Hotel F&B Leases:
The View from the Restaurant
This study identifies the key provisions that concern restaurant operators who hold the
lease for hotel F&B operations
by Keith L. Goldman
and James J. Eyster
HISTORICALLY, RESTAURANTS
have been viewed by many hotel
owners as a necessary evil offered
by the property to accommodate
guests’ needs for food and bev-
erage. Today, with the weakness
in occupancy rates, food and
beverage operations have taken on
a new level of importance.
With the rise of the limited-
service segment, many lodging
properties have &dquo;farmed out&dquo; their
F&B operations to an independent
© 1992, Cornell University.
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operator or restaurant-
restaurant restaurantoperators through lease
management company. This agreements.
&dquo;farming out&dquo; process is usually
arranged by means of either a Exchanging Vows
management contract or a leasing The study on which this article is
arrangement by which the lodging based investigated the nature of
company acts as the lessor and the
restaurant company as the lessee. Keith L. Goldman has worked in
At first glance, a leasing ar- various restaurant-management
rangement appears to be a great and consulting positions on the
opportunity for independent Eastern Seaboard and is currently
restaurant operators who have innkeeper at the Sherwood Inn in
found it increasingly difficult to Skaneateles, New York. In 1991 he
start new operations in the face of earned his M.P.S. degree from the
site saturation, skyrocketing School of Hotel Administration at
start-up and real-estate costs, and Cornell University, where James
lack of financing prospects. This J. Eyster, Ph.D., is the Hospitality
article examines the &dquo;marriage&dquo; Valuation Services Professor of
between lodging companies and Hotel Finance and Real Estate.
72
the leasing agreements into which
the various independent or chain
restaurant operators have entered
with lodging companies in the
limited-service segment (the
limited-service segment is the only
segment that uses the leasing
option on a wide scale). I also
evaluated the effectiveness of those
arrangements in meeting the
financial and operational needs of
the restaurateur, and I discuss
here the key lease provisions that
have implications for reaching
those objectives.
Points of concern. My focus is
on only those provisions of the
lease agreement that are of partic-
ular concern to the restaurateur
and those provisions that have
been reported to cause uncertainty
and perhaps friction between the
two parties in already existing
agreements. (I do not attempt to
analyze the entire lease agreement
provision by provision and I do not
get into anextensive discussion of
the provisions from the hotel’s
point of view.)
Restaurateurs have to adapt to
the nuances of the hotel environ-
ment that are different from those
of a free-standing restaurant.
Examples of provisions that are
likely to be of major concern to the
restaurateur include the terms of
the lease, the rent structure,
banquet services and facilities,
room service, operating hours,
operating expenses, and marketing
and advertising.
Aspects of coexistence, unity of
standards and goals, and control
over operations are discussed. The
successes and failures of previous
agreements will be analyzed
through the eyes of the
restaurateur.
Methodology. I sent a ques-
tionnaire to 30 restaurant opera-
tors who were involved in a lease
agreement with a particular
limited-service lodging company.
Of the 30 restaurant operators who
Downloaded from cqx.sagepub.com at UNIV ARIZONA LIBRARY on April 19, 2015
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This Best Western property in Ithaca, New York, while not part of the study,
is an example of a limited-service hotel that has lease agreements with
restaurant operators to provide on-site food and beverage services.
received the questionnaire, 14 com- study, therefore, does not examine
pleted and returned the question- differences across market segments
naire. Those 14 operators repre- or brand names.
sented a total of 24 restaurants. The study also deals only with
Five of the respondents leased two selected provisions of a lease and
or more units. Of the 14 respon- excludes many provisions that may
dents, 10 were interviewed for be of equal importance. The
further information regarding their analysis is performed strictly from
responses to the questionnaire. the restaurant operator’s perspec-
In I interviewed
addition, tive and is thus markedly biased in
managers from one chain restau- that direction. Other limitations
rant company representing five include the possibility that some
restaurants that had terminated participants were reluctant to
its lease agreements with a single disclose sensitive information.
hotel company.
Factors Influencing the
My final interview was with an Lease Agreement
industry expert in hotel-restaurant
leasing agreements who has According to Robert Patterson (who
established such programs for at the time was with the now-
various hotel and restaurant defunct firm of Laventhol and
companies. Horwath), F&B departments
Limitations. A major limitation across the board
produce about a
of this study is that the informa- 16-percent profit before unallocated
tion depicts only the nature of lease operating expenses are deducted
agreements between one limited- versus a 70- to 75-percent profit for
service lodging company and the rooms department.’ It’s
several of the restaurant groups reasonable, then, for a hotel
that have engaged in lease agree-
’Megan Rowe, &dquo;Can F&B Make Money?&dquo;
ments with that company. The Lodging Hospitality, June 1990, pp.77-78.
73
company to concentrate on
managing rooms. At the same
time, however, hotel operators
know the importance of good food
service.
