Case Study of the Arts Property and Hotel

Case Study of The Arts Property and Hotel

Xiaofan Yue

Abstract

Xavier Faus, one of the owners of the Arts Hotel Project in Barcelona needs to figure out a strategy to maximize his investment by increasing the value of the hotel and the vacant land, including renegotiation of the management contract. The author proposes four ways to help Faus make better decisions: 1. Clean the project and sell it. 2. Hire a consultant company. 3. Hire New Employees. 4. Have contract with a new management company.

Keywords: management contract, construction, management company, Real Cortez

Discussion

The key case facts are as follows:

1. Charlie Croker developed a project of building a Hotel for Olympic games in Barcelona.

2. He got the money from Sogo, and he kept the control of the company.

3. He signed and agreement with the Real Cortez for the operation of the hotel.

4. The hotel wasn’t finished for Olympic games; it opened with 10% of the hotel rooms and with no services. When construction started, the whole city was overwhelmed with real estate development projects; the price for construction doubled; American architects didn’t know the Spanish ways of building and doing business; the subcontractor went bankrupt, this project was postponed. In 1992, this property went into bankruptcy and Sogo toke over. In 2000, Sogo liquidated the Arts Property and Xavier Faus acquired it.

5. They are no foreign hotel brands in Barcelona, the US chains often are beaten by local player. The majority of hotels are four-star, but none was operated by US chains. Cap rate in Europe increased from 8.6% in July 2001 but it was the lowest in the world in 2002. Barcelona increased its room supply by 6% in 2000 and would increase it by 11% in 2001.

6. The contract management with Real Cortez wasn’t developing as it should be doing it.

The problems are as follows:

1. Industry: The expansion has no defined path: There are many hotels that plan to open from 2001 to 2004. Rooms that each proposed hotel has are from 40 to 500; the developers are different; hotels are not chained. It is difficult for Arts Property to set the primary and secondary competitors and find its own position. Also, after Sep 11, 2001, 86 events had been canceled and hotel industry, especially luxury hotel market was hit.
2. Hotel: the structure of Arts Property was complex: it was owned and operated by Sogo through two companies which owned Trapalaya, but these Spanish companies incurred over €211 million of tax losses. The Arts Complex was operated under a 20-year management contract by Real Cortez. The employees were chosen by Real Cortez and they may be transferred to other hotels without hotel owner’s consent. Faus thought that the current agreement didn't align the hotel operator’s goals with the owner’s desire to increase the sale.
3. Faus, the new owner: He didn’t know what to do with the extra land parcel and the apartments, the value of the hotel. His strategy was unclear: if another hotel on the extra land was to be built, he didn’t know whether it would have operated by US chains or local/regional operator. Also, with new competitors, Faus needed to come up with new marketing strategy to retain the hotel’s premier position and found a way to have more leverage as the owner, such as having control over hotel’s budget, contracts, hiring. Also, being a former lawyer, Faus didn’t have too much knowledge about real estate and hospitality. As an owner, his goal was to generate a profitable sale of Arts Hotel in the short term, but he didn't think too much about the marketing of hotel, how to increase brand awareness, set a target market, differentiate the hotel from other 5-star hotels, or improve the service and so on.

Solutions are provided as follows: