Hotel Management — August 2015
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News
By C. Elliott Mest, Associate Editor

Investment
Alternative development, construction options exist
By C. Elliott Mest
Associate Editor
NATIONAL REPORT – Financing for hotel development and acquisitions was one of the first things to dry up in 2008 as banks began to fail. Though money was no longer available from traditional avenues, the need for cash injections and lines of credit never dissipated, and hoteliers instead relied on alternatives to keep their investments viable.
Sandesh Patel, SVP, SBA lending for Atlantic Capital Bank, said that at the time accessing Small Business Administration loans was one of the only means of financing available to hotels. The concept of SBA loans was established in the 1970s, and two programs are available to borrowers: the 504 and 7A. While the 504 is similar to a conventional mortgage and can only be used for acquisitions and new construction, the 7A loan is more popular thanks to its lack of restrictions and its ability to bring more profit to banks.
“Debt refinancing, buyouts, construction, expansion and whatever else a hotel could need can be achieved with 7A loans,” Patel said. “Though the question of what you can do with an SBA loan is all up to the lender, the risk is mitigated and we saw a big uptick in these loans in recent years.”
Patel said 7A loans typically lend themselves to branded economy, budget and midscale hotels because lenders giving these loans are often trying to shave off as much risk as possible. On top of that, they seek out reliable construction and management companies to get involved with the project, sourcing the main barriers to receiving these loans to the government side (such as felony convictions and defaults on government payments). Because of how easily obtainable these loans have become and their subsequent ubiquity in the hotel industry, Patel is confident they will remain popular.
“I’ve been involved with SBA loans for 20 years now, and I’ve never had a bad year,” Patel said. “The competition we face is from conventional lenders who may lower their standards due to competition, though that is no longer as prevalent.”
Dollars for jobs
Another way hotels can receive financing through unconventional means is the EB-5 or Immigrant Investor Program, which was established in 1990 to encourage foreign investment in the U.S. EB-5 financing emphasizes creating American jobs in exchange for a U.S. green card, and a foreign national must invest between $500,000 and $1 million (depending on the project’s location) in a “new commercial enterprise in the U.S.” that must create at least 10 U.S. jobs.
According to Jim Butler, partner and chairman at Jeffer Mangels Butler & Mitchell’s Global Hospitality Group, EB-5 capital only works for new developments or major expansions to hotels, and the more experienced and higher level the developer, the easier it is to tap into the program.
“Investors are getting more sophisticated with their approach to the program,” Butler said. “It’s critical a project gets finished, and on time. If there are delays, visas may not be valid anymore.”
Butler warned against partnering with the wrong entity because there are more than 600 regional centers in the country approved to participate in the EB-5 process, but only 20 or 30 of them have ever raised money. “That means there are roughly 600 entities who have never done a deal or have no experience,” Butler said. “If you are a developer who can’t sort the process out you can end up with a tragic case, you could be two to three years into a project and going nowhere.”
China is the most active investor in EB-5, with more than 80 percent of all investments coming from the country. Other strong markets include Brazil and Venezuela, which are investing heavily in Florida. Butler said multiple sources predict that India, Korea and the Middle East will become involved in the process soon.
The people have spoken
The hospitality industry is following in the footsteps of crowdfunding website Kickstarter as part of one of the newest methods of procuring hospitality development funding. EquityRoots is a company designed around crowdfunding real estate development, and is shifting its gaze to the hospitality arena.
“We want to break the process down and democratize the development of real estate for the middle class, many of whom do not have a $3-million check for equity to build a hotel,” said Bhavik Dani, dealflow organizer for EquityRoots. “When a community holds a business close to its heart, there are massive returns at stake.”
EquityRoots creates funding campaigns for select-service, limited-service and extended-stay hotels attached to major brands. These parameters were chosen to limit the risk being taken on by donors who lack industry knowledge. Also, limited-service hotels are easier to market because they can be built in almost any community.
Crowdfunding for real estate became possible in 2012 after the Jumpstart our Business Startup Act passed, opening legislation to offer better rewards to donors, sometimes including a cut of the profits. “When this happened, it clicked with real estate developers, and they saw a way to execute a strategy between crowdfunding and real estate,” Dani said. “We personally know the hotel space, and we want to give the public a shot to pool capital alongside savvier developers.”
This prospect, while interesting for all parties, presents a number of unique challenges. Trust, according to Dani, is the most important building block in development and is difficult to come by. Because of that, EquityRoots is selective about the clients they are willing to allow to receive passive capital from donors. Many of these clients have 35-plus-year records in the industry, and are investigated for defaults and their decision making in times of economic difficulty.
“Making this profitable is a part of any business, but there is a subjective part of this,” Dani said. “We want to democratize this investment space and give hard-working people opportunities for investment that they’ve never had.” ■HM
emest@questex.com
See Investment options | page 155
Investment options

A rendering of what the lobby will look like at the Hotel RL in Spokane, Wash., after it is renovated from its current state as the Red Lion Hotel at the Park.