Hotel companies that realize the
importance of having quality F&B
offerings also may find it unprofit-
able to provide such services
themselves. Considering that
limited-service hotel companies
may prefer to divest their F&B
management and that restaurant
operators face many challenges
and difficulties when opening new
restaurants, a marriage between
the two entities seems like a timely
and natural evolution. The hotel
companies can recruit independent
restaurant operators or restaurant
companies with F&B expertise to
lease and operate the hotel’s F&B
facilities.
Denise Brennan stated it this
way: &dquo;As marriages between
lodging chains and restaurant
companies proliferate, hotels can
forgo the high-labor-to-low-profit
ratios that traditionally plague
Downloaded from cqx.sagepub.com at UNIV ARIZONA LIBRARY on April 19, 2015
hotel food service. Meanwhile,
restaurant operators can pick up
stream of steady income, gain
access to prime sites, and tap
previously unacceptable markets
for the low entrance fee of a
monthly rent.&dquo;’
In addition to the advantages
there are potential hazards, many
of which stem from negotiating poor
leases or an improper assessment of
the site’s revenue potential. These
and other pitfalls are revealed
throughout this study.
Leasing Considerations
A list of the
advantages and
disadvantages restaurant operators
have reported in terms of their
leasing agreements with limited-
service lodging companies is
presented in Exhibit 2.
Restaurant operator risk. The
risk inherent to the restaurant
operator in entering into a lease
agreement depends essentially on
2
Denise Brennan, "Reinventing Hotel
Foodservice," Restaurant Business, May 20,
1987, pp. 208-218.
74
three factors. The first is the hotel
a owner’s intent or ability to main-
tain ownership of the hotel prop-
erty. Are there plans to sell the
hotel? Is bankruptcy or reorganiza-
tion of the hotel a possibility? These
questions are important because
they raise the issue of assignment.
Typically, restaurant operators
are not allowed to transfer, sub-
lease, or assign their leases to other
parties without the full approval of
the hotel owner. But if the hotel
itself changes ownership, the lessee
often has no choice but to become
the direct tenant of the new build-
ing owner. This inequity of assign-
ment may pose problems for some
restaurateurs. A new hotel owner
could have substantial adverse
effects on the hotel property, which
could potentially result in declining
sales for the restaurant.
A restaurant company can hedge
against this risk before entering
any agreement by completing a
thorough analysis of the lodging
company’s financial statements and
track record.
 The second factor is whether the
hotel’s performance is sufficient to
help the restaurant operation to
meet its financial goals. For
example, is the hotel properly
managed and in a location that
affords the restaurant the amount
of traffic needed? Clearly, the
restaurant operator, who must pay
the monthly rent no matter how
good the F&B business is, is
partially reliant on the hotel to
generate the traffic that’s needed
for a profitable sales volume. Yet
the lease agreements I’ve analyzed
thus far make no connection
between the hotel’s occupancy rate
and the amount of rent payable.
The third concern is the hotel
owner’s ability and willingness to
enhance the restaurant operator’s
position in the local market. The
success of these types of restau-
rants in many instances is depen-
dent on the development of local
trade. If this is the case, the hotel
must allow the restaurant to form
its own identity with signs, exterior
entrances, and promotions.
Key Lease Provisions
The provisions of the lease between
restaurant operators and lodging
companies should clearly spell out
who pays for what and when and
who has access to what facilities. It
should also define the balance of
control and authority over all of the
F&B services of the hotel and of
the restaurant.
Leases are often lengthy and
include detailed provisions. All
provisions should be considered as
important and should be carefully
examined. There are, however,
certain key provisions in each lease
that are of primary importance to
the restaurant operator. The key
provisions highlighted in this study
are:
(1) Terms of the lease,
(2) Rent structure,
(3) Definition of gross sales,
(4) Operating cost,
Downloaded from cqx.sagepub.com at UNIV ARIZONA LIBRARY on April 19, 2015
(5) Banquet facilities and
services,
(6) Room service,
(7) Complimentary F&B
offerings by the hotel,
(8) Hours of operation,
(9) Lodging company’s imposed Once the lease is signed, the
standards and policies, and amount of rent restaurant
(10) Marketing and advertising. operators have agreed to
These provisions were chosen pay is for the most part
because they represent topics of not renegotiable.
critical importance, areas of
greatest potential conflict, or
subjects unfamiliar to the typical
restaurateur.
Terms of the lease. Terms of
the lease commonly include the
initial length of time that the
contract will remain effective (base
term) and the options available for
contract renewal (options). Gener-
ally speaking, the longer the
restaurant operator has the
authorization to conduct business
at the leased location, the lower the
risk that cash flows will be inter-
rupted. It was also suggested by
those interviewed that longer
leases tend to inspire a greater
effort by the lodging company to
support the restaurant operation
and to be more cooperative.
