The Case of the Unhappy Owner

In this assignment, you will read a brief case study, and then using what you have learned in the course, answer the questions given.

The Case of the Unhappy Owner:

The State Employees Retirement Fund (SERM) invests funds for the benefit of it’s retiring members.  Typically, these funds must be invested for long periods of time and must grow well over that time, so that when the SERM members retire, the money will be available to benefit it’s members.  The fund invests in a variety of things, including stocks, bonds, and real estate.  The fund has over $500 Million dollars invested.

One of the assets the SERM purchased two years ago was a 250 Room hotel property.  The property was only 3 years old when it was purchased, but it had not been performing well and as a result, SERM was able to purchase the hotel at a reasonable price.  The investment objective of SERM was to find a global brand to franchise the property and a management company to operate the hotel.  SERM plans to hold the asset for 10 years, at which time they want to sell it and use the profits to pay retirement benefits.  The hotel will increase in value as profit and cash flow increase.  If profit and cash flow do not increase, the hotel will not increase in value.

SERM hired a professional Hotel Asset Management (HAM) company to assist them in the selection of a brand and a management company, and to generally oversee the operation of the hotel. HAM conducted a bidding event where both the global brands and the management companies who wished to brand/manage the hotel presented their business plans.  The plans included market share achievement, profit achievement (based on the market share achievement), fees, costs, and the additional investment which would be required by SERM over the term of their ownership to maintain and renovate the property at years 5 and 10.  These renovation cycles were consistent between all of the brands.

Following the presentations, HAM recommended the Omega brand to both franchise and manage the property.  This was based on the promises Omega made regarding their ability to deliver market share and profitability, and their overall costs, including the estimate for renovations in years 5 and 10.  SERM accepted that recommendation and entered into a Franchise agreement and a Management agreement with Omega. 

HAM further recommended that SERM enter into the two agreements separately, and that the management agreement and the franchise agreement both have termination clauses in them which would allow SERM to terminate either or both of the agreements if Omega did not perform as they had promised. 

It is now 2 years later, and Omega has not delivered all that it promised.  SERM is reviewing the results of the hotel operation with Omega and HAM in a meeting which will determine whether or not SERM will cancel the Franchise Agreement, the Management Agreement, or both.  If they cancel either of these, SERM will need to bring in another management company, or change the brand of the hotel, or both.