Red Lion hotels corporation

Brand conference

Red Lion battle plan: convert and conquer
By David Eisen
editor-in-chief
SPOKANE, Wash. – When time comes for a hotel to undergo a significant property improvement plan, the property often has two choices: go through with the renovation or, depending on the state of the management agreement, reflag under a different brand. If the decision is the latter, then Red Lion Hotels Corporation, with its five brands, is there, said CEO Greg Mount.
“We are a conversion company,” Mount, who became CEO of Red Lion Hotels in January 2014, said during the company’s brand conference here at the Red Lion Hotel at the Park, itself to embark on a renovation of its own and emerge as a Hotel RL, Red Lion Hotels’ new lifestyle brand, which opens its first property in Baltimore this month. “So many hotels feel they that are under branded and under capitalized.”
And while areas of protection may safeguard an owner against a hotel of the same brand, it doesn’t affect other hotels in a company’s brand portfolio. Red Lion doesn’t have that problem; not yet. “We are one of one, not one of six,” Mount said.
brand New
Which isn’t to say it won’t some day. The company, which reported double-digit revenue-per-available-room growth in the first quarter, is in full expansion mode. Beyond its Hotel RL opening in Baltimore, it’s also absorbing two other brands. In April, the company nearly doubled its size to 130 total hotels when it acquired 73 GuestHouse International and Settle Inn & Suites franchise license agreements from Boomerang Hotels. (It’s now in the process of modernizing the brands’ logos and building more relevancy.) “This acquisition is another step in our asset-light strategy to reinvest in quality growth opportunities that leverage our pioneering technology and operating programs,” said Mount at the time of the transaction.
Now, Mount and Red Lion, which also has Red Lion Inn & Suites in its portfolio, are in the process of figuring out what to do with each brand, including the possibility of converting some GuestHouses to Red Lions, or even vice versa. “There are some switches that make more sense,” Mount said.
Meanwhile, in Settle Inn, Red Lion has a still fledgling brand. Only five currently exist in the Midwest, but Mount sees opportunity. “We are going to shift that over to being an extended-stay economy brand,” he said. “We like the name, but there are not a lot of them. How can we monetize it?”
Again, here, Mount is banking on the success of the conversion model, pointing to a glut of extended-stay properties due up for significant PIPs. “A number will change hands,” he said. “There is wide bandwidth there.”
One of the obstacles when acquiring new brands is overcoming any qualms by those brands’ current owners/franchisees, many of which Red Lion tried to placate during its conference. “Like any integration, you run into some apprehension, with owners hesitant and concerned that their autonomy will go away,” Mount said.
Here, Mount is clear with his intentions. “We are not a Wyndham or an IHG,” he said. “We are not going to force-feed you our Kool-Aid.” Mount was adamant that it doesn’t mean there isn’t any standardization. “We are not overbearing, but standards are important,” he said. “There are some things that are important that they may not be able to see, but we can. What is important is to get them in our ecosystem.”
fresh approach
Red Lion is setting a course that is heavily focused on its people and technology, high on management and low on owned real estate. All of this was on display during its conference, as Bill Linehan, Red Lion’s EVP and CMO, established under the tagline of “Make it Worth It.”
“We need to embrace the need to grow and embrace change,” he told the audience of owners and GMs.
Red Lion’s approach, not unlike other hotel companies with ownership stakes in real estate, is to divest but retain the management contract.
“We are drawing more attention from the investment community,” Linehan said.
Undoubtedly. In June, HNA Group, the Chinese parent of Hainan Airlines, acquired a 15-percent stake in Red Lion Hotels Corporation, showing that foreign capital is not afraid to take lofty positions in hotel companies solely with a U.S-based network.
Cross-border investment in either U.S.-based hotel groups or U.S. hotel assets themselves continues to become more widespread, as foreign companies seek to diversify and park their money in the relative safe haven U.S. real estate and companies provide.
Not only is foreign money taking a shine to Red Lion, so is Wall Street. The company’s stock price has risen 29 percent in the past 12 months or so. “We are expanding aggressively with financial flexibility,” Linehan said.
Red Lion Hotels is surely one of the more progressive hotel companies as it relates to the overall guest experience. For instance, its Hotel RL brand will have keyless entry, the ability to check into a room via a mobile phone and, soon, the brand will offer the ability for guests to choose the exact room they want.
Meanwhile, Red Lion is offering a new bedding program, a new terry program, new bath amenities, a new coffee experience, mobile check in, guest messaging and a new TV program.
The company is also embracing the millennial mindset, based on the amount of influence this generation holds, including its influence on baby boomers.
Red Lion is also using such revenue management tools as Duetto and RevPak customer-management solutions to further engage guests and improve its hotels’ bottom lines. “Increase bookings and decrease costs: That’s what we try to do,” Linehan said.
Other initiatives for Red Lion include a new coffee culture, with signature coffee brands, Whidbey and Victrola, for Red Lion and Hotel RL, respectively.
the future
Gordy Dhatt, Red Lion’s VP of IT, outlined new launches, including new digital lobby signage, improved Wi-Fi (including free 5M premium access for Hello Rewards members), new in-room entertainment (DirecTV Residential Experience replaces Samsung REACH, with 90-plus HD channels), a larger TV (55 inches as a brand standard) and smartphones that act as room keys. At Hotel RL properties, there will even be TV channels broadcasting TED-like talks, which will take place in the lobbies.
Red Lion is also looking beyond its borders. Mount, alluding to the HNA investment, sees Asia as a natural fit for Red Lion. “In China, there is opportunity not in the luxury tier, but in midscale,” he said.
For the time being, however, the U.S. will be the focus. In particular the Hotel RL brand, which Mount is bullish on and has hotels in the works—renovations of current Red Lion properties—in the aforementioned Spokane, Olympia, Wash., and Salt Lake City. (Mount couldn’t be specific, but said there are currently two additional franchise applications for RLs.) “If we are successful, we want an RL in Washington, D.C., New York, Philadelphia and Boston,” he said. “And we will use our equity to take down strategic assets.” ■HM
deisen@questex.com

See Red Lion conference update | page 155
Red Lion conference update
Guestrooms at Hotel RL properties will be decidedly modern with graphic design playing a large role. The first Hotel RL opened in Baltimore earlier this month.
Red Lion hotels corporation

5 questions with ...
Eric Danziger

The president and CEO of Hampshire Hotels Management talks brands, standards and values

Hotel Management last spoke with Hampshire Hotels Management President and CEO Eric Danziger in December 2014. One month later, the company launched Début Hotel Group, a new management company with five different tiers of lifestyle brands. We caught up with him again this summer to see how the company is faring and get his thoughts on the industry.

1 HM: Why did you want to launch a new branded hotel group?
ED: What I love to do is create companies and build companies. When I got to DoubleTree, it had five hotels. When I got to Wyndham, it had nine hotels. When we came to [Hampshire], it had a few hotels, but no brands and no brand strategy. We have 47 hotels in the pipeline in 10 months across five brands. That’s me helping people do great work. Great people doing great work—if you don’t have that, I don’t care what your brand is!

2 HM: How do you balance your values with brand standards?
ED: I am the anti-brand standards guy. I hate standards. Brands should be about essences, not standards, so that you communicate to the consumer the essence of what you have promised them. I’ll never have two Dreams that look the same. They’ll never look the same because what works in New York won’t work in San Francisco or Dallas. My job is to say to an owner, “How am I going to maximize your value as an owner?” In order to do that, I have to figure out what’s the product that will make you the most money with what you have. The more I standardize that, the worse it is for them. I should find out how you’re going to dominate the market, and the only way to do that is to find out what’s in the market, give them the kind of product that’s going to outperform the rest, and do it in a way that fits what those customers want. Hotels should only impose on the development of a hotel those things that the customer wants, values, appreciates and pays for.

3 HM: What is the biggest difference between running a large corporation and a smaller brand?
ED: Resources. I have 45 people in my corporate office and we had 45,000 at Wyndham. But the best lessons in life that got me ready for any of those jobs were the early lessons. You still have consumers. You still have owners. And ultimately, the only way you succeed and grow in a company is to do a good job with both of them, whether there are 6,000 of them in 63 countries or one in Las Vegas and two in San Diego.

4 HM: What is the biggest challenge the hospitality industry is facing?
ED: The largest threat to this industry isn’t economics. It’s about having enough good people who have the hospitality spirit. You can’t fake welcome. The human factor is this business, so we have to figure out how to hire and train and develop and promote the right people.

5 HM: What does a business need to succeed?
ED: You have to have great strategy, great people, great execution of the strategy. And very, very few companies will have all three. Some will have great strategy and weak people. Some will have great people but a bad strategy, and you can’t execute a bad strategy well. Or—I guess you can. You can execute a bad strategy well, but it’s sure not a good idea.

Distribution
How to deal with OTA anxiety
HVS report shows online travel agencies are a threat to hotels
By Bruce Serlen
contributing editor
NATIONAL REPORT – Hotel owners and managers have lived with a kind of love-hate relationship with online travel agencies for years. From downright hostility in the years following the launch of Hotels.com in 1991 (and Expedia, Priceline and Orbitz in 1996, 1997, and 2001, respectively), the hotel industry has viewed the OTAs’ growing prowess with alarm and frustration.
The OTAs’ record of success continues. In the first quarter of this year, bookings via OTAs grew 15.1 percent, year-over-year, according to TravelClick. By comparison, bookings on hotel branded web sites grew 7.1 percent.
But the industry has been more than willing to hand over unsold rooms in bulk during downturns. The OTAs became a “necessary evil,” “one more distribution channel” to be used strategically.
The tone recently has become increasingly conciliatory, but the HVS consulting firm last month issued a report claiming that OTAs harm hotels on three fronts.
Impact on profits
First, OTA commission rates of 15 percent to 30 percent take a heavy toll on hotel profit margins. With rate parity provisions, the rate offered by the OTA can’t undercut the best available rate offered on the branded web site. But, HVS notes, this also means the rate available on brand.com can’t be lower than on the OTA, limiting hotels’ ability to make brand.com more attractive to consumers.
As a general policy, Peachtree Hotels & Resorts is one owner/manager that shies away from allotting much inventory to the OTAs, particularly the opaque sites. “We only use the opaque sites when we have severely distressed inventory. OTAs are too expensive a channel to use otherwise,” said James Bethany, corporate director of revenue management.
But the decision is also market specific. “There are some markets—typically those with significant leisure travel, including families—that are big OTA markets,” according to Bethany. “Then there are others where, regardless of how much inventory you allot, it doesn’t produce much. So OTAs are necessary partners, though the decision when to use them and which ones to use takes careful forethought.”
Power play
Second, the HVS report cautions that a wave of acquisitions of small or regional OTAs, primarily by Expedia and Priceline, has put more power into the hands of these major players, making them even more of a competitive threat. Combined, Expedia and Priceline have invested an estimated $7.6 billion on acquisitions in the past two years.
Expedia acquired rival Orbitz Worldwide for $1.6 billion in February after acquiring Travelocity for a more modest $280 million in January. In the wake of these deals, Expedia became the online travel agency with the greatest worldwide gross bookings, accounting for about 70 percent of the total U.S. market, according to HVS.
Among Priceline Group’s major acquisitions, meanwhile, has been Kayak, for which it paid $1.8 billion in 2013.
The HVS report refers to Expedia and Priceline as a “duopoly.” The risk built into their growing market share doesn’t just pose a threat to hotels, the report notes, but to smaller OTAs.
Gerry Chase, president & COO of New Castle Hotels & Resorts, distinguishes between the larger, established OTAs and the smaller upstarts. “A few of the smaller, less well-known OTAs intentionally try to mimic the look of the brand.com sites. They’re trying to confuse the customer. It’s a big problem and to our mind highly unethical,” he said.
The Federal Trade Commission last month alerted consumers about deceptive OTA sites that trick people into thinking they’re booking directly with a hotel. The American Hotel & Lodging Association publicly endorsed the FTC action, claiming that the scam affects as many as 2.5 million bookings a year.
Likewise, it hasn’t always been clear to customers that when they book through an OTA, they may not be eligible to earn frequency points in the brand’s program, that the booking is nonrefundable and that they may not be able to switch guestrooms. “The larger, better-known OTAs are more apt to honor rate parity and be transparent as to what the customer is and isn’t entitled to,” Chase said.
Loyalty fight
Third, the HVS report points out that OTAs have begun launching their own loyalty programs, competing against hotel companies in an area where programs like Marriott Rewards, Hilton HHonors and Hyatt Gold Passport and others have been among hotel companies’ most effective marketing efforts.
Expedia, for example, rolled out Expedia+ last summer, where members can earn and redeem reward points much as they can with Marriott Rewards. Priceline offers its Priceline Cash Back Rewards.
Independent properties typically have more to gain from using OTAs than branded hotels, but at an increasingly steep price, Jill Barthel, one of the study’s authors, told Hotel Management. “It’s generally tougher for independent hotels to acquire global exposure, given their smaller marketing budgets. Thus OTAs offer them a chance to increase this visibility, albeit at the high cost of commissions,” she said.
The goal for all hotel properties is to achieve a healthy balance between OTA bookings and brand.com bookings. To attract more bookings to their brand.com sites, HVS recommends that hotels take two courses of action: improve the functionality of your website and invest in search optimization strategies as a way of improving a website’s prominence on search results. ■HM
hm@questex.com
See OTA anxiety | page 156
OTA anxiety
The Courtyard by Marriott and Residence Inn by Marriott in Syracuse (N.Y.) are part of New Castle Hotels & Resorts, which prefers larger OTAs because of their transparency.
new castle hotels & resorts
The Embassy Suites in Williamsburg, Va., is part of Peachtree Hotels & Resorts, which generally steers clear of opaque OTAs.
peachtree hotels & resorts

