Chapter 1
1. Some of the factors that affect investors’ interests in foreign investment are the region of the world, the maturity of the hotel industry in that region, and the varied real estate and capital markets throughout the world. Among these, the first two are the ones most related to the host country.
2. Hotels are considered high-risk international investments because unlike the products of manufacturing companies, unsold hotel rooms cannot be stored for later use. In addition, real estate and construction costs constantly increase. Still, other risks include natural disasters, political instability, terrorist activities, fluctuations in exchange rate, and the limited number of opportunities for other uses in the event of a foreclosure. As well, market factors (e.g. target market and location), accessibility, the project’s anticipated lifecycle, and the track record and reputation of the developer and the intended project operator also serve as risks.
3. The main investment criteria for private sector investment in a country or region are the history of political stability, the benign laws toward foreign investment, the government support for foreign investment, the history of economic stability and growth, and the applicable lending quotas imposed on specific industries governing international commercial banks and individual governments. Other criteria include the current economic conditions of the country, the government regulations with regards to foreign investments, the prevailing accounting conventions, the comparative interest rates, and the exchange rate considerations. Still, other considerations include the availability of government incentives, the tax policies of the host government, the economic stability of the country, and the overall investment climate.
For international hotel investments, in particular, the investment criteria consists of financial factors such as the payback period, the discounted cash flow return, the cash flow to service the investment in terms of debt service and return on equity, and the project’s ability to generate an adequate profit based on the capital invested.
4. The standard criteria for obtaining hotel loans include the following: a strong, realistic feasibility study for the project; a proven track record for the owner; experienced management; chain affiliation; real cash equity; project’s capability to generate a healthy cash flow; subordination of management fees; developers’ personal liability upon loan default; and shorter maturity dates, call provisions, and front-end fees, which are usually shouldered by the borrower.
5. The goal of private investors is to obtain profit or to obtain a project that is capable of meeting the interest rate and making payments on time, with a minimum amount of risk. On the other hand, the goal of government investors is to obtain higher fiscal revenues, foreign currency, employment, and economic development.
6. Some of the factors that led to Japan’s aggressive action in the international hotel industry include lower capital costs, the weakness of the dollar, and their diversification strategies.
7. The most common methods of hotel financing used in developing countries include international development banks, such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the World Bank Group. However, other sources of funding also include domestic development banks, private foreign sources, bilateral or multilateral aid on a government-to-government basis or government lending agencies; and local funds.
8. The government investment incentives commonly used to promote hotel development are incentives to secure the investment; incentives to decrease the ongoing operating costs; and incentives to reduce the required capital outlay. Some governments also provide selective investments, which are not available to all hotel owners.
9. The major attraction of listing a hotel on stock exchange is that it provides hotel owners with access to a wider range of capital sources, which enables them to fund their expansion and growth. In addition, publicly listed companies are able to access debt securities such as convertibles.
10. Accounting conventions in the United States discourage property ownership as they require the depreciation of freehold assets on the balance sheets, which places a constraint on the property owner’s debt capacity, with fewer options for leveraging the property assets. In addition, the tax laws in the United States are more complicated than in other countries.
On the other hand, the United Kingdom’s accounting conventions allow for the yearly revaluation of appreciating property assets, in turn allowing the hotel’s property asset values to greatly increase during progressive times. This results in the expansion of the hotel owner’s debt capacity and the increased share price for publicly listed companies.
Chapter 2
1. The three general forms of organization in the international business field are transnational, global, and multinational organizations. A transnational organization operates on a global scale but allows for the individual development of each property in accordance to the local market needs. On the other hand, a global organization views the world as a single market and ensures that all of its properties around the world share the same standards, level of reliability, and brand. Finally, a multinational hotel organization uses successful flagship hotels in coming up with ideas for new properties in other countries.
2. The strategies used by a hotel chain to expand nationally or internationally are the following: the expansion of existing local markets (national expansion); the creation of new products that appeal to new market niches (national and international expansion); and the development of new markets overseas (international expansion).
3. It’s important for hotel chains to standardize their products and provide a consistent service quality in order to establish a strong identity, which is important for hotel companies.
4. Some of the advantages of international expansion are that it allows for profitability and strategic growth. In particular, having a strong foreign presence increases the brand recognition for the company and can also boost the company’s domestic business. In addition, international expansion allows hotel chains to increase their market penetration and allows them to track their customers, which fosters customer familiarity and loyalty.
