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Recession-fed tensions grow in luxury hotel industry

Owners and managers are at odds over how much to spend on keeping up deluxe properties, where bottom lines are sufferings as travelers scale back.

July 03, 2009|Roger Vincent

At the tranquil Four Seasons Resort Aviara north of San Diego, a heated struggle for control of the deluxe hotel's future is playing out in a rare public spat.

The increasingly nasty tussle at the Carlsbad resort is indicative of tensions throughout the higher end of the hotel industry, as travelers cut way back on spending.

At issue is the very definition of luxury.

The real estate investors who own the hotel say Four Seasons, which manages the property, is spending too much money keeping up appearances. They want to eject the fancy hotelier and bring in an operator they control.

The dust-up comes at a time when some industry experts say luxury hotels themselves are falling sharply out of favor. Hotels with names that include "spa" or "resort" are getting the cold shoulder, in part because their carefully crafted image of opulence is at odds with the public's mood during a bad economy.

"I think the word 'luxury' will disappear," said hotel consultant David Brudney, who is based in Carlsbad and familiar with the Aviara property. "It will no longer be used in the future when we describe properties. It connotes 'excessive.' "

Travelers, especially business travelers whose stays are paid for by their employers, are trading down, Brudney said. An expense report from a Westin or a Marriott has become more acceptable than one from a Four Seasons or a Ritz-Carlton, he said, and some of that frugality is expected to outlast the recession.

But Four Seasons is known for maintaining high standards. The company doesn't discount rooms, and it keeps tight control over decisions on how to run any hotels it agrees to manage. In this recessionary climate, that means less profit for Broadreach Capital Partners, which is the controlling owner of Aviara and has a contract with Four Seasons to manage it.

In May, Broadreach announced that Four Seasons was out as manager of the hotel. Four Seasons won an emergency court decision that allowed it to stay while the parties went into arbitration.

Both sides have since been forbidden by a gag order to speak about their quarrel, but Four Seasons' position appears to be that a Four Seasons hotel has certain standards that can't be compromised even in lean economic times.

"Four Seasons and Ritz-Carlton have spent a lifetime developing the power of their brands," Brudney said. "Customers have the highest expectations when they go, and those customers historically have been loyal."

Four Seasons guards that reputation by securing elaborate contracts with owners that ensure it will be able to maintain the property according to its standards.

Hotel operators such as Four Seasons, Marriott and Hilton typically receive about 3% of a hotel's income for management fees, said industry attorney Jim Butler of Jeffer, Mangels, Butler & Marmaro. But that's just the beginning. Operators also pay from hotel revenue all the costs of operating the hotel, including employee wages and benefits, utility bills, food and beverage costs, marketing, reservations systems and a host of other items.

Brands also dictate owners' spending on capital improvements such as carpeting, wall coverings, televisions, furniture, linens, towels and other operating supplies and equipment. In total, about 12% to 14% of a branded hotel's gross income is controlled by the operator, Butler said.

That formula becomes problematic for owners when hotel income goes down. At the Aviara, revenue has declined with the recession but the owners still have to make payments on a $186.5-million loan they took out to acquire the hotel at the top of the real estate market in 2007, analysts said. In that transaction, Palo Alto-based Broadreach became the majority owner in a joint venture with hotel investment company Maritz, Wolff & Co. of St. Louis.

"Based on what's going on with resort hotels, there is no way that property can cover its debt service," said industry consultant Alan Reay of Atlas Hospitality Group. "The hope from the owners is 'If I can get rid of Four Seasons, I can get rid of a lot of expenses.' "

Four Seasons said in a statement last month that the Aviara was operating profitably but that the owners' loan payments had become a millstone.

"Put simply, they borrowed more money than the resort can service," Four Seasons said. "Broadreach Capital Partners and Maritz, Wolff & Co. are unwilling to take the necessary steps to meet their financial obligations, and Four Seasons will do everything possible to ensure that the owners live up to these obligations."

Four Seasons contracts are perhaps the toughest for hotel owners to break, consultants said. By Four Seasons' reckoning, the Aviara opened as a Four Seasons in 1997 with the expectation that it would stay a Four Seasons for 100 years.

The Aviara's owners and managers have been knocking heads at least since early this year.

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