Growth
'L&L': The slow and steady rebound
Strong operating numbers, big transactions boost luxury/lifestyle segment
By Bruce Serlen
contributing editor
NATIONAL REPORT – Coming out of the lodging industry downturn of 2008-2010, analysts were surprised at how badly the luxury/lifestyle segment had fared and then how long it took for the segment to rebound. It wasn’t until 2014 that brand executives began to speak with any confidence that “L&L” was back.
Fast-forward to mid-2015 and all traces of indecision are gone. Lodging Econometrics noted that as of the end of this year’s first quarter, there were 37 luxury projects, accounting for 10,500 guestrooms, in the construction pipeline in the U.S. Granted, these numbers pale compared to the construction pipeline of the upper-midscale industry tier for the same period (1,457 projects, 141,269 guestrooms). But luxury/lifestyle is a wholly different development model.
Desirable building sites are harder to come by. The barriers to entry are higher. The number of room keys may not be that much greater, but the interior design is more elaborate, the finishes more expensive, the ancillary facilities (food-and-beverage, spa, conference space) more extensive.
On the operations side, the performance of the U.S. luxury/lifestyle segment has rebounded, as well. According to industry analysts, year-to-date through April, the luxury segment scored an occupancy rate of 75.1 percent, the highest of any industry tier. Even more impressive, analysts expect average daily rate at luxury properties to end 2015 5.5 percent ahead of last year with revenue per available room for the year up 6.1 percent.
Evolving segment
In style and design, today’s luxury lifestyle offering evolved from the previous era’s boutique hotel model. The 20 Hard Rock hotels, for example, are located in trendy destinations around the world from Bali to Vallarta on the Riviera Nayarit, Mexico. Given their often exotic location, the hotels emphasize authenticity, meaning that the service and amenities should reflect the destination.
In keeping with the millennial generation mindset, lifestyle hotels generally are experiential, placing a high priority on giving guests a range of experiences they couldn’t get at traditional hotels. In the case of the Hard Rock brand, many of those experiences revolve around music.
Celebrating its 44th anniversary this year, Hard Rock International expanded from cafes, opening its first hotel in 1995 in Las Vegas. Other pioneering lifestyle lodging brands include Kimpton Hotels & Restaurants and W Hotels, which is part of Starwood Hotels & Resorts Worldwide. InterContinental Hotels Group acquired the Kimpton brand in late 2014 for $430 million with the intention of growing the brand outside the U.S.
More recent entrants into the lifestyle arena range from Ace Hotels and Viceroy Hotels & Resorts to Virgin Hotels and, as of nine months ago, Canopy by Hilton.
Looser lenders
With luxury lifestyle hotels posting successful results with each passing quarter, lenders’ reticence to green-light loans has gradually diminished. Meanwhile, the transactions market is being propped up, in part, by the amount of foreign investment capital available to acquire high-quality assets.
Two recent luxury transactions—both in New York—tell the story. Both are bound for the record books. In February, Hilton Worldwide Holdings completed the sale of the iconic Waldorf Astoria hotel to Chinese interests for a record $1.95 billion. The same month, Starwood Capital Group and Tribeca Associates sold the new 114-room Baccarat Hotel & Residences for $230 million, or a record-breaking $2 million per key, also to Chinese interests.
Chinese interests aside, private equity firms, institutional buyers, lodging real estate investment trusts, sovereign wealth funds and private individuals are among those chasing the most desirable luxury and lifestyle assets.
Pebblebrook Hotel Trust, for example, a six-year-old lodging REIT based in Bethesda, Md., in the past eight months acquired luxury and/or lifestyle properties in San Francisco; Naples, Fla.; Boston; and Nashville, Tenn., investing a total of approximately $600 million. ■HM
hm@questex.com
See L&L segment | page 156
L&L segment
Hard Rock hotels emphasize authenticity, and service and amenities reflect the destination they are located in, such as Tampa, Fla.
hard rock hotels
Starwood Capital Group and Tribeca Associates sold the new 114-room Baccarat Hotel & Residences in February for $230 million, or a record-breaking $2 million per key.
starwood capital group

