Table 6 - uploaded by Michael J. Turner
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Source publication
The somewhat idiosyncratic accounting procedure of maintaining reserves to fund furniture, fittings and equipment (FF&E) capital expenditure in hotels mediated by a management contract is examined. Five research objectives have been pursued: (i) ascertaining contrasting motives of owners and operators with respect to FF&E reserve accounting; (ii) d...
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Significant funding is devoted across the world to transforming traditional classrooms into flexible learning environments. These efforts are often motivated by a desire to create learning spaces attuned to twenty-first century competencies, which involve learning how to communicate, collaborate, think creatively, and how to become critical users o...
Citations
... Researchers have recently begun to empirically investigate some of the capital expenditure (Turner & Guilding, 2010a), human resources (Gannon, et al., 2010) and managerial implications resulting from the owner-operator split. ...
A principal-agent relationship exists between hotel owners and the management companies which often operate their hotels. In addition, they both act as principals to a mutual agent, the hotel's General Manager, who is tasked with trying to achieve each parties' objectives. Extensive research on hotel management agreements which govern the owner-operator relationship has demonstrated that these objectives are often incongruent. However, the property-level managerial and performance implications of their goal incongruence has not been empirically examined. This study analyzes these issues using a matched sample of surveys from both owners and operators across 64 hotels operated under hotel management agreements. Using structural equations modeling, we demonstrate that owner-operator goal congruence positively impacts hotel performance and that this relationship is both mediated and moderated by the hotel General Manager's autonomy.
... In terms of budgeting, considerable friction between hotel owners and hotel chains is well documented in connection with capital budgeting (see e.g., Turner & Guilding, 2010a;2010b, 2012. "Few, if any organizational decisions carry more profound implications for organizational success than the investment decision" (Guilding, 2006, pp. ...
... Only around 13% of hotels, however, are able to achieve this (Turner & Guilding, 2010b). ...
... Failing this, the next best alternative is to negotiate a notional (non-cash) FF&E reserve as opposed to one that is cash funded (Turner & Guilding, 2010b). Finally, owners should seek to retain approval rights concerning release of funds from the FF&E reserve (Turner & Guilding, 2010b). ...
This chapter examines the management contract and the key components that shape its success as an entry mode. Management contracts are increasingly popular among owners because they can gain ready access to the operational expertise required to operate a hotel without any need for operational responsibility. Alternatively, hotel chains find management contracts desirable because they enable rapid expansion at relatively low cost by virtue of there being little to no equity investment. Only when there is an equal balance of power in the relationship between an owner and a hotel chain, however, will both parties be able to best achieve their business goals over time. A one-sided hotel management contract can create conflicts that can result in lengthy and costly legal disputes or early termination of the management contract. The balance of power between hotel owners and hotel chains, however, is constantly shifting. An owner’s choice of hotel chain and management contract terms is therefore perhaps the most critical factor which will determine the long-term success of their hotel. In addition to the relationship between hotel owners and hotel chains, this chapter also examines implications of hotel management contracting on the hotel’s general manager, financial controller, as well as bankers and lenders.
... At the same time, and as in the franchising arrangement, there is an important need for hotel chains to ensure that hotel partners have solid financial resources so that brand standards can be upheld. Given the predominant importance of ongoing capital expenditure in maintaining brand standards, as a further safeguard the majority of management contracts require hotel partners to establish a reserve for the replacement of furniture, fittings and equipment (FF&E) set at approximately three percent of annual turnover (Turner & Guilding, 2010a). The hotel chain typically 8 administers expenditure from this reserve account. ...
... The hotel chain typically 8 administers expenditure from this reserve account. Nevertheless, the FF&E reserve account is about 40% underfunded (Turner & Guilding, 2010a) relative to the true cost of all capital expenditure required to maintain brand standards so it is imperative that hotel chains sign with a partner that understands and supports their brand strategy. ...
... Data collected during the study's interview phase suggest substantial hotel owner type variations on key business dimensions such as strategy pursued and also investment time horizons. It is notable that the relatively developed literature concerning hotel capital budgeting (e.g., Turner & Guilding, 2010a;Turner & Guilding, 2010b, 2012, 2013 has failed to explore for any significant roles played by owner type in connection with capital budgeting dynamics. There has also been significant literature examining the optimal timing of real estate investment. ...
... The primary contribution of this study is that it is believed to be the first to shed any light on the nature of hotel property ownership outside the U.S. The lack of research interest in hotel ownership is surprising when it is recognised that there is considerable scope for distinct ownership styles affecting the manner of hotel management control and key hotel operating decision making (Turner & Guilding, 2010a, 2010b, 2012, 2013. ...
