The Arts Property and Hotel

Executive Summary:

The Arts Property and Hotel was recently purchased by Faus and other investors after the previous two owners had experienced heavy losses due to poor management during development and operation. The property was purchased by the investors in order to maximize internal rate of return in a short amount of time. In order to increase the value of the property, Faus should construct a new hotel at the empty land site and use its management contract as a leverage to renegotiate terms of existing contract with Real Cortez. This can help Faus in improving the performance of the hotel by incentivizing Real Cortez and acquiring the control over specific resources at the property. This can further solidify the hotel’s competitive edge to tackle growing competition and maximize profits for the investor’s consortium.

Case Overview:

• The Arts Property and Hotel was comprised of a 455-room hotel and 30 luxury apartments tower, a separate office building, a retail and casino complex, a vacant plot of land and a 500-car garage.
• It was constructed during the early nineties to capture the tourism influx due to 1992 Olympics in Barcelona
• Its development was hindered with multiple issues and underwent changes in ownership twice while suffering major operating losses.
• Xavier Faus, president of a law firm, along with other investors bought the Arts Property in 2001, seeking to maximize the internal rate of return in a short time.
• The hotel and luxury apartments at the Arts property were being managed by Real Cortez Hotel Company.
• The contract for the management of the hotel was to expire in 2018, while that of the apartments expired in 2005.
• The hotel management contract was signed hastily, without looking into fine details.
• A majority of the terms set in the contract were highly deviated from the European average.

• Higher than average contract length, base fee and incentive fee.
• Absence of right to terminate the contract upon sale

• Slightly higher than average occupancy percentage among its competitive set, even though its ADRR (Average Daily Room Rate) was more than 26% higher.

Case Problem:

Faus needs to solve several problems in order to achieve his goal of maximizing the internal rate of return for the investors in a short amount of time.

1. Come up with a value for the Arts Hotel, figure out the strategy to employ with the extra land parcel and soon-to-expire management contract for the apartments, and strategize a plan to tackle increasing competition due to new development of luxury hotels in central Barcelona.
2. Manage the hotel’s operator in a better way: Current contractual agreement and system gave the hotel owners control over some high-level aspects like annual operating budget and capital budget only. In order to increase profits and increase efficiency, Faus needed the control over all contracts over a certain dollar value, and to hire key personnel and limit the transfer of key employees to other Real Cortez managed properties.
3. Gain some leverage over Real Cortez and force a contract renewal in order to improve contract terms in the favor of hotel owners and make the management fees more incentivized.

Solutions to the Case Problem:

There are several solutions to each of the problems that Faus faces. Some of these problems have only one solution while others have multiple options. Here are some of the options:

In addition to one of the above three solutions, Faus also needs to decide on a management company to operate the luxury apartments, whose contract will soon expire in 2005. There can be two options here: