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Luxe Hotels in a Battle for Control

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May 28, 2009

Luxe Hotels in a Battle for Control

By JONATHAN D. GLATER

It is not often that luxury hotel owners find themselves locked out of their own properties, but that is what the lawyers for owners say has happened at the Four Seasons Resort Aviara, north of San Diego.

This month, Four Seasons added security, including personnel at checkpoints, to head off owners and their representatives. The owners have accused Four Seasons of mismanagement, tried to fire the company and named a replacement operator ? who so far has not set foot on the property.

Owners and operators are fighting more often and more intensely as the economic downturn reduces the number of guests and forces down rates while owners struggle to cope with debt payments on their multimillion-dollar properties, say industry analysts.

The disputes have usually not become public because contracts between hotel operators and owners require arbitration, but some have grown so contentious that.

For example, luxury hotel operators typically do not want to reduce their rates because doing so may hurt the brand?s image.

Nor do they want to reduce costs by cutting back on amenities ? even though keeping multiple restaurants open 24 hours a day, for example, may be very expensive ? because such services justify the brand?s premium.

The economic downturn has affected high-end resorts far more than less costly hotels. In the first three months of the year, occupancy at luxury hotels was down 16.3 percent from a year ago, compared with a 10.9 percent decline for the industry as a whole, according to Smith Travel Research, a private research firm that tracks the lodging industry.

Those declines have put pressure on owners of luxury hotels, usually investment groups, wealthy individuals or companies specializing in lodging. Many owners took out loans to buy, finance or remodel their properties when occupancy rates were higher and credit was easy, but now loan payments can be crushing and borrowing difficult.

To add insult to injury, in the current climate no business traveler wants to put the name of a high-end resort on an expense report.

The economic problems for luxury hotels are compounded by the competing interests of property owners and operators, who are tied together by contracts that can span decades and that may give the operators little incentive to cut costs.

The contracts are supposed to give owners the benefits of a hotel operator?s reputation and its marketing and management prowess. But provisions in those operating agreements also usually require owners to cover the costs of operating the hotels, in addition to paying the hotel manager a fee, often a percentage of gross revenue.

Owners have been emboldened to sue management companies by judges? favorable decisions in owner-operator disputes in the last decade, said Hushmand Sohaili, a lawyer in the Los Angeles office of Akin Gump Strauss Hauer & Feld.

?The balance of power in the relationship has shifted to owners and lenders and away from management companies,? he said.

The owners of the Turnberry Isle Resort and Club in Aventura, Fla., filed a lawsuit in April against their operator over nearly $1.3 million in what they called ?unsubstantiated? fees.

full article ?

Source: JONATHAN D. GLATER (2009). The New York Times published May 25, 2009. Viewed May 28, 2009, http://www.nytimes.com/2009/05/26/business/26hotel.html?_r=4&em

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