Long-term leases can be equally
detrimental, however, if the
restaurant operation is not profit-
able and is bound by a contract
that requires full rent payment
regardless of performance. The key
for the restaurant operator in z
negotiating the terms of a lease is
to structure it so that the security
of time is achieved along with
~
periodic exit opportunities (e.g., a
five-year base lease with three five-
year options).
Another factor to consider is
that a long base term (and long
periods between options) can be a
double-edged sword. During times
of inflation, a long-term lease with
a fixed base rent can be beneficial
to the restaurant operator. During
a recession, however, leases signed
at the start of the economic down-
75
 turn may tend to be at the high in the methods for calculating rent
end of the rent spectrum toward are apparent.
the latter years of the term. Many The rent calculation is certainly
respondents suggested not agree- a critical provision in the lease.
ing to base terms of longer than Many operators warned that once
ten years but instead seeking the lease is signed the amount of
Contract provisions for more, short-term options. rent they have agreed to pay is for
banquet services caused the The results of the questionnaire the most part not renegotiable.
highest levels of conflict indicated that base terms plus Several operators terminated their
between hotels and their renewal options ranged from five to leases because the rent payments
restaurant lease holders. 20 years total. The base terms turned out to be unmanageable
alone ranged from one to 10 years and the hotel operator was not
and the renewal options varied in willing to offer any relief. If care is
length from leases that offered no taken in formulating a reasonable
renewal options to leases that assessment of what sales, profits,
offered either one three-year and break-even points are likely to
option, two five-year options, or be, the restaurant operator can
one 10-year option. Those opera- more accurately determine what is
tors who had combined terms affordable and what is not.
totaling 20 years considered this Take a situation, for example,
portion of the lease agreement to where a restaurant operator, who
be optimal. Those with total terms has not devised a pro-forma
less than 20 years but more than statement, negotiates a lease with
10 years mostly felt that their a rent obligation of $10,000 a
terms were adequate but not month. If gross sales at year end
optimal. Those with terms totaling for this restaurant are $1.5 million
under ten years were concerned with a 20-percent profit before
with their future prospects, lack of rent, the restaurant operator
security, and inability to perform stands to make a $180,000 profit
long-range capital planning. after paying $120,000 rent. In this
Restaurant operators who were situation the restaurant owner will
unable to negotiate any renewal have an 18-percent profit margin
options were considered the most and his rent expense for the year is
disadvantaged because they have 8 percent of gross sales. If, instead,
limited control over the future of the gross sales for the year are
the operation. $1,000,000 and profit before rent
A few operators negotiated an continues to be 20 percent, then
escape clause that provides some the restaurant would make an
protection from sub-par revenue $80,000 profit after paying the
performance. Such a clause typi- same rent of $120,000. The profit

cally allows the restaurant opera- margin in this scenario would be 8

tor to terminate the lease if, after percent and rent expense would be
any full accounting cycle, the 12 percent of gross sales. Finally, if
operation fails to reach a predeter- the restaurant were to generate
mined gross sales amount. Negoti- only $750,000 in gross sales for the
ating for an escape clause can be year with a 20-percent profit before
difficult for the restaurant operator rent, the restaurant would only
but it can be beneficial and is make a $30,000 profit after the
therefore worth the effort. $120,000 rent payment. In this
Rent structure. Although a case, the profit margin would be 4
benchmark for determining percent and the rental expense
monthly rent for these types of would be 16 percent of gross sales.
agreements has not yet been Rent should always be based on
established, some basic consistency the operator’s expected cash flow

76

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and not on the market value of the
restaurant space. Bill Main, a
financial and food-service manage-
ment consultant who specializes in
lease agreements, suggests that a
starting point for the restaurant
operator’s negotiations over the
amount of rent should be 5 percent
of break-even revenue.3Typically,
leases between hotels and restau-
rant operators range between 5
percent and 10 percent of yearly
gross sales, with the average being
7 percent to 8 percent.
Rent was found to be calculated
in one of three ways: on a flat-rate
basis; on a percentage basis; or by
some combination of both. Only
two restaurant operators reported
paying rent based solely on a fixed,
flat rate.
In six instances, the restaurant
operations’ rent was calculated
solely on a percentage basis. Under
this arrangement, the restaurant
operator applies an agreed-upon
percentage to monthly gross sales
figures to determine that month’s
rent payment. Five of those six
restaurants use a sliding scale so
that the percentage rate (rent)
increases incrementally as certain
sales levels are achieved. For
example, oneoperator pays 8
percent gross up to three million
of
dollars, 9 percent if sales are
between four and five million, and
10 percent if sales are over five
million for the year.
The five using the sliding
percentage averaged between 8
percent and 10 percent rental
expense as a percentage of yearly
gross sales, putting them among
the highest of those represented.
(The sixth had a straight 3-percent-
of-gross-sales agreement, making it
the second lowest rent-payer in the
entire sample.) Some operators
expressed animosity toward the
3Bill Main, "Restaurant Leases: Like Money
in the Bank," The Cornell Hotel and Restaurant
Administration Quarterly, 30, No. 3 (November
1989), pp. 83-89.
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sliding-scale arrangement, for it hotel operator than for the restau-
seems, they said, that the harder rant operator because the hotel is
they work the more money they are protected against downturns in
required to pay the hotel owner. business whereas the restaurant
&dquo;Hotel operator greed&dquo; was men- operator is not.
tioned several times in connection Some F&B operators find it
with calculating rent. inequitable that rent is in no way
One respondent who repre- tied into occupancy rate and
sented five restaurants negotiated suggest that hotel operators need
a combination of a fixed base rent to share more of the risk since they
plus a percentage of gross sales. In are responsible for a significant
this arrangement, the restaurant portion of the restaurant’s reve-
operation pays a set minimum rent nues via hotel-guest traffic.
then adds a percentage of gross New hotels and new restaurants
sales. Typically, the lower the both require a period of time to
percentage, the higher is the establish themselves in the local
minimum (base) payment. A market. It is common, therefore,
sliding-scale percentage can be for the restaurant operator to
used here as well. This method negotiate an &dquo;adjustment&dquo; period
allows for more creative negotia- during which time no rent or
tions whereas it is often beneficial partial rent is paid. This arrange-
for the restaurant operator to trade ment can be an enormous help to
off a higher percentage on a sliding operators who typically have
scale for a lower minimum rent. greater cash outflows than inflows
(As sales levels become elevated, during the start-up period. (Start-
profit margins tend to accelerate up costs ranged anywhere from
and the incremental cost of the $50,000 to $400,000 among the
higher percentages on a sliding respondents who participated in
scale have minimal effect.) this study. Those costs included
Seven of the restaurant opera- purchasing smallwares, paying
tions paid rent according to a for such pre-opening expenses as
minimum fixed rate or according to marketing and training, and-
a percentage of gross sales- in the most extreme cases-
whichever proved to be the great- renovating and redesigning the
est amount for that particular restaurant.)
period. Under this type of agree- Of the 24 restaurants repre-
ment, rent stays fixed up to a sented in the study, only three
certain level of sales and then were unable or did not attempt to
switches over to a percentage of negotiate a rent-adjusted period.
sales beyond that point. For For the rest of the restaurants
example, respondent reported
one represented, all but one negotiated
having a rental agreement that rent-free adjustment periods
called for a $10,000 monthly rent ranging in length from two months
or 8 percent of sales, whichever to one year. One restaurant
was greater. operator negotiated an adjustment
Rentpayments involving period requiring payments based
percentages are usually annualized solely on a percentage of gross for
and adjusted at year end to make the first six months, thereby
up for fluctuating monthly sales avoiding a minimum, fixed pay-
volumes. ment during that time.
Arrangements whereby rent The reasonableness of the
comprises both a base amount and adjustment period is usually a
a percentage of the gross are factor of the hotel’s location, the
typically more beneficial for the expected sales volume of the
77

restaurant, the restaurant opera-
tor’s investment, and the extent to
which the operation is reliant on
local clientele versus hotel guests.
According to this study, a four- to
six-month adjustment period can
usually be successfully negotiated
under most circumstances.
Gross sales defined. To
calculate the rent accurately and
equitably based on a percentage of
the gross, the lease agreement
must plainly define the measure of
&dquo;gross sales&dquo; in as much detail as
necessary. Exhibit 3 shows what
have commonly been considered
&dquo;inclusions&dquo; or &dquo;exclusions&dquo; from
gross sales for the purpose of
determining rent. Generally, any
sales that take place from the
restaurant premises, no matter
where those services or products
are consumed, are attributed as
part of the restaurant’s sales.44
When defining gross sales, the
parties must determine at what
4
Some restaurant operators use the leased
kitchen facilities to support other business
ventures. In these cases, the tenant must
negotiate an additional agreement to define on-
premises sales versus off-premises sales.
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Lease provisions will typically
provide for record-keeping and
reporting guidelines as well as
procedures for the auditing of gross
sales by the lodging company to
ensure the accuracy of gross-sales
reports. The reporting procedures
generally require a monthly profit-
and-loss statement and an annual
statement of gross sales certified
by a public accountant. From these
reports a yearly reconciliation can
be performed and adjustments
made.
Operating costs. Regarding
lease negotiations, respondents
stated that nothing should be
assumed and no detail be taken for
granted. Determining who pays for
what, up front and clearly stated in
the lease, is an important step in
negotiating the lease and is likely
to avert future conflict. The pay-
point the sales revenue is actually ment of operating costs by the
recognized. In a majority of the restaurant operator is one of those
cases in my study, the sales areas that turns out to be more
charged to credit or installment negotiable than one may think.
accounts were treated as sales in My survey shows that the
the month in which those charges payment of operating costs was
occurred (versus hotels’ policies of allocated quite differently by the
not recognizing guests’ room hotels and restaurants in my
charges, for example, as sales until sample. While gas and electricity
payment is received). This policy is used by the restaurant were paid
generally consistent with banquet by the restaurant operator in a
and catering charges, which are majority of the agreements, a
calculated into gross sales in the substantial number of hotel
month in which services are operators picked up those tabs.
rendered. Charges for water and other
In most instances, charges that utilities (primarily air conditioning
are reimbursed to the restaurant and heating) were typically paid for
by the hotel are done so minus a by the hotel, yet there were a few
3-percent credit charge, which is restaurant operators who had
not included in gross sales. agreed to pay or failed to negotiate
Hotel reimbursements in away the payment of those ex-
general were a hot topic for many penses. Refuse removal and pest
of the respondents, some of whom control were also predominantly at
reported that sums between the expense of the restaurant
$100,000 and $200,000 for room- operator; however, there were a
service and banquet reimbursables few hotels who agreed to pick up
were outstanding for as long as six those expenditures either solely or
to eight weeks. Others have wisely jointly with the restaurant opera-
negotiated provisions in their tor. Pest control was the operating
leases that call for a 20-day turn- cost most commonly paid for jointly
around on hotel reimbursables. by both entities.
78
 Expenses that were paid for by
the restaurant in every circum-
stance were telephone and menu
expenditures. There would not
appear to be much room for negoti-
ation in those categories for the
obvious reason that they are both
entirely at the discretion of the
restaurant operator.
In terms of furnishing and
equipping the restaurant, the hotel
operator usually supplied all the
furniture, fixtures, and equipment
(FF&E) for both the front and back
of the house. The restaurant
company traditionally supplied the
smallwares and other &dquo;tools of the
trade.&dquo; In only one instance did the
restaurant operator supply the
FF&E, however, in five instances
the restaurant operator did share
the cost for FF&E.
Smallwares were supplied by
the hotel in five instances. The
maintenance and repair of the
furniture, fixtures, and equipment
were predominantly at the expense
of the restaurant, were sometimes
the joint responsibility of the two
entities, but were never solely paid
for by the hotel. The replacement of
FF&E was also found to be prima-
rily at the expense of the restau-
rant, in which case the hotel
operator might stipulate that a
reserve fund be set up into which
the restaurant operator must make
periodic contributions. The amount
of the contribution, if such a
provision is in the lease, was
usually between 1 percent and
2 percent of monthly gross sales.
The survey findings reveal a
great deal of flexibility with regard
to negotiating for payment of
operating costs. Because of this,
those expenses should be consid-
ered individually and negotiated as
such, rather than lumping several
together under convenient head-
ings such as &dquo;utilities&dquo; and &dquo;re-
pairs.&dquo; Most restaurant operators
shifted at least some operating
expenses to the hotel and a few
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were successful in negotiating on restaurant sales. For the most
virtually all operating expenses to part, the restaurant operators felt
the hotel company. that the banquet and catering
Of those costs for which the services were the key to their
restaurant operator is responsible, livelihood and that without them
a reliable and fair method of their marriage with the lodging
allocation must be determined. In company would lose one of its
most cases, utilities are metered major advantages.
separately. In other situations, Negotiation of this provision is
utilities are divided between the primarily concerned with who has
hotel and restaurant by means of access banquet rooms and
to the
square-footage allocations. In other when, who is to control the booking
operations, the restaurant agrees of the function rooms, and who is to
to pay a fixed monthly amount to control the scheduling of catered
the hotel operator. These last two events. It is important that the
methods of allocation are not as questions of &dquo;who&dquo; and &dquo;when&dquo; be
reliable an assessment of utility settled up front, before the lease is
consumption as is the separate signed, to reduce potential conflict
metering of those utilities. Restau- down the road and to ensure
rant operators who use the non- profitability for the restaurant
metered methods report some while allowing for reasonable
dissatisfaction with the results. delivery of hotel guest services.
Banquet services, facilities. The banquet-services provision
Banquet services was viewed by a caused the highest levels of conflict
majority of the respondents to be between the two entities, according
an area of vital importance to the to the survey responses. The hotel
success of the restaurant operator operator, on the one hand, feels a
and was perhaps second only to strong obligation to have meeting
determining the rent in the overall and banquet rooms available for its
importance of lease provisions. As guests at all times. The restaurant
banquet services and catering are operator, on the other hand, needs
often new territory for many and wants to generate as much
restaurant operators, many of the catering business as possible from
respondents felt they were at a the local market. The types of
disadvantage during the initial functions the restaurant operator is
negotiation of this provision. likely to solicit from the community
Banquet services, as referred to (e.g., weddings, receptions) require
here, include the facilities the hotel lengthy reservation periods to
has available on its premises to secure, sometimes a year or more.