The results of a study seeking to advance a typology of hotel owners as well as examining the composition of hotel owners in Australia and New Zealand are reported. Interview observations resulted in the six hotel ownership categories, discernible from prior commentaries, being broadened to nine hotel owner types. Considerable insights with respect to differentials in the investment time horizon and capital expenditure strategy applied by different owner types were gleaned from the interview data. From a questionnaire survey phase it was found that high net worth private investors and hotel management companies each own approximately a quarter of large 3–5 star Australian and New Zealand hotels. Several distinct hotel operational characteristics are also apparent across the hotel owner types. These include the observation that developer, high net worth investor and strata-title owned hotels tend to be smaller in terms of revenue generated and also these owner types tend to own less hotels. Also, general managers tend to hold their position for shorter periods in hotels owned by hotel management companies and high net worth private investors tend to own older hotels.
... To do this, researchers are likely to benefit by considering topics in which they specialize and how they might exploit the hotel management contracting context to advantage. As an example, issues pertaining to the topic of 'capital budgeting' have been investigated in areas such as deficiencies in owner-operator capital expenditure goal congruency [10], accounting for the furniture, fittings and equipment reserve [11], motivation of hotel owners and operators to engage in earnings management [12], factors affecting biasing of capital budgeting cash flow forecasts [13], and capital budgeting implications arising from locus of hotel owner/operator power [14]. Investigation of such issues would not have been possible outside of the management contracting context, thus allowing novel contribution. ...
The objective of this article is to outline what a hotel management contract is, the main challenges arising, and why it is a particularly rich research context.
... A further potentially interesting area of research that could build on the study reported herein could seek to determine the sensitivity of hotel management contract clauses to different distributions of power between hotel owners and operators. It could be, for example, where an owner is in a powerful negotiating position, there is a high likelihood that the FF&E reserve is notionally based and not cash based, as it appears owners prefer the additional flexibility of notional FF&E reserves (Turner & Guilding, 2010a). It is notable, however, that Schlup (2004) claims that it is likely to be extremely difficult to weigh up the advantages and disadvantages of all hotel management contract clauses. ...
The findings of a study concerned with the locus of power between hotel owners and operators in Australia and New Zealand with hotels operated via a management contract are reported. Hypotheses are developed and tested in relation to the potential of locus of power to be associated with capital budgeting procedures. Using questionnaire survey data, support has been provided for the view that greater owner power is associated with: greater owner involvement in the capital budgeting process; greater emphasis on financial analytical tools in capital budgeting; and operators experiencing greater difficulty in securing a release of funds from the furniture, fixture and equipment reserve.
... STTA unit titles are no different from any other S&CT lot, and they are therefore subject to the same stringent statutory requirements for termination or the instigation of common property upgrades. These requirements assume a more profound significance in a tourism context, however, as managing growth, upgrades, and/or rejuvenation are fundamental to the provision of tourism accommodation, as is evident from the well-established 5-yearly refurbishment cycle culture of the hotel sector (Turner and Guilding 2010). This highlights the consumption-based orientation of the tourism accommodation product that now occupies an increasingly competitive market space following the inception and widespread take-up of Internet-based accommodation booking and search engines. ...
This destination-wide, longitudinal case analysis provides an examination of the growth of strata titled tourism accommodation (STTA) on Australia’s Gold Coast. The observations signify that the first decade of the 21st century has seen a continuing amplification of the dominance of STTA developments on the Gold Coast. Data supportive of the view that an attempt to consolidate an old STTA complex into a larger rejuvenated tourism complex can become an insurmountable challenge is also provided. Noting the extent to which this challenge can jeopardize the long-term sustainability of a tourism destination core that has a high STTA density, has resulted in the development of a provocative analogy that likens STTA intensification to the growth stages of cancer.
... Allocations to the FF&E reserve are most commonly based on a predetermined percentage of gross revenue (Turner and Guilding 2010a). Since the 1930s, the general rule of thumb has been that annual contributions to the FF&E reserve should be set at around three per cent of annual gross revenues (Brooke and Denton 2007). ...
... This amount, however, is typically insufficient to cover the true cost of FF&E expenditure because it ignores plant life cycles, routine maintenance costs and hotel building ageing (Reichardt and Lennhoff 2003). This is why some management contracts allow more than the 'rule of thumb' to be contributed to the FF&E reserve (see Turner and Guilding 2010a). Nevertheless, Turner and Guilding (2010a) found that FF&E reserves remain, for the most part, significantly underfunded. ...
