What hotel business models should an investor choose in Germany?

Investments in the hotel business

Investments in the hotel industry are not just a financial commitment, but a thoughtful choice regarding the level of involvement of the investor in hotel management, as well as factors related to risks and expected returns. For a more detailed analysis of the various hotel management models prevalent in Germany, it is worth considering several key types of contracts, including lease, management, franchise, and combined models.

Hotel rental

Let's start with leasing, which is one of the most common models. A hotel lease agreement involves transferring the hotel complex to the tenant for a fixed fee, which does not depend on the success of its operations. This approach provides the owner with predictable income, but it completely excludes their involvement in the hotel's operational processes.

All management responsibility is placed on a professional manager who oversees the daily operations of the establishment and makes important decisions. The main advantage for the owner in this case is the reduction of operational risks, as all management falls on the tenant.

Management Agreement

Another interesting type of contract is a management agreement. In this case, the management of the hotel business is carried out by a professional operator who acts in the owner's best interest. In this model, the owner receives a percentage of the operating profit, while the manager is compensated for their work through commissions and bonuses based on the results achieved.

This can contribute to an increase in revenue, provided there is quality management and motivated managers. However, it should be noted that the owner has no direct control over the day-to-day operations of the hotel.

Franchise model

The franchising model is another option where the franchisor provides the hotel owner with a well-known brand, a proven business model, and necessary support. Hotel owners pay fixed fees and additional contributions for bookings and marketing activities.

This approach also opens up the possibility of stable income and the provision of consulting services, but within the framework of fixed payments, there is no direct link between the owner and economic indicators, which can negatively impact the final results.

Model risks

The risks associated with each model can vary significantly.

• When renting, the owner faces lower operational and financial risks.
• In management and franchising, he may deal with risks associated with the ineffective performance of the operator or brand.

It is important to remember that for the successful implementation of these business models, it is necessary to take into account the current state of the market and the level of trust among all participants.

Advantages and disadvantages of models

Each of the models listed above has its own advantages and disadvantages.

• Hotel ownersThose who choose to rent often face fewer risks, but they also lose the ability to influence daily operations.
• Hotel ownersUnder the management of operators, they can earn higher incomes, but they become dependent on the manager's work.
• FranchisorsThey offer their partners various advantages, but the risks can also increase here.

Making investment decisions

In the process of making investment decisions, hotel business owners need to carefully weigh all the pros and cons, analyze available opportunities, risks, and potential benefits in order to choose the most advantageous model that aligns with their financial and management ambitions.

Moreover, to achieve success in the hospitality industry, it is crucial to follow current trends and adapt to the constantly changing market conditions.

Lease agreement for hotel management

A lease agreement concerning hotel management is a legal document under which the owner leases an already operating hotel business. This service package includes components such as premises, specialized equipment, furniture, dishes, as well as existing business relationships, licenses, and all necessary permits.

The principle of distributing operating costs

In Germany, there is a special practice for distributing operating costs based on the principleroof and tradeThis means that the building owner is responsible for capital expenses, while the hotel operator must cover all ongoing costs related to daily operations.

Reserve fund

In practice, capital and operational expenses often fluctuate. For this reason, to effectively manage a hotel, the owner should establish a reserve fund that will amount to 1 to 2% of the revenue for maintenance work. It is also recommended to allocate 3 to 4% of the revenue for replacing furniture and equipment. In the first year of the hotel's operation, the reserve fund can be reduced to one-third of the expected expenses. In the following year, this reserve should reach two-thirds of the planned costs.

Owner's income calculation

Calculation of the income of a hotel owner, which is callednet cash flowor return on investment is calculated using the following formula:

• owner's income = rental income
• - the cost of building insurance
• − land tax
• - operating expenses related toroof & facade
• - other non-operational management costs

Key terms of the rental agreement

The main conditions of the rental contract include the following aspects:

• the sizes and procedure for paying rent
• conditions for operating costs
• indexation of rental payments
• details regarding collateral and other forms of security
• responsibility for carrying out repairs and their compensation
• requirements for equipping a hotel with furniture and equipment

It is essential to define the duration of the contract, the possibility of its extension, the conditions and procedures for terminating the agreement, as well as the mandatory notification of the parties.