support meetings, social functions, Some respondents suspected
and other gatherings of various that hotel owners simply don’t
sorts and sizes. want business of that kind at the
Revenue from banquets and hotel because of the potential wear
catering services accounted for and tear on the property that can
between 20 percent and 50 percent occur with such functions and
of the restaurant operators’ total because the hotel itself is not
sales, with the average being dependent on such business.
between 35 percent and 40 percent. Hotels traditionally are not
The profit margin on such sales willing to reserve far in advance
ranged between 15 percent and function space for events that don’t
65 percent, with the average being generate rooms sales. The idea is, a
between 45 percent and 50 percent. hotel guest or group might need
This compares to an average profit that space instead on relatively
margin of 15 percent to 17 percent short notice (several weeks versus
79
several months). As the hotel tries
to protect its interest in rooms
revenues (group business is often
reliant on function space), the
banquet and meeting rooms are
often not available to the restau-
rant and in many cases remain idle
at times when the restaurant could
have been generating revenue
through their use.
The other source of conflict lies
in the actual selling and booking of
the functions. While it can be
advantageous for the hotel to have
a sales force selling catering jobs
for the restaurant operator, that is
also a sore spot. The respondents
often complained that the hotel
staff members who sold catering
packages for the restaurant did so
without the correct information
and expertise and without proper
communication to either the
customer or the restaurant staff,
thereby creating stressful relations
all around.
Arrangements made for compro-
mise have had varying degrees of
success and equity according to the
respondents. Of the 24 restaurant
operations represented, only three
were granted full and open access
to the banquet facilities without
restrictions. Nine restaurants had
exclusive rights on weekends, six of
which also had exclusive rights in
the month of December. Some
agreements gave exclusive rights
to some but not all of the function
rooms and others granted rights to
any room after 5:00 PM.
Other agreements had function
rooms tightly restricted, in which
case function rooms were released
on a first-come, first-served basis
for periods of only 30 to 120 days
from booking until the proposed
function date. Generally it can be
said that the tighter the restric-
tions on the function rooms, the
greater the opportunity that high-
margin banquet revenues were
being lost by the restaurant
operation.
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Few clients in the local market The lease also should stipulate
will make function arrangements who is responsible for cleaning the
on short notice (30 to 120 days), so banquet facilities after functions
the function rooms will usually go and by what time the following
unused if the hotel has not been day. It should also be determined
successful in booking them. Since who is to pay for periodic cleaning
most social affairs typically occur and maintenance expenses, such as
on weekends, perhaps the most steam cleaning the carpets. In
equitable compromise is the agree- many cases those costs are split
ment that allows exclusive use of evenly between the two entities but
banquet rooms by the restaurant on other arrangements have been
weekends. With the inclusion of made as well.
December, which is by far the most Room service. The experience
active and lucrative month for local of most hotels shows that room
banquet and catering planning, the service is not a money-making
restaurant operator is likely to be operation. The primary reason this
quite satisfied. is so is that the sporadic, inconsis-
In terms of control over the tent demand for room service is
booking of banquet functions, only unable to offset the extra labor
two restaurant operators had costs of the service providers
complete control, both of which (waiters, cooks, order takers) who
were also granted open access to all must be on duty just in case there’s
banquet facilities. These operators a heavy demand.
reported low to moderate levels of This study’s respondents re-
conflict in this area and a high ported total room-service sales of
degree of satisfaction regarding 1 to 10 percent of gross sales, with
their banquet-provision agreement. an average of 5 percent per opera-
Seven of the operations repre- tion. Profit margins were between
sented relinquished complete 0 and 20 percent, with an average
booking control to the hotel. Of of 8.7 percent.
those seven operations, six were Restaurant operators who made
reported to have high levels of a good profit on room service were
conflict with hotel management the ones who made no separation
over banquet and catering sales between the restaurant operation
and low levels of satisfaction with and room service. The food came off
this provision of the lease. the same line, was prepared by the
The majority of the operations same cooks, and was delivered by
agreed upon joint control over the the restaurant’s servers. (These
booking of functions. The levels of operators also reported busy
conflict and satisfaction varied restaurants in general, thus the
among this group depending mostly incremental cost of additional labor
on restrictions to access to the for room service was insignificant.)
facilities. In all cases, the restau- The most important lease
rant operator, regardless of who provision to negotiate with respect
booked the function, was always to room service is the hours of
the entity that provided the F&B operation. Ideally, room-service
services, set the price, and received hours should correspond to the
full payment. None of the opera- hours that the restaurant is open
tions reported having to pay any (thereby minimizing labor costs).
additional rent for the use of the Only seven F&B operators in this
banquet rooms and facilities, sample did not or could not negoti-
although hotel operators were ate such an agreement, and those
allowed to charge the guests a seven reported that it would have
room-rental fee if they so desired. been preferable to have done so.
