Marriage of convenience

There have been only a few examples so far of marriages between hotels and shopping centres, mostly in the United States, where building mixed-use complexes is commonplace. Already a few such projects have been developed in Poland, but these are still only isolated cases. However, such a relationship could generate a lot of profits, provided it is well thought-out and the partners are a good match. "Retail developers should think about hotels because they add to the strength of a project. They are the sort of tenants that do not rotate because they sign long-term leases, for example for 20-25 years, and guarantee an around the clock ?life' for the facility. They often strengthen a shopping centre with their brands, too," says Alex Kloszewski, head of the hotel and leisure project department at Colliers International. There are only a few retail projects in Poland that have so far exploited the opportunity of combining with a hotel:
Galeria Lim (Lim Joint Venture) with Marriott (Marriott International) in the centre of Warsaw, Manufaktura Apsys) with Andel's hotel (Warimpex) in Łódź, Galeria Victoria (Keen Property Partners Retail) with Holiday InnExpress (InterContinental Hotels Group) in Wałbrzych, as well as Millenium Hall (Develop Investment) with Hilton Garden Inn (Hilton Worldwide) in Rzeszów. Another hotel is to be opened in the City Center Rzeszów complex - Star Europa - in Rzeszów. However, the details for this project have yet to be disclosed, as is the case with a hotel to be opened at the Sukcesja shopping and entertainment centre in Łódź. Polish group DeSilva, which has seven hotels operating under its brand, has also announced similar plans. At the ?Chain Hotelsin Shopping Centres' conference in Warsaw in September, Witold Ignatowski, the president of DeSilva, said that the company was currently in negotiations with five potential investors. In two of the projects the hotels are to be built above malls, the other two will be sectioned off areas functioning within the shopping centre building, and one is a stand-alone facility. The interest of both developers and hotel operators confirms that, despite being difficult, the business is growing, and an opportunity has been spotted for some successful business. "Mixed-use facilities that combine retail and hotel services can benefit from the synergy effect, increasing the value of the whole complex," adds Alex Kloszewski.

To agree on expectations
The starting point in the negotiations between a developer and a hotel operator is always the location. The hotelier is interested in entering such a business if they consider the location suggested by the developer to be suitable for the operations of their facility. "What a hotelier gains thanks to such a partnership is a good location at a lower price than the construction of a stand-alone facility in a similar location. The hotelier will save money on the construction and the developer will benefit from the presence of a hotel," explains Andrzej Wójcik, vice-president of the board and responsible for sales and development at Satoria Group. He goes on to add that Satoria Group receives many offers from investors who have projects in smaller towns or on the outskirts. "Such investors usually have more free space and are thinking about adding a hotel to generate additional profits. You need to remember that a hotel chain evaluates a location from a different angle than a retail project owner. Locations in city centres are of course attractive for both parties. But in the case of retail facilities on the outskirts, the situation is not so clear and requires a thorough analysis," adds Andrzej Wójcik. Apart from having a specific location in a town, a hotel operator also assesses this from the perspective of the map of Poland. Hotel businesses will not succeed in every town. According to Alex Kloszewski: "You need to take into account the competition that is already there, the presence of factors that stimulate people traffic, i.e. the presence of businesses, big companies, educational centres, tourist and cultural attractions, as well as transport and communication infrastructure." Other important factors include the location of the hotel in relation to the retail facility, the entrance and exit routes, as well as the emergency and fire exits. "Hoteliers want the hotel to be situated in the best possible position in terms of transport routes. This issue requires a compromise with the developer, who is also looking to achieve good visibility for the shopping centre. Another issue is the location of the hotel in relation to the delivery points. Deliveries to shopping centres usually take place at night, which does not help guests sleep. So this kind of traffic cannot take place near the hotel," Andrzej Wójcik points out.

A cure for all evil?
The retail market in Poland is slowly reaching saturation point, and as a result the strong negotiating position of tenants is not making the leasing of new projects any easier. Building a hotel on a plot next to a shopping centre or using its upper floors for this purpose, therefore, seems like a good idea. However, some developers disagree that a hotel could help to fill vacant space. "It is hard to imagine a situation where, for example, the owner of a 60,000 sqm shopping centre has a problem with leasing 20,000 sqm and suddenly comes up with the idea of bringing in a hotel. It needs to be remembered that a facility which is to be used as a hotel has to fulfil the precise requirements of the hotel operator and be fully in-line with their specifications. There is nothing random here," stresses Maria Prokop, the marketing director at Master Management Group, which is the facility manager of Galeria Victoria. She also adds that the construction of a mixed-use facility is often dependent on the local zoning plans, which may stipulate a requirement for introducing such a function. This was the case with Galeria Victoria. Develop Investment - the owner of Millenium Hall in Rzeszów - also considered having a hotel from the very beginning. The fact that hotel operators are partners that provide stability is not without importance. "In acquiring a well-known hotel brand the developer of a shopping centre increases the catchment area of their facility and diversifies the revenue portfolio," claims Alex Kloszewski. And this has to be a definite plus. "Most often a developer leases their hotel area to an operator under a long-term contract, which is a good solution for both parties," adds Maria Prokop. Moreover, a hotel operator pays rent that is lower than the average for a retail tenant, as it represents a stable revenue stream. "Rent negotiations normally end up agreeing on the usual rate for office space in that region, but the eventual level depends on a number of factors, although it is not usually lower or higher than this," explains Andrzej Wójcik.