On the other hand, some of its disadvantages include the following: that profits and success are not immediately realized when measured against local standards; and that the lack of adequate suppliers, the cultural differences, nationalism, and political instability can lead to problems with runaway costs, consistency standards, comprised quality, and resource availability. Other disadvantages include problems with repatriating profits or royalties; dealing with conflicting or adverse government regulations; and securing adequate resources and providing timely support. In addition, there can also be problems with quality control and financial accounting and control. As well, problems may be encountered with adapting the marketing strategy or product to new markets; transportation logistics; and time differences.
5. The factors that explain the differing geographical distribution patterns of international hotel chains include geographic proximity and linguistic, cultural, economic, and political factors.
6. One of the key markets that foreign chains target when establishing properties in the United States consists of the sophisticated or upscale travelers who are seeking a reliable service or a different experience.
7. Corporate hotel chains are hotel companies that have their own brand or brands, which a conglomerate or a corporate chain manages. On the other hand, voluntary associations consist of hotels that are independently owned and operated by different owners, but which joined together for marketing purposes. Lastly, conglomerates are organizations that manage either independent unbranded hotels or corporate brands.
8. Operator loans allow operators to invest in a project when the owner doesn’t want to share their decision-making privileges. Operator loans are contributions that become due if and when the contract ends.
9. The chief operational problems and concerns in multinational chains are unreliable communication systems, time differences, and geographic distance. Other problems involve the development of an appropriate financial system that conforms to the host country’s rules, delayed approval of expenditures, and the country policies that apply to to the compensation of expatriate versus local employees, along with such things as work permits and pay differentials.
Chapter 3
1. The development team for an international hotel should consist of the following: developers, hotel operators, builders and contractors, interior designers, architects, environmentalists, anthropologists, landowners, planners, the host government, and lenders.
2. The five phases of hotel development are the following: 1.) Conceptualization, planning, and initiation; 2.) Feasibility of analysis; 3.) Commitment; 4.) Design, layout, and construction; and 5.) Management/operation.
3. The general factors that should be considered when determining investment opportunities in a foreign country include political stability; the business environment; the market potential; the sales forecast; and the profitability versus the risk.
4. No, developers should not take infrastructure for granted as certain elements of the infrastructure may not be adequate for hotel development. Instead, they should perform a careful evaluation of each of the infrastructure components’ short- and long-term capacity with regards to the hotel’s requirements and the requirement of other planned developments.
The types of infrastructure that a developer may need include transportation infrastructure, water systems, electric power, communication infrastructure, sewage and drainage systems, health care facilities and emergency medical treatment centers, labor force, and security.
5. A country’s tourism master plan serves as a guide for the development of tourism-related facilities and resort destinations, including recreation amenities and hotels. It provides the basis for the regulations, procedures, and policies that govern development.
6. The general criteria used for selecting a specific site for an international hotel are the terrain, environmental stability, view, and location.
7. A preliminary site and building analysis is a tool used for the evaluation of a site before design documents and drawings are created. It is important because it prevents financial losses that may be incurred from the creation of extensive drawings and designs on a location that may not be economically feasible. In addition, it enables the developer to come up with an estimate of the overall construction budget and to gauge the long-term economic viability of the project.
8. It’s important to develop a strategy for the approval process in order to be able to anticipate and avoid problems that may lead to project delays of up to a year or more. This is especially likely to happen in countries that have a burdensome and time-consuming approval process.
Some of the approvals that may be needed include licenses, environmental impact
statements, and impact fee assessments.
9. Hotel design is a sensitive matter because it should be ensured that the design does not come into conflict with the host country’s social, psychological, and cultural values.
10. The seven basic categories of regulatory control that an international developer is likely to encounter include the following: 1.) The responsibility of the owner, contractor, and architect to comply with the standards that ensure the constructional safety of the building and adequate provisions for sanitation; 2.) The obligations of the hotel operator to maintain the premises in a safe condition; 3.) Provisions for the protection of the welfare, safety, and health of the employees who work on the premises; 4.) Specific requirements that relate to fire protection and the means of escape, as well as to hygiene, food, and licensing for particular uses; 5.) Conditions for the mortgage, financial subsidy, classification, or grading for different types of hotels; 6.) Insurance requirements and conditions as stipulated in insurance agreements; and 7.) Standards of safety provided for in the installation of mechanical and electrical services, through regulations and engineering codes.