... This is why some management contracts allow more than the 'rule of thumb' to be contributed to the FF&E reserve (see Turner and Guilding 2010a). Nevertheless, Turner and Guilding (2010a) found that FF&E reserves remain, for the most part, significantly underfunded. ...
This study contributes to a neglected aspect of the capital budgeting process, namely, the proposal development stage, which is primarily concerned with project cash flow estimation. Given that the deployment of sophisticated selection techniques is severely undermined when directed to input data suffering from bias, it is surprising that minimal empirical research has sought to explore for antecedent factors associated with biasing of capital budgeting cash flow forecasts. This paper reports the findings of a survey concerned with determining factors associated with biasing of capital budget cash flow forecasts in hotels that are mediated by a management contract. Statistically significant support is provided for the view that higher levels of biasing of capital budget cash flow forecasts occur in the presence of: high emphasis attached to the payback investment appraisal method; deficient reserve funds for furniture, fittings, and equipment (FF&E); low operator accessibility to reserve funds for FF&E; shorter periods of time to management contract expiry; and high emphasis attached to non-financial factors in capital budgeting appraisal.
... An idiosyncratic facet of governance that is found in many hotels, provided the primary motivation for the study's hotel sector focus. Many hotels are governed by a management contract that sees the hotel owner engage the services of a specialist hotel operator to manage and operate the hotel (Contractor & Kundu, 1998;Turner & Guilding, 2010a). 2 The relationship signifies that the owner (principal) retains full economic risk associated with ownership of the property, while the operator (agent) is responsible for the operation of the hotel (Schlup, 2004). ...
... In an attempt to lessen the propensity for overbuilding, an owner may seek to fund non-furniture, fittings, and equipment (FF&E) expenditures from the FF&E reserve fund. The FF&E reserve is an account intended for operator use to fund FF&E capital expenditure (Turner & Guilding, 2010a). This strategy depletes the FF&E reserve fund, thereby restricting the operator's capacity to engage in overbuilding. ...
... This strategy depletes the FF&E reserve fund, thereby restricting the operator's capacity to engage in overbuilding. Turner and Guilding (2010a) found that in hotels mediated by a management contract, it is common for the owner to be required to contribute around three per cent of gross revenue to the FF&E reserve. ...
Purpose
The purpose of this paper is to empirically investigate the differential motivations of hotel owners and operators to engage in earnings management through the selective capitalisation or expensing of asset related expenditures.
Design/methodology/approach
Research evidence has been collected via a mixed methods approach utilising 20 semi‐structured interviews with key hotel management contract stakeholders in Australia and a questionnaire survey administered to hotel general managers in Australia and New Zealand.
Findings
A review of the literature has resulted in an original distillation of 18 distinct earnings management motivations for hotel owners and operators. Qualitative data collected suggest an additional four motivations and that the primary motivation for hotel owners and operators to engage in earnings management stems from the two parties' desire to affect the size of the incentive management fee that is paid to hotel operators. A suggestion that operators have a greater tendency to seek to capitalise asset related expenditures, relative to owners, has been supported by both qualitative and quantitative data collected.
Originality/value
This study appears to be the first to have examined the manner in which an idiosyncratic aspect of hotel governance can result in competing earnings management motivations between hotel owners and operators; the first to pursue a broad level of abstraction with respect to examining earnings management in the context of asset related expenditure capitalisation decision making; the first to assess the relative strength of earnings management motivations concerning the capitalisation or expensing of asset related expenditure; and the first to conduct earnings management research utilising a mixed methods research approach involving the conducting of face‐to‐face interviews as well as administration of a questionnaire survey.
This study investigates the impact of renovation capital expenditure on multiple measures of hotel property performance. We conduct analyses in two time periods: for a three-year period immediately following renovation (short-term impact), and three-to-six years following renovation (long-term impact). The study is based on proprietary project, operational and financial data obtained for 305 renovation capital expenditure projects of individual properties within a single budget hospitality chain. We find renovation capital expenditures offer significant short-term beneficial impact in terms of increased revenue, profitability gains, higher customer satisfaction and decreased repair and maintenance expense. Altogether, these outcomes should be advantageous to hotel property performance. In the long-term, a significant decline is apparent in revenue and profitability. Surprisingly, customer satisfaction does not decline, and repair and maintenance expense does not increase, which are both favorable.