News Briefs
◾ Big in the borough: The fourth Wyndham Garden hotel opened in New York, with the newest popping up in Brooklyn’s Sunset Park neighborhood. The 70-room hotel is within 20 miles of the area’s three airports. It is owned by the 457 Hotel Group and designed by Horst Design International

◾ Curio opening: Hilton Worldwide opened the 278-room Reichshof Hamburg hotel in Germany. The hotel is part of Hilton’s soft brand, Curio – A Collection by Hilton, and is operated by Event Hotelgruppe. This is Curio’s first hotel in Europe.

◾ Solo standing: Best Western opened a new Premier hotel in Solo, Indonesia. The hotel is in the city’s tallest building, and its Ruby Convention Hall can accommodate up to 2,500 people. This is Best Western’s 14th hotel in Indonesia and its first in Solo.

◾ Sunny reopening: Starwood Hotels & Resorts Worldwide opened the Westin San Jose after completing guestroom, corridor, lobby and public space renovations. The 171-room hotel is the brand’s 18th hotel to open in California, and has 10,000 square feet of meeting space.

◾ New in town: The first Hyatt hotel in Okinawa, Japan opened last month as a joint venture between Hyatt Hotels Corp., Ken Corp. and Ken Real Estate Lease. The 294-room Hyatt Regency Naha, Okinawa is the 10th Hyatt-branded hotel in Japan, and the sixth Hyatt Regency to open in the country. ■HM