Control over management reporting

An important aspect is the oversight of management reporting in compliance with necessary standards and the mandatory presence of insurance.

Types of rent payments

There are different types of rent payments:

• Fixed rent payment— implies a constant payment amount throughout the entire term of the contract.
• Fixed rent with a reduction— In the first 1-3 years, the payment amount is 25-40% lower, after which the rent can increase significantly.
• Fixed rent with a percentage of revenue— the tenant pays a lower fixed amount, while the owner receives a percentage of the turnover.

Rent based on turnover

The rent based on revenue depends on the hotel's income, which allows the owner to better understand the structure of the hospitality business, including all possible expenses, as well as to manage them. The rights of control and intervention in these agreements should be clearly outlined in the contract to avoid conflicts between the owner and the tenant.

Agreement on Minimum Guarantee

The minimum guarantee agreement links a percentage of revenue to a specific minimum level that the tenant is obligated to provide.

Introduction

Gross operating profit (GOP) is reduced by fixed rental payments, and the remaining amount is divided between the owner and the tenant according to a pre-agreed ratio. However, this form of leasing is quite rare, as the financial conditions of the tenant can be complex enough to analyze.

Rental model with a reserve fund

There is also a rental model with a reserve fund. In this case, a conditional reserve fund is created, which is based on a fixed rental agreement. It stipulates that rental income must exceed a certain percentage of the total annual turnover. If the income falls below the planned level, the shortfall will be covered by the reserve fund. If this fund is depleted, the rental terms change, and the rent becomes proportional to the turnover.

Hotel management agreement

Another important aspect is the hotel management agreement. Under this agreement, the owner grants the operator the right to manage their hotel. Although the owner can participate in management and influence important tactical decisions, the full responsibility for operational processes lies with the operator. At the same time, the majority of risks still remain with the owner. All finances are registered in the owner's name, and they bear the expenses, including those related to contracts with contractors.

Operator compensation

The hotel management agreement is significantly different from a standard lease, especially in terms of revenue distribution between the operator and the owner.

Performance clause

The conditions related to the performance of duties, known as the "performance clause," are a critically important element that shapes the quality service standards in the hospitality industry. This includes not only obligations for informing and verifying but also the rights of the parties regarding the termination of the agreement.

It should be noted that the contract may also specify its duration with the possibility of extension. The guarantees of the parties and their legal documentation are key aspects of this process.

Non-compete clause

Furthermore, the agreement may include non-competition clauses that protect the interests of all parties involved. In particular, the terms of the mortgage agreement stipulate that the lease will remain valid between the hotel owner and the manager even in the event of a change in market conditions.

This is especially important for both parties as it creates a solid foundation for the partnership.

Compensation of the hotel operator

The contract also includes a provision for the payment of a fee to the hotel operator, which depends on pre-agreed criteria, such as:

• operational indicators;
• fixed amounts referred to as "owner's priority".

In the modern hotel industry, hybrid contracts that combine characteristics of both leasing and hotel management are increasingly being used. This change has arisen against the backdrop of the shortcomings of traditional models, which do not always provide an adequate distribution of risks and profits among partners.

Economic stability and risks

In times of economic stability, neither party is eager to share additional income. A similar situation occurs during difficult economic times, when there are declines in turnover or increases in operating expenses.

When analyzing hybrid models, several calculation options can be identified, which may vary:

• percentage share of investments;
• percentage of the hotel's turnover;
• fixed percentage with variation related to gross operating profit (GOP).

It is important to note that interest rates and the calculation procedures are developed individually for each specific enterprise and depend on the actual profitability in that location.

Key points of hotel management

The key points to pay attention to in hotel management are:

• flexibility in risk distribution;
• income generation;
• creating a safe environment for the investor.

This is critical for fulfilling debt obligations.