11. According to the Brundtland Report, sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Gee, 1994, p. 211). Some of the organizations and initiatives that support this concept are the following: World Tourism Organization; International Finance Corporation; and U.S. Green Building Council.
Chapter 4
1. The criteria that should be applied to any qualified operator bidding or negotiating to manage a property include the following: contacts and experience in the relevant market, with a marketing and promotion staff in place within the defined market area to be served by the property; availability of experienced and qualified personnel; sensitivity to cultural customs and concerns; integrity and a reputation for fair dealing; high standards of operation and accounting; a proven record of financially successful operations; finance strength; a successful record in localizing management and training staff; a willingness to share risks through performance-based management fees, loans, or equity investments; and fees and agreement terms.
2. Management contracts are often very popular in developing countries because these countries greatly rely on tourism for foreign exchange and economic development. In addition, hotels provide employment opportunities as well as revenue from tourism.
3. The services that are typically included in a management contract are the following: feasibility reports and marketing surveys; advice and technical assistance on planning, design, architecture, and interior design; advice on the selection, layout, and installation of equipment; contracting, procurement, and construction coordination; startup operations and openings; marketing, advertising, and promotion; recruitment and training; secretarial, bookkeeping, control, and reporting functions; technical consulting; purchasing; central and international reservation services; management personnel to operate the property; and home office supervision and control.
4. The basic components of most management contract fee structures are the basic fee, which is usually a percentage of the gross revenues, and the incentive fee, which is related to a negotiated net cash flow or profit.
Operators prefer a basic fee because it ensures them of a certain amount of fee regardless of their performance. On the other hand, owners prefer the incentive fee as it motivates the operator to produce profits, because the incentive fee would depend on the profits.
5. The length of the initial management contract period has gotten shorter because owners have become more experienced in operating hotels and have become more cautious because of high debt service. In addition, with more operators competing for a management contract, the operators have become amenable to short-term contracts.
6. The contract termination rights that always exist for both the owners and the operators under the management contract are the following: 1.) If either party fails to perform or observe agreements for 30 days following notice of default; 2.) if either party files for bankruptcy or assigns the property to creditors; and 3.) if either party causes the property’s licenses to be suspended or revoked. As well, the contract can be terminated through a negotiation between the two parties.
On the other hand, the types of termination provisions that have recently become more common include the following: 1.) the owner’s option to terminate without cause; 2.) an option to terminate in the event of property sale; and 3.) operator performance provisions.
7. The right to maintain operating control is often contentious in management contract negotiations because the operator often wants to retain complete control over the hotel operations in order to ensure that interference, which may be detrimental to sound management principle is minimized. On the other hand, owners feel that they should participate in crucial management decisions in order to protect their equity interests, especially since they bear the risk of loan repayment, of the investment, and other financial obligations, although the operator’s credibility and reputation are also at stake.
8. The most important tool that owners can use for controlling and monitoring a hotel’s operation is the restrictive covenant, which prevents the operator -- for a certain period of time -- from owning, managing, or being affiliated with another property within a specified geographical area that encompasses the owner’s hotel. This ensures that the owner has the widest possible geographic area and that they are able to obtain exclusive benefit of the operator’s services and avoid possible conflicts of interest with the operator.
9. The advantage of joint ventures is that they enable companies to combine their various strengths, which enables them to become more competitive in the marketplace. On the other hand, the disadvantages include the loss of control in the exercise of discretion over various aspects of the hotel’s management, in the determination of compensation packages, and in the hiring and firing of staff. In addition, joint ventures can lead to the loss of flexibility in quickly responding to labor needs and market demands.
10. One advantage of franchising from the owner’s perspective is that it facilitates
international expansion due to the small risk involved. It is capable of quickly providing companies with an overseas presence, as well as an increased brand loyalty and international customer recognition. On the other hand, the disadvantages of franchising include the loss of control on the daily operations; the potential difficulties in dealing with the owners; the lack of control over pricing; and the possibility of cleanliness, service, and quality control problems. In addition, it may be difficult for the company’s name to be dissociated with the disreputable company.
References
Gee, C. Y. (1994). International hotels: Development and management. Educational Institution of the American Hotel.