Cuba prepares for possible business influx
By Jena Tesse Fox
Associate Editor
HAVANA, Cuba – While global companies wait for the U.S. to lift its trade embargo against Cuba, Cuban professionals are guardedly optimistic about how international business relations can help the nation’s economic growth and cultural character.
In Havana, ICAP (Instituto Cubano de Amistad con los Pueblos) is a social organization that helps facilitate a better understanding of Cuba for international visitors. Vladimir Falcon, who works in the U.S. division of ICAP, called Cuba “forbidden fruit” for American travelers, and said that Havana is unprepared for the anticipated “tourism tsunami.”
The government is working with both local and international developers to open new hotels, he said, and tourism is a driving force for the nation’s economy. “We can use it to improve our infrastructure,” he said. “Tourism will be a door.”
Fidel Ortega Perez, president of the Cuban Chamber of Commerce, emphasized that Cuba has had international business relations with other countries for decades and has several hundred international partners already, including in the hospitality field. The Spanish-owned Melia brand, for example, has 28 hotels in Cuba, and more in the pipeline.
Challenges
Several challenges face any international company looking to invest in Cuba.
◾ 1. The Embargo and the Helms-Burton Act
The decades-long embargo (called the “blockade” in Cuba) still prevents most U.S.-based trade with the island nation, and the Helms-Burton Act from 1996 has made it difficult for many international businesses to operate in both countries. It will be very difficult for companies to legally operate in both countries until the United States officially lifts the embargo—making this the biggest challenge of all for international companies to overcome.
◾ 2. The dual-currency system
Cuba is a nation of two currencies: the CUP (the local currency for Cuban citizens) and the CUC (the “Cuban Convertible Peso” that international visitors can use). The CUC is accepted by businesses that are frequented by foreigners—in other words, many restaurants and shops. The system has many drawbacks, especially for international companies that (as required by law) partner with the government. Most notably, the foreign company cannot pay its Cuban workers in CUCs, so international businesses pay the appropriate government agency their workers’ salaries, and the government then pays the workers in CUPs. The system is widely regarded as inefficient, so the government is planning to scrap the CUC and make the CUP open to everyone.
◾ 3. Government regulations
Cuban citizens can form private businesses, but cannot form corporations. International businesses cannot partner with private citizens. The only way for an international company to (legally) get a foothold in Cuba is to work with the government, which can present bureaucratic challenges.
Approval of foreign investment applications depends on the sector and the size of the investment. Most importantly, Ortega said that the applicant must propose something that is in the interest of Cuba and its people. “Cuba has to gain and receive income,” he said.
Similarly, in terms of leadership roles, Ortega said that international developers can send some of their own workers over to make sure the project is run efficiently and to their standards, but most of the hired workers must be Cuban, and many international businesses have a foreign and Cuban manager working side-by-side. The government agencies that pay the workers also control employment, so the foreign partner would not be in charge of hiring or termination. International businesses will also need to accept and work with Cuba’s strong union system, which protects many of its workers.
◾ 4. Cuba’s credit situation—and reputation
While the embargo is still officially in place, Cuba has been able to trade with the United States on a limited basis—but all imports must be paid for in cash rather than credit, a rule the U.S. does not impose on other nations.
This lack of credit means that nearly every transaction is cash-only, and few businesses in the country accept credit cards. (According to Cuba’s tourism website, credit cards are accepted when supported by several international companies, including Visa and MasterCard International, provided they have not been issued by U.S. banks or their subsidiaries.)
The challenge of debt and credit has already affected numerous international investors, as has the issue of the Cuban government’s reputation as a business partner.
◾ 5. The infrastructure
Havana’s infrastructure is in a state of flux. Nearly every street in the central and historic neighborhoods has some kind of improvement project under way. Historic streets paved in old brick are being repaved with new cobblestones, buildings are covered with scaffolding and painters are constantly improving facades. All of these projects, of course, will boost the city’s appeal for potential developers—but other improvements are still needed. For example, sewage systems in some areas are so fragile that they cannot handle toilet paper.
Havana’s international airport also needs a renovation in order to accommodate the expected increase in travelers, and Wi-Fi would need to be installed to facilitate communications.
Falcon, however, does not expect widespread telecommunications improvements until 2018, but when implemented, improved telecommunications would also make it easier for credit cards to be used throughout the country.
Other improvements could, in theory, happen very quickly once the embargo is lifted. For example, even in some high-end hotels, the public restrooms off the main lobby do not offer hand soap for guests to use, and toilet paper (if available at all) is dispensed from the main wall rather than available in each stall. With increased access to supplies, this could change rapidly and improve the overall guest experience, bringing it up to an international level.
The benefits
There are, however, some definite benefits to doing business with Cuba.
◾ 1. A growing service sector
As a socialist country in which everyone is equal, Cuba has not had a strong service sector in the past. The new laws that have spurred the private sector have also improved standards for both options and quality throughout a range of industries. As private restaurants called Paladares open throughout Havana, for example, government-owned eateries are improving both food and service in order to remain competitive. The rising tide is floating all boats, and the cash influx from these private businesses is supporting both the burgeoning middle class and overall public improvements through taxation.
The growing private sector has increased demand for high-end restaurants and hotels, and a new generation of workers are willing to cater to international-level service demands as tourism numbers rise. Workers at the Paladares—from chefs to waiters—are trained to provide top-tier service.
◾ 2. A strong entrepreneurial spirit
The growth of the private sector has also given strength to a new generation of Cubans who are looking for niches and are eager to serve changing needs. Foreign partnerships and investment are expected to grow, and workers are eager to learn new skills from international professionals. As new demands evolve, new suppliers are stepping up to fit changing needs—and international businesses can profit from an eager work force determined to prove its skills to the world at large.
Foreign business
But even as the private sector blooms, entrepreneurs are still blocked from forming legal partnerships with international partners—even as franchisees. Falcon said that he has heard of interest in bringing the franchise model to Cuba, but he did not feel that franchises are a priority because they do not seem likely to help Cuban entrepreneurs. “Why would we open a door to that kind of business if we don’t need it?”
Falcon also emphasized that growing foreign trade cannot be used to “undo the revolution,”as he phrased it. “We don’t want to make Cuba dependent on anyone. We don’t want to go back to pre-1959.” As an independent country for 50 years, he added, anyone who wants to work with Cuba will need to work within Cuba’s framework. The country will need to determine for itself what kind of relationship it wants with foreign partners, and how to maintain Cuba’s interests as a priority. “We must identify how the business interest balances with the interests of the Cuban people.”
Likewise, any international business would need to respect Cuba’s laws in terms of labor. Unions cannot be prevented from working in any business, and in the case of any disagreement, the court for litigation must be Cuban. “Cuba has been fighting for its right to make its own decisions,” Falcon said. “Let us decide the best path to take for our development.”
But foreign funds have been helping to improve Cuba’s economy for years now, and international business seems poised to continue growing. “Cuba is open to all foreign investment,” Ortega emphasized. “We do not consider the nationality.” ■HM
jfox@questex.com
The historic Hotel Nacional de Cuba has hosted international celebrities since it opened in 1930. Today, it is operated by Gran Caribe.
HM | ALL PHOTOS JENA TESSE FOX
See Cuba tourism | page 157
Cuba tourism
The Spanish-owned Melia chain is one of the largest international hotel operators in Cuba with 28 properties. The company’s ultra-modern Cohiba hotel is a popular pick for VIPs.
The three-star Hotel Telegrafo (in blue) has been renovated and restored. The facade to the left is still waiting for its refurbishment.
Just off the historic Plaza Vieja, the Hotel Ambos Mundos was once a favorite hangout of Ernest Hemingway’s. The property is now operated by the Habaguanex hotel chain, and is under renovation.

