-operator model struggles to maximise P&L profitability or asset valuation.
Lease agreements sit at the opposite end of the spectrum regarding owner control. By definition, the lessee assumes the position of the owner in all operational aspects and carries the full financial risk of the asset.
This risk transfer is reflected in the economics of the model: lease structures typically reduce owner’s return by 20%–30%, compared to owner-operator scenarios, as the tenant must be compensated for taking on all the operating risk.
Of course, a strong brand can sustain a high level of performance and asset value under a lease, but the owner’s return will always be capped relative to other more flexible operating models.
Last, but not least, the idea that leases guarantee consistent returns, irrespective of economic cycles, has been repeatedly discredited in periods of market disruption.
Contract types matrix
HMAs are the preferred structure for sophisticated hotel management companies seeking to deliver operational excellence without assuming asset-related financial risk. Under an HMA the owner retains full exposure to the P&L while delegating all management responsibilities to an expert operator that may leverage its own brand or a third-party brand.
Either directly, or through an asset management firm, the owner can exert a significant degree of control over the operator’s performance. When the HMA has been properly negotiated by a specialist legal advisor, operator and owner interests can be substantially aligned.
The operator fees are variable and come mostly from total revenue and GOP results, incentivising the operator to drive results.
The big distinction here is in the nature of the contract. While the HMA is a service provision contract, the franchise model is a commercial contract for the licensed use of intellectual property: brand, systems, standards, know-how and/or operational methods.
In this model, the owner retains full control of the operation and full P&L exposure. The brand provides powerful tools to the owner to grow commercial performance, but extracting value from these tools is entirely the owner’s responsibility (or the appointed management company). This applies to any aspect of the operation including sales & marketing, PR, training, IT tools, F&B guidance, etc.
When executed effectively, the combination of strict cost control and brand-driven top-line performance can deliver maximum profitability and asset valuation potential, most of the times outperforming other contract models in terms of GOP margins.
Understanding these dynamics is the key to selecting the contract format that will maximise the long-term performance and value of a particular hotel asset.
