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Explainer

What Are Sustainable Hotel Operations?

Explainer by Gregory Autin

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Last updated on 11 December 2020Comments

Sustainable Human Factors (People)
In the United States, hotel management companies typically employ all hotel staff. Outside the US, the owners of hotel property typically employ hotel staff and liable for all employee claims, while the management company only assigns certain personnel to serve in key positions.

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Under the hotel management agreements (HMA), an operator generally has the responsibility of hiring and training the line-staff personnel. Owner approval is typically required only for the hiring of such senior staff as the general manager, financial controller, and director of sales and marketing, who usually exit the property when the HMA is terminated or expires.

Where the operator hires certain senior management, the payroll for those staff is charged back to the hotel operation. Managers also often require owners to maintain insurance to cover liability arising from employee conduct and to bear the costs associated with insuring employee-related liabilities.

An outsourcing clause regulates the appointment of providers of external services to the hotel's operations, such as housekeeping services. The owner's consent is rarely required for this unless the contract is above a certain hurdle amount or the term of engagement is longer than 12 months.

In several jurisdictions, hotel staff is deemed to be jointly employed by the management company and the property owner for purposes of assessing liability to the employer for the conduct of employees. Moreover, in those countries that place social and employee obligations on a lessee or where there are relevant tax issues, hotel management contracts normally state that the agreement is neither a venture, partnership agreement or lease.

Sustainability practices and corporate social responsibility of hotels are the subject of growing demand from all stakeholders - guests, hotel personnel, the local community, investors, and society at large. Sustainable hospitality calls for hotels to respect cultural values, engage in fair-market competitiveness, support local businesses and community, and provide good labor conditions.

Sustainable Economic Factors (Profit)
In addition to the operator's base management fee, other issues affecting a hotel's operational performance include:

  • Incentive fee - Typically based on adjusted GOP, calculated by deducting the base management fee from the GOP, net operating profit (NOP) after deduction of some or all fixed charges, or NOP after deduction of some or all fixed charges and an owner's priority return;
  • Profit guarantee - The guarantee of a hotel operator of a minimum level of profitability to the business owner as compensation for any shortfall, commonly subject to an annual and aggregate cap and clawback when the profits rise again;
  • Key money - An upfront payment made by the operator of a newly built or converted hotel to the owner for entering into the operating agreement, to secure the owner's initial investment in the property; and
  • Owner's priority return - Deferral of incentive fees to the owner's debt service such that the incentive fee is not paid if there is insufficient profit to pay the interest on the loan to the owner.

If strong hotel performance is projected, operators may accept a mechanism to reduce or scale down their base management fees in the early years of hotel operation. They may also accept incentive fee deferral until profitability reaches a certain threshold or the owner's minimum return requirements are met, typically relative to debt service (DSCR).

Approval clauses in operating agreements establish when owner consent is required for decisions affecting hotel operation, allowing the business owners to be involved in decisions that affect cash flow and cost transparency. They typically include budget, employment of management, outsourcing, capital expenditure, leases, and concessions.

Hotel companies and operators implement sustainable practices while increasing profitability. Hotels are designed according to sustainability principles to provide a favorable environment for guests and staff, run at optimal efficiency, and reduce operational cost, for the benefit of all stakeholders.

Sustainable Environmental Factors (Planet)
Sustainable hotels respect the socio-economic needs of hotel staff and the local community and are operated for the profit of the owners and operators while lowering their environmental impact. Sustainable practices call for respect of the environment in hotel design, development and operation.

The environmental impact of hotels on the local and global environment is drastic. In Europe, the built environment is responsible for 40% of energy consumption and 36% of green-house (CO2) emissions. Of all real estate asset classes, hotels are the most energy- and water-intensive.

Higher operational expenditures following a climate event, such as drought, put great strain on a hotel's overall profitability. Hotels also suffer from a resulting lack of supporting infrastructure, such as access to clean and fresh water, food, and supplies.

Hotel companies and individual hotel owners adopt sustainable solutions for the day-to-day operations of their hotels. Their sustainable practices include cutting water usage, lowering waste, saving energy, and/or using renewable energy sources.

Hotel policies are generally aimed to either minimize the impact on the environment or contribute to nature preservation and regeneration. Sustainability decisions are made to combat climate change that lead to a significant cost saving over the longer term.

Sustainable practices in hotel operations are employed to maintain the qualities that are valued in the physical environment within the means of natural systems (environment) and without harming other people (society and culture). Hotel design and development are being focused on environmental protection and sustainable hotel operations, to reduce the associated climate risk, provide a satisfying guest experience, improve the work environment for staff, and increase profitability.

Their heightened exposure to climate change and increased pressure from all stakeholders have made green building initiatives of special importance to the hospitality industry. Sustainability reporting - the disclosure of the environmental and other effects of organizations' economic actions - contributes towards assessing the industry's global impacts.

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