NYU Conference
Leaders share insights on state of the industry
By Jena Tesse Fox
Associate editor
NEW YORK – At NYU’s International Hospitality Industry Investment Conference in June, several industry leaders gathered to discuss the state of the industry and deliberate about the most critical issues affecting this continuously evolving and expanding business sector.
Growth and Top Markets
Carlson Rezidor Hotel Group, session moderator Adam Weissenberg of Deloitte noted, has the largest hotel pipeline in Africa, India, Russia and Turkey, and is looking to grow in Brazil, China and Colombia. Currently, the company has 1,370 hotels across seven brands in 110 countries.
David Berg, Carlson COO, explained that as the company looks to grow, it focuses both on science (the local gross domestic product, revenue-per-available-room growth in existing hotels and attractive demographics) and art. “Do we have some infrastructure that we can leverage?” he asked rhetorically to explain the “art” angle of the decision. “Where do we think we can make a difference to the customer?”
Carlson breaks its business down into three primary theaters, Berg continued: the Americas, Asia Pacific and Europe, the Middle East and Africa. “In the Americas, we are very bullish on the U.S. market, particularly in the midscale brand and upscale select brand. We recently bought out our partner in Latin America, so we now have direct access to all of our hotels in Latin America. And Colombia actually is one of the countries in Latin America that we’re bullish on. We also think that Chile and Brazil—where we have a leadership position—are markets that we’re going to focus on.
“We’ve been in Africa a long time and it’s a long investment cycle,” Berg continued, “but it’s a place where, because of the leadership role, we’ll continue to invest.”
In the Asia Pacific region, Berg acknowledged that China is an “attractive market,” but the company is currently focused on Indonesia, Vietnam and Thailand.
David Kong, president and CEO of Best Western International (4,000 hotels in more than 100 countries), said that his company keeps a close eye on supply. “If you look at downturns, aside from the normal economic cycle, supply growth is a huge factor,” he said. A company can see a RevPAR decrease of up to 17 percent “because of supply growth that totally outstripped demand,” he warned.
Which is not to say, of course, that Best Western is having any kind of problems.“We have record occupancy levels achieved, and Smith Travel is forecasting even higher occupancy levels to come,” Kong said. “Which means that the demand is outstripping the supply. So we’re in a really good place right now.”
Hospitality growth, he added, is focused primarily in the upper-midscale and upscale markets at “30-some percent each,” he said. “And it’s for good reason: The economics are really good. It’s rather inexpensive to build, it’s very cost-efficient to operate, and you’ve got a huge return on investment.”
Hotels without large public spaces or meeting spaces or restaurants can be very profitable. “The rest of the regions around the world are warming up to the idea” of focusing on rooms rather than food-and-beverage, Kong said.
Brands: Soft and otherwise
Another notable change has been the increased fragmentation within brands of sub-brands and soft brands. Best Western, for example, recently launched its Vib (pronounced “vibe”) brand. “It’s actually a boutique, lifestyle brand, and we launched it to cater to today’s travelers’ needs,” he said.
Meanwhile, “A soft brand is competition to the online travel agencies. Independent hotels may not want to be so heavily reliant on Expedia, etc. Here’s a great alternative because our pricing is actually based on commission, so we don’t make anything unless we deliver on reservations.” Earlier this year, Best Wstern launched BW Premier Collection, a soft brand focusing on upscale and luxury independent hotels.
And how does Expedia feel about the new brands? “The brands that do really well in our marketplace are the new products,” the company’s president Cyril Ranque said. “Consumers who are looking for a selection of hotels in the market get attracted by a new product in a new positioning, and it works really well with the undecided consumer.” Business travelers may be more dedicated to existing brands, he acknowledged, but “the undecided consumer” has a “great appetite” for something new.
“New brands appeal to new demand,” he said. “The positioning of Expedia is to bring new customers to our brand partners, and so every time they have a new brand, they have to market it to new audiences and to use our distribution channels. So there’s a good alignment when there’s a new brand created.”
Attracting Millennials
Soft brands, Kong continued, don’t necessarily appeal to the growing “authenticity” trend that is largely credited to the millennial generation. In fact, he said, appealing to millennials—both as guests and as employees—is a wide-reaching challenge due to the diversity of the demographic. “The millennial segment is not homogenous,” he said. “Their needs and wants and preferences are not the same.”
“This is the most misunderstood group of people out there,” said William Ferguson, chairman and CEO at SEO specialization company Ferguson Partners. “There’s this view out there that they’re not hard-working and committed.” This, he argues, is an unfair mischaracterization. “They basically want to be engaged. They ask a lot more questions, they’re a lot more interested—holistically—in the business than (maybe) my generation was.”
In order to attract and retain millennial workers, he continued, employers must understand the generation’s broader expectations. “Mentorship is a key component,” he said. “They want to be paired up with somebody in the company who cares about them and is viewed to be a leader and really can share life experiences. They want to understand more broadly, whether it’s cross-functional or cross-geographic ideas, and putting those ideas together at an earlier age and really allowing them to understand the business.
“This is a group that does want to make a contribution, and they do want to make a difference, but you’ve got to engage them,” he continued. “You can’t just tell them to go into their offices and work hard and come back in two years [for a promotion]. That’s just not the case with that group.”
Berg agreed that mentoring is vital for attracting and keeping millennials in a business environment—but the advantages go both ways. “I’m a mentee with the millennials in our organization,” he said. “A 50-year-old-guy can understand what these folks are thinking about! That’s been very impactful for our leadership team.” ■HM
jfox@questex.com
See Leaders speak | page 154
Leaders speak
From left: Adam Weissenberg of Deloitte’s travel, hospitality and leisure group led the Leaders Check In (Part Two) panel at the NYU International Hospitality Industry Investment Conference with Carlson COO David Berg; Ferguson Partners CEO William Ferguson; Best Western CEO David Kong; IHG CEO, The Americas Elie Maalouf; and Expedia President Cyril Ranque.
NYU School of Professional Studies/Mark McQueen
“Vib is a boutique, lifestyle brand, and we launched it to cater to today’s travelers’ needs,” Best Western CEO David Kong said at the conference.
NYU School of Professional Studies/Mark McQueen
Cyril Ranque, president of Expedia, discusses the latest trends at his company during the NYU conference.
NYU School of Professional Studies/Mark McQueen

Design pros talk globalization, market segments
Discussion at HOTEC Design North America turns into a debate on rapidly changing markets and demographics
By Jena Tesse Fox
Associate Editor
San Diego – At the annual HOTEC Design conference, held this year at the Omni La Costa Resort & Spa and sponsored by Hotel Management’s parent company Questex Media, hotel design leaders gathered for a panel that focused on the role designers play in the overall guest experience—and what guests want in the first place.
Puccini Group managing director and partner Amy Jakubowski; Gatehouse Capital CEO and president Marty Collins; HKS executive principal and director of hospitality Nunzio DeSantis; and Concord Hospitality interior design coordinator Molly Ballard initially looked at globalization, but quickly turned to new market segments and changing demographics.
Globalization
The Puccini Group, Jakubowski said, is bidding on projects throughout Asia, the Middle East, China and Eastern Europe. “There’s no way we’re not global anymore,” she said. “We are seeing a big increase in that. In fact, we just recently opened an office in London to accommodate that increase.”
Collins, on the other hand, tends to operate domestically. “The effects that I see of globalization really come in the form of capital,” he said. “We see a lot of flight capital in China, a lot of drama in the Middle East with negative yields. That’s the influence of ongoing increase. It’s basically large capital, is being kind of parked. It’s kind of changing the landscape.”
For his part, DeSantis recognizes the significance of globalization. “Probably 85 percent of our work is international,” he said. “In terms of our business, our industry, I think our clients want this eclectic, powerful combination of design styles.” The ever-growing Asian market, he added, is having “tremendous influence on us domestically.”
“I think the market has always been global and will continue to be global,” Ballard said. “In terms of purchasing product, buying overseas is very competitive in cost, but you take a risk with quality control and lead times. We always look for competitors that are tariff-free, especially with casegood pieces. We also factor in cost of freight and duties.”
There has also, she added, been a “change in antics” within the U.S. “There are new quality brand opportunities, like the ‘lifestyles’ and ‘boutique-ish’ properties that we see as a terrific opportunity to expand our portfolio.” This, she continued, will give Concord a chance to expand in urban areas and attract a new generation of business travelers.
Changing Markets, Demographics
Ballard’s mention of lifestyle and boutique brands set off a discussion on how a segment of the industry that used to be fiercely independent is now becoming corporate, and how the growing millennial demographic is changing how designers create hotels. As a millennial only two years out of college, Ballard acknowledged that she herself was more likely to stay in a boutique or lifestyle hotel—“Something that’s geared towards my taste, my design [with] local restaurants and small details,” she said. “Hotel brands, and what they’re providing, is really what I look for.”
Jakubowski argued that the desire for authenticity and experiential elements is not exclusively a millennial quality. “We keep trying to define boutique versus lifestyle versus experience,” she said, “and I think it’s going to be a perpetual argument until we can understand everybody.” A small, independent hotel used to be called “boutique,” but now is called “lifestyle,” she noted, “and then other people start to define it as experiential. I think it’s creating a great design experience for our market, for people that are acquiring the sensibilities.”
DeSantis, meanwhile, feels that designers—and their clients—should eschew labels like “boutique” and “lifestyle” in favor of focusing on the overall guest experience. “Our clients can go anywhere, anytime in most cases—they’ve got selections, they’ve got opportunities,” he said. “How do you stand apart and own your guests’ experience?” That, he predicted, will be the future of both the hotel industry as a whole and design as a specific niche: “Break down the model of designing a hotel that’s like one continuous statement, but rather a whole experience.”
What this may well mean, Collins predicted, is the “emergence of product below the four-star level” that resonates more with a demand for authenticity than luxury. “They have different expectation with their room experiences,” he said of today’s travelers. “They don’t need to have charger plates and chandeliers and that crap. On the other hand, there are two parts of the business that are clearly emerging. One is the upscale segment with limited service with meeting space and restaurants and stuff. The other, of course, is the luxury and the big-meeting side.”
The “small Westin, the small Sheraton, the small full-service Marriott” are all part of a disappearing segment, Collins continued, and the brands are looking to attract the new demographic.
Jakubowski agreed: “We also, as designers and suppliers, need to also think about how we make it easier for the employees of the hotel to service the guests and bring them to neutral and make their experience better. How do we give them the tools and the opportunity to be the guests’ service-person, that concierge to each individual guest to make the entire experience a great experience so that they come back? At the end of the day, we’re designing for our owners that want a return on their investment.”
To “lift” a hotel, DeSantis added, an owner must focus on the basic needs of the guest: ease, comfort and consistency. “Sometimes we focus on design rather than the essentials,” he said. “When you do, you know you’ve made a mistake immediately. I think it goes without saying the hotel has some basic needs and ingredients in terms of how you program it, design it, implement it and create that guest experience, that thread from when they arrive all the way through. Along the way, you have moments that you can shine. It’s the wow factor, the shock factor where it reveals itself.” ■HM
jfox@questex.com
See HOTEC Design | page 154
HOTEC Design
At the HOTEC panel, from left to right, Amy Jakubowski, Puccini Group managing director; Gatehouse Capital CEO Marty Collins; and HKS Director of Hospitality Nunzio DeSantis discussed how globalization and the millennial generation are changing the design industry.
hotec design
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