Many hoteliers are reluctant restaurateurs, and for a good reason: Restaurants are even more labor intensive than hotels. A standalone restaurant is doing extremely well if it achieves a net operating income (NOI) of more than 20 percent, since the norm is 10 percent or less. Add these two elements together, which is the exact scenario we have in full-service hotels, and your NOI is negatively impacted from the drag caused by the food and beverage department.
In the last 20 years, the impact of leased or third-party managed restaurant operations in hotels has been dramatic. That impact is double barreled, however. On one hand, profitability skyrockets because you have tenant income. This can take a hotel from potentially breakeven or worse in the F&B department to tenant income that is nearly 100 percent flow through. It’s not a full 100 percent because your real estate taxes will likely increase with a better bottom line. Unless your lease is perfectly crafted, you’ll inevitably end up paying for a slightly unfair allocation of common area charges, utilities, disposal costs, etc. Reasonable allocations backed up by a win-win lease should yield 85 percent of tenant income flowing through to your bottom line.
The second barrel is loss of control. No matter how great your choice of restaurant operators, unless you are risking your own dollars via an F&B management contract and not a lease, then you are giving up your right to call the shots. Decisions in the hotel are totally and unilaterally yours to make, but decisions by a third-party F&B operator may not be to your liking. For instance, if you want to offer a certain brand of coffee, the operator may say no. And if you have meeting space you may not agree on the menu choices for attendees.
The worst thing that can happen is inconsistency in service standards. A hotel that holds the top TripAdvisor rating in its market and receives accolades for outstanding service may be dragged down if its F&B operator doesn’t share the hotel’s drive for great service. How will you reply to guests that complain about a poor restaurant or room service experience?
So far I have painted a pretty ugly picture, namely the trade-off of a better bottom line or increased value for your asset weighed against a loss of control. There is an in-between solution, but it requires an incredible amount of effort and communication between the hotel and restaurant operator. And most important, it requires an expectation that is mutually understood in terms of service standards and food quality standards.
You can create a lease document that is iron clad and gives you protection. But this will do you no good if your restaurant partner isn’t achieving the returns required for their initial investment. Unless you are giving them all the money for build out and start-up costs, they will likely have a sizeable investment—borrowed from family, friends, or worse, a bank—so you want them to succeed. For the relationship to work and for you to deliver a great product to your guest, your partner must succeed.
I would never recommend such an arrangement for a novice. Learn from others that have gone down this path and have made mistakes that you must avoid in this type of relationship. A solid lease is a good start but it is not enough to achieve a win-win scenario. Your bogey is insuring that you are delivering outstanding F&B to your guests and at the same time your profit and loss statement is positively impacted and your partner is making a reasonable return. Make it work for both partners.
Jeffrey Saunders is president of Saunders Hotel Group in Boston, Mass.