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Who Will Run Your Franchised Hotel?

By Charles B. Cannon
September 17, 2003

Management agreements provide the vehicle through which investors in hotels, restaurants, and other commercial properties engage professional managers to operate their properties. The practice began in the lodging industry after the end of World War II when hotel construction boomed in response to demand from middle-class American families for clean, moderately priced travel accommodations ' the same demand that spawned the Holiday Inn chain and other lodging industry franchises. Investors with no experience in hotel management fueled the boom in hotel construction with their capital, but professional managers generated the returns on investment the investors craved.

By the late 1960s, management arrangements between property owners and independent, professional management companies had become commonplace in the lodging industry. Nowadays, insurance companies, pension funds, and real estate investment trusts (REITs, which the tax laws prohibit from actively managing their own properties) own many of the large hotel and resort properties. These and other institutional investors invariably choose to rely on professional help to operate their properties instead of developing their own property management infrastructures.

The use of management arrangements in the restaurant industry developed later and remains an exception to the norm. One reason lies in the lower barriers to entry that prevail in major segments of the restaurant industry. Most quick-service restaurants do not carry the investment burden that even smaller hotels carry, and experienced food service operators can more easily access the capital normally required to develop restaurants that occupy less than 3000 square feet. Also, operating a quick-service restaurant is comparatively simpler than managing a hotel, and (with the training assistance that franchisors provide) novice operators can quickly acquire basic operating skills.

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