80
 All but one respondent ex-
pressed satisfaction with the
overall room-service provisions of
their leases, and all agreed that
providing room service for the
hotel’s guests was appropriate and
sometimes beneficial.
Hotel’s F&B services. Many of
the lodging operations in the
limited-service category make it a
trademark to include in the price of
a room a complimentary breakfast
and hors d’oeuvres and cocktails in
the afternoon. In our study, any
complimentary breakfasts and
&dquo;happy hours&dquo; were provided by
the hotel, and not by the restau-
rant operator, except for two
restaurant operators who agreed to
provide the breakfasts (for which
they were reimbursed by the hotel).
Many of the respondents pointed
out two primary conflicts that
result from allowing the hotel to
provide complimentary food and
beverage services. First, breakfast
and happy hour are perhaps the
two most profitable times of the
day for a restaurant located in a
hotel. With the hotel offering both
services, the restaurant is in most
cases left without those opportuni-
ties for high-profit revenues.
(Concerning breakfast, the conflict
was minimal as most of the restau-
rant operators in our study were
inexperienced with that meal
period and did not care for the
extended hours that it would
bring.)
Second, many respondents felt
that not only had they lost the late-
afternoon beverage revenue but
that dining-room sales for dinner
were also greatly reduced due to
guests’ consumption of the free
hors d’oeuvres and beverages. Not
all of the respondents made such
claims, however, reporting good
dining-room business even during
the happy-hour period.
Any lease provisions allowing
the hotel to offer F&B services
should be thought through care-
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fully before entering into such an
agreement. If a restaurant operator
feels that breakfast revenue is
critical to the success of the opera-
tion or that the restaurant needs
the revenue typically generated
Restaurant operators who
during the so-called happy-hour
period, then alternative hotel made a good profit on room
companies should be sought. service were the ones who
Another possibility is to offer to handled requests for room
provide such services for the hotel service as part of the regular
at a set fee. restaurant operation.
Hours of operation. Keeping
in mind the principle of economy of
scale, the restaurant operator must
work out an equitable schedule
with the hotel operator whereby
the hotel guest is sufficiently and
reasonably served and yet the
restaurant can remain at a certain
level of profitability.
Lease agreements with lodging
companies usually call for restau-
rants to provide services seven
days a week, and every day of the
year-that is, whenever the hotel
is open. Some negotiation is
possible, however, in terms of daily
hours of operation and holiday
schedules. In all of the restaurants
represented, the restaurant facility
was open at 11:00 AM and closed
between 10:00 PM and 11:00 PM,
with lounge areas remaining open
until midnight or 1:00 AM. Room-
service hours generally corre-
sponded with restaurant hours,
although several operators
reported agreeing to expanded
hours for room service.
Some lease agreements state
that less than full operation of the
restaurant during certain holidays
would be permissible with approval
by the hotel and at least two-
weeks’ written notice. Most leases
do not allow a restaurant operator
to close operations for an entire
day, for any reason.
Lodging company standards.
None of the respondents felt that
the F&B standards of the hotel
were markedly different from
their own. To assess the level of
81
 autonomy that was generally Marketing and advertising.
granted restaurant operators, At first glance there were indica-
respondents were asked to indicate tions that cooperative marketing
which entity had the authority to arrangements existed among the
make decisions regarding restau- hotels and the restaurants. A closer
rant-concept changes, menu look, however, revealed that no
The restaurant operators changes, price changes, entertain- joint marketing came to fruition.
surveyed were granted ment, labor policies, and selection Most promises of cooperation were
overwhelming discretion of suppliers. made on handshakes or discussed
in determining their In a somewhat surprising informally, but were not provided
operating policies. finding, the restaurant operators for in the lease.
were granted overwhelming For the most part, all marketing
discretion in determining their and advertising of the restaurant
operating policies. The hotel did was devised and paid for by the
not have full authority in any of restaurant. In just three instances
the areas just mentioned. Five of did the hotel and restaurant
the restaurant operations needed combine efforts, the cost of which
the joint approval of the hotel to was split between the two entities.
make concept changes; one needed All of the restaurant operators
mutual consent for menu and price supplied each guest room with
changes; another needed mutual table tents, menus, and the like,
consent for entertainment book- and did so at their own cost. Some
ings ; three reported that the hotel respondents strongly felt that the
was involved in labor policies; and hotel should share in those expen-
none of the hotel operators at- ditures that go toward enhancing
tempted to involve themselves in the guest experience.