"Average rents range from EUR 10 to EUR 13 per sqm," reveals Alex Kloszewski. However, it should be borne in mind that a hotel only usually becomes profitable in the third year of its operations and the operator will want to make savings within this period. Witold Ignatowski, on the other hand, reveals that in the case of the DeSilva chain, the rent in the first year of its operations is equal to that of half the monthly rate that was established with the developer. Paying the money back can be discussed at a later point in time. The company has suggested a two rent solution to its partners, i.e. as a percentage of their revenue and at a fixed rate.

And they lived happily ever after
Those who have opted for a similar arrangement are not shy when it comes to expressing their satisfaction. "We have been cooperating closely with the Victoria shopping centre from the very start of our operations. We support each other mainly in terms of marketing, and mutually recommend our services and cooperate with the management of the mall and individual tenants. Our guests can go shopping or to the cinema having only to walk 100 metres. Moreover, they can use the services of a hairdressing or beauty salon and have a quick bite to eat at any time of the day," says Sandra Stawowczyk, the director of Holiday Inn Express. Marta Półtorak views the presence of a hotel in the vicinity of the Millenium Hall shopping centre in terms of extending its catchment area. "Thanks to the fact that there is a hotel operating at our centre we have the opportunity to organise a number of events and in this way present our commercial offer," she adds. The owner of the hotel facility also benefits from the synergy effect. "There have already been two events and three more planned are for the next month. These are events connected with the Millenium Hall shopping centre. Our hotel provides accommodation and catering to the participants of these events," explains Marzena Kijak of the Hilton Garden Inn Rzeszów. Despite the fact that the presence of a hotel does not directly translate into the higher footfall or turnover of a shopping centre, it is an additional factor facilitating a shopping centre's positioning. "The relationship between the presence of the hotel and the footfall level is not strong. For example, if the footfall of a shopping centre amounts to app. 60,000 people per week and a hotel has 130 rooms, it can clearly be seen that the correlation cannot be considerable. However, it is worth emphasising that a shopping centre including a hotel has better recognisability and is better positioned in terms of its importance to a town or city," comments Maria Prokop.

The times of making quick and easy money are already gone. Now it is time for more difficult business ventures that require more involvement and creativity. And hotels at shopping centres seem to be exactly this kind of project.

Robert Szczepanek legal advisor at the Causa Finita law firm
Clear rules are the key
Adeveloper has a few possibilities when choosing how to get involved in hotel operations. They can go for a ?classic' tenancy for a specified period with a basic rent, a turnover rent, standard securities on the lessor's receivables and the possibility of transferring the project to the buyers. Investors who would like to be more involved in the hotel operations can build it, furnish it and hand it over for management to a specialist company in exchange for a share in the hotel's turnover. They can also establish their own company to run the hotel, lease the premises to it and charge rent. Shopping centre developers will usually be interested in the first of the above-mentioned options, so they will strive for a long-term lease of the hotel area. When preparing for an investment of this type, however, you need to bear in mind the considerable differences in the legal terms of leasing hotel premises compared to leasing retail premises. The first difference is in the method of calculating the rent. Hotel tenants will try to avoid expressing the rent as a monetary value per square metre, preferring it to be expressed per room. Unlike in the retail business, the basic measurement unit in the hotel business is one available room, not the area for lease expressed in square metres. As a result, it seems logical not to ?over-do it' with the communal areas - lobbies, restaurants, bars, fitness clubs, etc. - when designing a hotel, and to restrictone self to the minimum requirements of the chain. On average these areas generate one third of all the costs of a project without generating any of the profits. Another issue is the part of the rent based on turnover. The standard rate ranges from 20-30 pct of the tenant's turnover. In the contract it is worth clarifying the definition of 'turnover', upon which the rent is to be calculated so that it complies with Polish VAT regulations as opposed to the industry's bookkeeping practices specified by the International Accounting Standards for the Hotel Industry. There are a lot of transactions in the hotel business that hotel accounting does not include in its turnover, when compared with Polish VAT regulations. The next quite serious issue involves the hotel tenants' expectations as to the standard of the premises that is to be handed over. As a rule a developer delivers turnkey premises, i.e. the interior of the hotel and the moveable equipment the so-called FF&E (furniture, fixtures and equipment). However, there are no industry standards with regard to maintaining the premises in a condition that is suitable for its agreed use. This is why in the lease agreement of the hotel premises it is advisable to avoid repeating the provisions of the code, according to which the maintenance of the premises is the responsibility of the lessor. The developer should only be responsible for the construction elements and the façade. It should also be remembered that tenants who run hotels as part of international chains usually only have a minor influence on the materials and equipment of the hotel rooms. They have to comply with the rigorous requirements of the chain in this respect. The tenants usually have slightly more freedom when it comes to the communal areas of a chain hotel. This is why, when drafting a lease agreement for the hotel premises, the lessor should establish a mechanism for agreeing technical issues directly with the chain. Hotel tenants tend to be reluctant to agree to the usual maintenance fee system of a shopping centre. They point out that their premises are organisationally separate from the rest of the complex, and the tenant has to take on the majority of the maintenance fees on their own. However, it seems only fair for a hotel tenant to pay for such maintenance fees as snow clearing, security, lighting and the maintenance of the car park.