Franchises in the hotel business

It should be noted that there is no "standard" form of a hybrid contract, and the terms will vary depending on the negotiations between the parties, the characteristics of the location, and the concept of the specific hotel.

As for franchises, hotel owners can take advantage of schemes that provide access to a proven business model and strong marketing support while still maintaining control over the property.

To successfully operate within a franchise, owners must have a deep understanding of the hospitality industry and experience in managing operations.

Owners bear all market and operational risks without receiving any guarantees of their business's success. The franchise fee is paid proportionally to the income received or the total turnover, while also having to meet all the requirements set by the franchisor.

Thus, despite the opportunities that a franchise offers, the business owner also faces certain obligations and risks.

Franchise networks in the hotel business

One of the most successful and well-known hotel chains in the world operating on a franchising system is Best Western. In Germany, large hotel companies like IHG and Marriott also choose a franchise strategy for their operations. Let's take a look at what contract conditions might allow for tax benefits in the country.

Taxes in Germany

In this country, there are two main types of taxes for companies:

• Profit taxwhich amounts to 15.825%;
• Trade tax, which fluctuates between 7% and 14% depending on the region.

Hotel owners who rent out their properties can theoretically avoid paying the sales tax by only paying the profit tax of 15.825%. However, in the case of management contracts, they will most likely have to pay both types of taxes.

Exemption from sales tax

Some companies have a chance to be exempt from paying trade tax if they meet the following conditions:

• Companies should only own and manage their own real estate.
• Conduct "core activities";
• Allow the receipt of income from permitted activities, such as:
• Management;
• Provision of maintenance services for apartment buildings;
• Construction and sale of residential properties.

It is important to understand that when engaging in any other types of activities, the company loses its right to exemption from the trade tax. Therefore, in order to obtain the exemption, the company must operate exclusively within its scope.core activityor combined it withpermitted activity.

Trends in the hotel industry

Considering the aforementioned tax aspects, it is worth noting that even before the pandemic and the subsequent economic crisis, there was a noticeable trend in the hotel industry towards moving away from traditionally used lease agreements. Although this form of contracts still predominates, accounting for about 85-95% of all deals, the negative experiences following the events of September 11 and the outbreak of the SARS virus have prompted the hotel business to seek more balanced approaches to risk distribution.

Changes in investors' approach

Investors who have been actively focused on the hotel sector for the past three decades have significantly improved their knowledge in this area. They have become more selective in choosing operators and forming contract terms. In particular, many of them are eager to participate inmanagement of my hotels.

Modern challenges of the hotel industry

A situation similar to what was observed in the early 2000s is beginning to re-emerge in the wake of the pandemic. Despite financial assistance from European governments to support the hospitality and tourism industry, many operators with fixed rental agreements are facing survival challenges in the new market conditions.

The increased interest from investors in the careful selection of operators and contract terms highlights significant changes and the adaptation of the hospitality industry to the unexpected challenges of modern times.

Conclusion

In conclusion to our article, I want to emphasize that investing in the hotel business requires careful analysis and understanding of various management models. Regardless of whether the investor chooses a lease agreement, management, a franchise, or a hybrid option, their success will depend on many factors, including the market, the chosen operator, and their own financial goals.

Each management model carries its own.advantagesanddisadvantages...that need to be carefully balanced. For example, a lease agreement may offer:

• Stable income
• Low risk
• However, the investor will be less involved in the hotel's operational activities.

On the other hand, a franchise can provide access to a brand and marketing support, but at the same time, it limits the owner's flexibility in management. Hybrid models can offer the best of both worlds, but they also require a greater degree of interaction and management.

It's important to remember thatrisk analysisandunderstanding one's requirementsWhen it comes to return on investment, these are key aspects that need to be considered when choosing a model.

I hope that my attempt to present a comparative analysis of existing hotel management methods will be useful not only for potential investors but also for everyone interested in this dynamic and exciting sector of the economy. Ultimately, the right choice of management structure and investment strategy can be a decisive factor on the path to success and financial stability in the hotel business.

I hope the information presented in the article helps you make an informed decision and achieve your goals.