the selection of purveyors. Only four of the restaurant
All but seven of the restaurant operators considered the hotel staff
operations had clauses in their to be adequately trained and
leases that gave the hotel owner or knowledgeable about the restau-
operator the right to inspect the rant and its services. (This study
premises without prior notice. found that hotel-staff training
Regarding the selection and regarding the F&B operations was
termination of key restaurant the sole responsibility of the
personnel, only one operator had to restaurant operator.) Five of the
consult with the hotel on such restaurant operators said hotel
matters. Two respondents said staff members were somewhat
they often received feedback from knowledgeable about the restau-
the hotel concerning key personnel, rant and more than half of the
while the rest reported no interfer- respondents considered the hotel
ence by the hotel regarding person- staffs awareness of the restaurant
nel matters. operations to be &dquo;low level&dquo; or
These findings indicate that &dquo;none.&dquo; There was a relatively high
restaurant-operator autonomy and level of dissatisfaction with regard
authority in relation to F&B to hotel staff members’ support of
operations is typically high and the restaurant.
should be ensured by the provi- In terms of restrictions placed
sions of the lease. If a restaurant on advertising and marketing, only

operator is neglectful in negotiat- two restaurants were required to

ing this autonomy, there could be get the hotel’s approval (although
unpleasant surprises down the many stated that the hotel sought
road, especially given hotels’ high such approval initially, before lease
turnover among management negotiations actually began). For
ranks. joint activities, such as New Year’s

82

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Eve packages, any advertising
and promotional activity had to
be approved by the hotel.
Restrictions on signs were
more common. More than half of
the operators needed approval for
the placement and design of any
type of lighted or painted sign on
anydoor, window, wall, or
awning on the interior or exterior
of the building. Signs are a
fundamental component of a
restaurant’s curb appeal and
image personification. For that
reason the restaurant operator
should discuss plans for signs at
length with the hotel owner and
have any agreement clearly
written into the lease.
All but five of the operations in
this study had a separate exter-
ior entrance to the restaurant. In
all but one, the restaurant could
also be reached by a separate
interior entrance (for hotel
guests). The absence of an ex-
terior entrance could easily be
the difference between success
and failure for a restaurant.
Local customers are usually not
drawn to hotel restaurants and
the probability of their walking
through a hotel lobby to find a
restaurant is slim compared to
their using an exterior entrance.
An exterior entrance could be a
hard item to bargain for if an
existing hotel’s restaurant has no
such layout, but if the hotel were
in the development stage, an
outside door would certainly be
an item worth negotiating for.
Success versus Failure
For restaurant operators, hotel
lease agreements provide new
opportunities. With financing
being difficult to obtain, the low
capital requirement of leasing
restaurant space from a hotel
owner is an appealing way to
grow. Finding favorable locations
for restaurants is also becoming
considerably more difficult.
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Hotel sites in the budget, was viewed by most respondents
economy, and all-suite segments as requiring much more supervi-
are often situated in such sion and communication with the
favorable locations as downtown, landlord (the hotel operator) than
the suburbs, and airports. These that required by a free-standing
locations are high-traffic in nature unit. Good relations between the
and easily accessible to the local restaurant operator and the hotel
market, making them good sites operator was commonly linked to
for restaurants. better banquet and catering
Marriages among lodging services, better hotel staff
companies and the restaurant awareness of the restaurant’s
operators seem to make perfect services, greater satisfaction with
sense. After five years of growing the lease, and greater customer
acceptance, however, relation- satisfaction.
A final point regarding the
ships between the two entities
have met with mixed levels of success or failure of leasing
success. agreements is that independent
Success in the context of this restaurant operators clearly
study is defined as the restaurant appear to be more successful than
operator’s achievement of a chain operators. Chain operators
minimum acceptable return on were said to react much slower
operations and a good relationship than independents when problems
with the hotel company in achiev- arose and they did not adapt to or
ing those returns. Although some understand banquet and room
might question the importance of service as well as the indepen-
good relations to bottom-line dents. Chain operators had poor
profits, it became apparent relations with hotel operators
throughout the course of this because of their difficulty in
study that acceptable returns communicating with their own
and good relations between the chain’s corporate management.
hotel company and the restaurant Independent restaurant operators,
operator often went hand in hand. on the other hand, were said to
Success factors. The three work much better because they
most critical success factors in were personally involved with the
achieving profitability under day-to-day operations and put
hotel-lease arrangements are their &dquo;life’s blood&dquo; into making the
(1) rent structure, (2) banquet restaurant successful.
and catering sales, and (3) ability
to attract local clientele. Implications for the Future
The study also indicated that Although the concept of leasing
the big chain-restaurant operators out the F&B facilities and services
had more difficulty achieving of a hotel has met with mixed
their financial goals than did success over the last several years,
it appears that this trend will
small, independent operators. The
primary reason for this is that continue to gain popularity-
chain restaurant companies have especially with limited-service
higher expenses than do the lodging companies. The reason
independents. These higher that this trend will continue to
expenses include paying for grow is that such agreements can
middle management and for be beneficial all around and
greater advertising and market- because the advantages for both
ing allocations. parties of a properly structured
Hotel relations. Operating a lease agreement outweigh the
restaurant in a hotel environment disadvantages. CQ
83