<p><strong>Hospitality in the Middle East &ndash; the journey<br /><br /></strong>Looking  back over the last 5 - 10 years, the hospitality industry throughout the Middle  East region has undergone an exciting and eventful journey.&nbsp;<br /><br />Investment  has poured into the region, attracted by the ever-increasing number of tourists,  creation of the many free-zones attracting international business, relaxation of  property ownership restrictions and a general opening up of the region.&nbsp; The  boom which started at the beginning of the last decade saw new hotel and resort  developments being announced so fast, that it was hard to keep count.&nbsp; For many  countries, room rates and occupancy were at an all time high and visitors had  money to burn.<br /><br />The end of the last decade brought an abrupt slow down,  reduction of revenue and profit, cancelled developments, litigation between  investors and developers, an oversupplied and stagnated property market,  redundancy, and bankruptcy/corporate restructuring.&nbsp;If that wasn&rsquo;t enough, the  turbulence emanating from the &lsquo;Arab Spring&rsquo; protests added fuel to the fire.&nbsp;  For the hotel business, this has benefitted some and caused suffering to  others.<br /><br />Now, as we draw towards the end of 2011, things appear to be more  stable and with the experience of the past 10 years, we are able to look to the  future.<br /><br />As a hotel owner or a lender with exposure to the hospitality  industry, what does the future hold for you?&nbsp; What should you be doing to ensure  that your business is in good health and well-placed to grow over the next  decade?<br /><br /><strong>A healthy business?&nbsp; Book a check-up<br /><br /></strong>A  successful business is about financial performance and growth.&nbsp; To achieve this,  the business must have the right foundations underpinning its day to day  activities.&nbsp; These extend from the corporate structure that &lsquo;owns&rsquo; the business,  its risk exposure (financial and operational), its management, its product, its  performance, its position amongst competition and its ability to adapt to a  changing economic environment.&nbsp;<br /><br />As the business matures, it would be wise  to make sure that you understand what has brought it to its current position,  what is needed to keep it fit, healthy and growing, and how to plan ahead.&nbsp; For  some, it might be a case of learning how to revive a sick business to good  health, for others, how to make healthy performance even  better.&nbsp;&nbsp;<br /><br /><strong>In this article, I have set out some important areas to  focus on:</strong><br /><br /><strong>Performance<br /><br /></strong>The hospitality  industry for most of the Middle East region is now mature and well-established.&nbsp;  For many hotels, stabilization has been reached and long-term overall  performance can be analysed in detail, and effectively measured against  competitors.&nbsp; As an owner or lender, you should always have a right of access to  the financial records of the hotel, together with a right of  audit.&nbsp;<br /><br />Don&rsquo;t just pay this lip service to these rights, now is a good  time to really dig into the business, with the help of industry experts, to  understand how best to move forwards.<br /><br />Undergoing such analysis will  assist in understanding the business&rsquo; performance, including not just the  performance of the hotel, but also of the operator and the brand.&nbsp; Looking  forwards at future growth, you should be able to consider whether the business  is positioned appropriately, all in terms of its structure, market position,  competition, customers and  cost.&nbsp;<br /><br /><strong>Strategy<br /><br /></strong>Measures to be taken to improve  performance can be considered, both short and long term.&nbsp; Additionally, a longer  view might be appropriate in terms of focusing on the business strategy going  forwards.&nbsp; This might include consideration of future hotel renovation,  repositioning, asset/brand conversion, or liquidation of some parts of the  business or its assets.&nbsp;<br /><br /><strong>Corporate  Structure<br /><br /></strong>Equally important to business performance is its  structure.&nbsp; Does the structure remain appropriate to the business?&nbsp; It may have  been sensible at the outset for a hotel to be held in a personal name when the  portfolio only consisted of 1 property, however, that is unlikely to remain the  case for a growing business.&nbsp;<br /><br />A health check will give business owners  and lenders, an opportunity to examine the underlying corporate structure and  either change or reinforce it.&nbsp; Consider whether new corporate vehicles should  be introduced to ring-fence a business and its assets from potential risks and  liabilities of other parts of the business.<br />Consider personal liability, or  succession and inheritance issues where assets are personally  owned.&nbsp;<br /><br />What are the tax implications for the existing and proposed  structures &ndash; can savings be made?&nbsp;<br /><br /><strong>Ownership, consolidation and  appropriate vehicles<br /><br /></strong>In tandem with ensuring the correct  corporate structure is in place, portfolio ownership should also be analysed,  with thought given to the various &lsquo;investment&rsquo; options that may be available to  the business, and consideration of whether these align with the business  requirements.&nbsp;<br /><br />In the Middle East, it is common for the hotel and the  land upon which it is situated to be owned.&nbsp; The owner then enters into a  management agreement with a third party operator to manage the hotel on the  owner&rsquo;s behalf.&nbsp;<br /><br />Is a different option available and if so, is it more  attractive?&nbsp; Perhaps sale of an asset(s), or sale with a leaseback of the asset  from the new owner might be worth considering? This would enable capital to be  released for the owner to improve its debt position, or to take advantage of the  current economic environment and purchase distressed assets, thereby providing a  way for the company to reduce its risk/financial exposure, or to continue to  expand.<br /><br /><strong>Contractual obligations and risk  analysis<br /><br /></strong>For many, negotiation of a contract culminates in its  signature by the parties involved, and the contract is then filed safely away  never to be looked at again unless things go wrong.<br /><br />No business can  properly operate unless it knows what it can and cannot do, how it should  operate, and how its future might be impacted by existing rights and  obligations.&nbsp; No analysis can be complete, nor should plans be made, without  understanding the contractual framework within which a business  operates.&nbsp;<br /><br />This extends not just to the hotel management and ancillary  agreements, but also to the business&rsquo; financial arrangements, its principal  operational contracts, its staff, and the local licensing framework, regulations  and restrictions that may impact any future action.&nbsp; An understanding of these  is therefore vital.<br /><br />Does the business have any potential claims against  it, or should it consider taking any claims against third parties?&nbsp; What is its  conflict exposure and what steps can be taken, if any, to remove or mitigate  these.<br /><br /><strong>Conclusion<br /><br /></strong>I have outlined above why, in a  changing environment, it is prudent to take stock and analyse the health of your  business and asset portfolio, and have given examples of what I consider to be  the main areas for consideration.<br /><br />The time and cost spent on undergoing  such an exercise need not be huge &ndash; many of these can be looked at from a high  level and where issues are identified for further examination, the exercise can  then be drilled down specifically where required.&nbsp;<br /><br />Prevention is always  better than cure and a healthy business will be in a position to expand and  prosper where an unhealthy one cannot.<br /><br />Owners and lenders alike can  benefit from such an exercise, and Al Tamimi is well-placed to assist and advise  you.&nbsp; Our Hospitality team incorporates experienced lawyers across all legal  practice areas, who have excellent relationships with experts throughout the  hospitality industry.<br /><br />If you would like more information, please contact  Tara Marlow, Head of Hospitality on <a href="mailto:t.marlow@tamimi.com">t.marlow@tamimi.com</a>.</p>