Financing Hotel Franchises

For new hotels, in particular, taking out a franchise offers the hotel owner a distinctive brand image that can be put to immediate use to attract guests. Hotel franchises offer central reservation systems, unified brand advertising and other types of marketing support. The growth of the internet has changed the way that many people search for and book hotel accommodation and being part of a group of hotels can make marketing more effective.

If you are considering becoming a franchisee, look carefully at all the costs and what you get in return. You will probably be charged the following:

  • Initial joining fee
  • Annual fee for use of the central reservations system
  • Cost of guest loyalty programmes
  • Other marketing programme costs

Franchises are usually for a fixed term, typically 20 years. This means taking a great deal on trust from the franchisor. Market conditions change and you or the franchisor might wish to change the terms of your franchise, during the franchise period. Be aware that the franchise contract may contain penalty clauses which could make you liable to pay damages to the franchisor, if you want to terminate the franchise agreement early. 

Franchised hotels have been very successful, particularly in the USA, and increasing numbers are likely to be opened in the UK, in the future. However, close scrutiny of the contract, preferably by a lawyer who specialises in this area, is essential before any mortgage commitment is made.

Investment in Hotel Rooms
In 2004, GuestInvest introduced a new concept to the UK hotel market. Instead of buying a whole hotel, an investor is able to purchase one or more hotel rooms. The standard formula is that the investor purchases a 999 year lease on a hotel room. In return, the investor can stay in the hotel for 52 nights per year and receives 50 percent of the annual income from the room.

This scheme has been controversial in some circles, but so far, investors have received an average return of around 6.5 percent and capital growth of 10 percent. GuestInvest has plans for further hotel projects and other developers are considering entry into this market.

Summary

  • Hotel franchises are becoming increasingly popular and offer a number of benefits to hoteliers
  • Hotel franchise contracts should be scrutinised carefully before being agreed
  • Schemes are available allowing investors to purchase individual hotel rooms
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