Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors
Best Practices Handbook
NOTE ON THE ENGLISH VERSION
This English version of the Best Practices Handbook for the Development of Hospitality
Properties for Private Real Estate Investors is an initiative of HotelInvest – Canteras &
Associados, a Brazilian expert in hotel investment. The translation was elaborated by
Prof. David Lord Tuch, under the supervision of Diogo Canteras and Thais Perfeito.
Although as close to the Portuguese original as feasibly possible, this version should
not be considered an official version, as authorized by SECOVI. In the case of any
deviation between the two texts, the original Portuguese version should prevail.
1
ABOUT HOTELINVEST
HotelInvest was founded in 1999 by Diogo Canteras, a professional with over 20 years
of experience in the development of hotel undertakings. It is a reference in hotel
investment advisory in Brazil, operating through three business areas:
• Hotel Investment Advisory;
• Hotel Asset Management;
• Hotel Investment Funds.
The Hotel Investment Advisory is responsible for the elaboration of market studies,
feasibility analysis for new undertakings, economic-financial evaluations and the
structuring of new businesses.
HotelInvest was a pioneer in the Hotel Asset Management activity in the country. This
area focuses in overseeing and maximizing the profitability of hotel investments.
Currently it has 14 hotel undertakings as clients in Brazil, distributed in over 3,500
investors with assets worth more than BRL 500 million.
In addition, the company has structured, along with Ourinvest Bank, the Maxinvest
Hotel Real Estate Investment Funds, which currently disposes of BRL 175 million worth
of assets. In 2011, the Hotel Maxinvest Funds was classified as the second most
profitable investment funds in the country, achieving a return of 47%, according to
Valor Econômico newspaper.
Throughout its history, HotelInvest has been addressing the most important
developers, investors and operators active in the country. In order to do so, the
company prides itself in creating and maintaining a team of professionals with a solid
academic background, recognized by their technical and market expertise.
HotelInvest professionals have an approach oriented to creating a lasting relationship
with their clients. This working style allied to the technical quality of the team, its
market expertise, and commitment to results guarantees a high level of satisfaction
and retention of a select group of national and international clients.
Best Practices Handbook
SUMMARY OF CONTENTS
Presentation .................................................................................................................................. 4
A New Level of Growth ................................................................................................................. 5
Chapter 1: General Information on the Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors ............................................................... 6
1.1 Introduction......................................................................................................................... 6
1.1.1 Private Real Estate Investors ........................................................................................ 6
1.1.2 Alternatives for the Development of Hospitality Properties ....................................... 6
1.1.3 Participants in the Development of PREIHs ................................................................. 6
1.1.4 Handbook Sponsoring Organizations ........................................................................... 6
1.2 The Objectives of the Handbook ......................................................................................... 7
1.2.1 Real Estate Developers ................................................................................................. 7
1.2.2 The Hotel Real Estate Investment Product .................................................................. 7
1.2.3 Consumer Code ............................................................................................................ 7
1.2.4 Primary Objective of the Handbook ............................................................................. 7
1.3 Scope of the Best Practices Handbook................................................................................ 7
1.3.1 The financing of the PREIHs ......................................................................................... 7
1.3.2 Characterization of Commercial Use............................................................................ 7
1.3.3 Hospitality Real Estate Products not covered in the Handbook .................................. 8
1.3.4 Definitions .................................................................................................................... 8
1.4 General Principles ............................................................................................................... 9
Chapter 2: Best Practices for the Development of Hospitality Properties for Private Real Estate
Investors ...................................................................................................................................... 10
Stages in the development of a hotel property intended for the Private Real Estate Investors
Market ..................................................................................................................................... 10
2.1 Product Definition ............................................................................................................. 10
2.1.1 Identification of the Market Segment or Market Niche ............................................ 10
2.1.2 Identification of the Site ............................................................................................. 10
2.1.3 Concept Development of the Hospitality Product and the Preparation of the
Feasibility Study................................................................................................................... 11
2.1.4 Selecting a Hotel Operator ......................................................................................... 12
2.1.5 Selecting a Hotel Asset Manager ............................................................................... 12
2.1.6 Developing the Architectural Plans and Detailing the Physical Characteristics of the
Project ................................................................................................................................. 13
2.1.7 Developing the Legal Structure of the Project ........................................................... 13
2.1.8 Litmus Tests for the Quality of the Hospitality Real Estate Investment Product ....... 13
2.2 Development of a Sales Strategy, Market Launch and Sales to Private Real Estate
Investors .................................................................................................................................. 15
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2.3 Construction, Decoration and Furnishing the Hospitality Product ................................... 16
2.4 Installation of the Hotel Operating Structure ................................................................... 16
2.5 Commercial Operations of the Hospitality Product .......................................................... 16
2.6 Functions and Obligations of Participants ........................................................................ 17
Advisory Board ............................................................................................................................ 19
Working Committee .................................................................................................................... 20
Sponsoring Organizations ........................................................................................................... 22
The Importance of Best Practices ........................................................................................... 22
Highway for Development ...................................................................................................... 23
Challenges for Development ................................................................................................... 24
Security for Investors and Market........................................................................................... 25
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Best Practices Handbook
PRESENTATION
We have arrived at the third generation of flat-hotels. The first generation appeared
between the end of the 70’s and the beginning of the 80’s and offered a hospitality
product that catered to both the resident and the traveler, boasting 500 sq. ft. rooms
and hotel services. The constant conflict of interests between residents and hospitality
investors (participants in the rent pool) demonstrated the need for improvement on
this early version of the product.
The second generation evolved in the middle of the 90’s and lasted until the beginning
of the new century. The novelty and main characteristic was the segment specific
hospitality product. For residents, a residential living space with hotel services was
developed; for the hospitality investor, properties were designed with drastically
smaller units (around 300 sq. ft.), and all units were obligated to participate in the rent
pool – correcting one of the primary conceptual problems of the first generation.
The difficulty of obtaining project financing for hospitality products and the
considerable room-night demand in the many regions of the country led to the third
generation of flat-hotels, based upon the model established in the second generation.
In this third generation, the nomenclature changed, designating condo-hotels as the
typical hotel product and apart-hotels as residential apartment complexes with
hospitality services.
In an effort to correct problems relating to legal definitions, technical aspects and
commercial details, as well as, the very definition of the different hospitality products,
Secovi-SP (Sindicato de Habitação – Real Estate Association), in conjunction with the
ABIH (Associação Brasileira da Indústria Hoteleira - Brazilian Hospitality Industry
Association), the FOBH (Fórum de Operadores Hoteleiros do Brasil - Hotel Operators
Forum of Brazil), the Adit Brasil (Brazilian Association for the Development of Real
Estate and Tourism) and the Fhoresp (Federation of Hotels, Restaurants and Bars of
the State of São Paulo), authored the Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors.
The objective of the handbook is to orient hospitality real estate developers and
establish references for the rights and obligations of the participants involved in the
development process: developers, hotel operators, hospitality consultants, real estate
brokers, financial institutions and investors.
The handbook does not set forth or suggest laws, codes or regulations, but explains
common market practices. We hope the handbook will be useful to you. Good reading.
Hubert Gebara
Vice President of Real Estate and Condominium Administrators, Secovi-SP
Heleno Haddad Maluf
Director of Flats, Secovi-SP
Caio Calfat Jacob
Coordinator of the Tourism and Hospitality Real Estate Nucleus, Secovi-SP
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Best Practices Handbook
A NEW LEVEL OF GROWTH
The Brazilian populace waits with anticipation for the 2014 World Cup and the 2016
Olympiad. However, before these events can occur, the public and private sectors
must contribute much time and effort to prepare Brazil to host the enormous volume
of athletes, authorities, press and tourists. For the inaugural World Cup game alone, 25
thousand journalists are expected to descend upon São Paulo.
There is still a long way to go to be ready for these events, the mobility infrastructure
being the most deficient. Roads, subways, airports and harbors must be expanded,
renovated and modernized.
As a result of this new wave of development, it is generally believed that tourism will
finally consolidate itself as a consumer product. However, modernization efforts must
be planned and coordinated so that the subsequent benefits are transformed into
permanent legacies for society and not simply become precarious arrangements to
meet the short term needs of the tourist demand.
Hotel room supply is also deficient in Brazil. In São Paulo, for example, there are 42
thousand rooms, distributed among 400 hotels. Of that number, 19 thousand are in
flat hotels that have been built since 1994. Given these numbers, we have a lot of work
to do before we can commemorate victories, conquests and increases in the number
of visitors.
The new level of growth requires suitable urban legislation, as well as, accurate and
informative publications, like this important Best Practices Handbook for the
Development of Hospitality Properties for Private Real Estate Investors.
These tips and guidelines will be very valuable to real estate developers in the tourism
real estate segment.
Congratulations to everyone who collaborated in the development of this handbook.
João Crestana
President - Secovi-SP
Claudio Bernardes
Vice President – Secovi-SP
Dean – Secovi University
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Best Practices Handbook
CHAPTER 1: GENERAL INFORMATION ON THE BEST PRACTICES
HANDBOOK FOR THE DEVELOPMENT OF HOSPITALITY PROPERTIES FOR
PRIVATE REAL ESTATE INVESTORS
1.1 Introduction
1.1.1 Private Real Estate Investors
The private real estate investors market is the primary source with which hotels are
developed in Brazil. The lack of adequate alternatives for financing available to hotels
creates a situation in that the majority of hotel properties are totally financed by
capital investors acquiring individual rooms, shares in hotel properties or shares in
investment funds. This is a practice different from what happens in the rest of the
world, where developers can count on help from financial institutions or government
entities to finance hotels. As a result of the intense capital demand during the
development process of hotel properties, direct access to private investors tends to be
an interesting alternative and is responsible for the inauguration of a large majority of
hotel properties in recent years. This phenomenon should continue to play an
important role in the future, at least until adequate alternative sources for hotel
financing become feasible.
1.1.2 Alternatives for the Development of Hospitality Properties
Although each has its own individual set of rules and regulations, there are a number
ways to develop hospitality properties through the use of private real estate investors:
a. Sales of one or more units (rooms) to individual investors;
b. Sales of shares of real estate investment funds that target hospitality properties
as part of their portfolio.
Without a doubt, the most frequent method of financing the development of
hospitality properties in Brazil is the sales of individual units to private investors. These
products, from this point forward, will be referred to as private real estate investment
hotels (PREIHs).
1.1.3 Participants in the Development of PREIHs
The development of a hospitality property is a long and arduous process that employs
a number of specialized professionals to detail various aspects of the product. It is
important to the efficiency of the process that these specialists execute their work in a
timely fashion, cooperating with important information without over stepping
boundaries. The prominent players in the development process are: Real Estate
Developers, Project Managers, Hotel Operators, Hospitality Consultants, Hotel Asset
Managers, Real Estate Brokers, Financial Institutions and Investors.
1.1.4 Handbook Sponsoring Organizations
In virtue of importance of describing the hotel development process, and singling out
the participants with their rights and obligations, a group of like minded organizations
met to author the Best Practices Handbook for the Development of Hospitality
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Best Practices Handbook
Properties for Private Real Estate Investors. They include Secovi-SP (Real Estate
Association), ABIH (Brazilian Hospitality Industry Association), FOBH (Hotel Operators
Forum of Brazil), Adit Brasil (Association for the Development of Real Estate and
Tourism of Brazil) and Fhoresp (Federation of Hotels, Restaurants and Bars of the State
of São Paulo).
1.2 The Objectives of the Handbook
1.2.1 Real Estate Developers
Real estate developers have been the primary agents in structuring and developing
PREIHs. They were largely responsible for the major increase in the number of hotel
rooms in the country beginning in the 80’s and 90’s.
1.2.2 The Hotel Real Estate Investment Product
Today, it is common knowledge that when commercializing a PREIH unit, the developer
is selling a hospitality real estate investment product, in which the buyer is not
acquiring a unit for his personal use but investing in the future revenue that the
property may generate as a rental unit. The stimulus for the investment purchase is
the hospitality operation and with it the potential to generate an attractive return.
1.2.3 Consumer Code
The purchaser of a PREIH is considered to be a product consumer, and thereby, all
ensuing contractual relationships are regulated by the Brazilian Consumer Code.
1.2.4 Primary Objective of the Handbook
The primary purpose of the Best Practices Handbook is to assemble and distribute
parameters, references and procedures that objectively characterize a good real estate
investment product. The use of the handbook will allow for greater assurance in the
development of a hospitality property and may offer a competitive advantage once the
product is offered on the market.
1.3 Scope of the Best Practices Handbook
This handbook covers all hospitality properties that are developed through the private
investor real estate market, including hotels, condo-hotels, flat-hotels, residence
hotels, apart-hotels, apartments with services and lofts, in which any hotel activity is
commercially exploited.
1.3.1 The financing of the PREIHs
The financing of the PREIH is constituted through unit sales to individual investors, the
sale of shares to real estate investment funds, or any legal structure that permits
fragmented unit sales of a hospitality property.
1.3.2 Characterization of Commercial Use
The commercial exploitation of the hospitality activity in products structured on a
condominium platform is characterized when a group of residential units, owned by
independent investors (which may encompass all or part of the units of the PREIH), is
operated in an integrated and uniform manner by a hotel operator, and the owners of
the units share all revenues, expenses and profits. This group of units is commonly
referred to as a Pool or Room Pool.
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Best Practices Handbook
1.3.3 Hospitality Real Estate Products not covered in the Handbook
In hospitality operations structured on a condominium platform, the independent
leasing of autonomous units (not participating in the Pool), in principle, does not
characterize the commercial exploitation of the hospitality activity. However, if
practiced, directly or indirectly, in a competitive manner with the hotel operator, the
group of independent units is regarded as a Parallel Pool, which in itself is prejudicial
to the operation and profitability of the investment as a whole.
A residential property, in which all the units are intended for private use or leased
independently, is not covered in this Handbook.
1.3.4 Definitions
For the purpose of this handbook, the following terms are assumed to be as defined:
a. Flat, flat-hotel, hotel-residence, apart-hotel or apart-service – a residential
property characterized by permanent or long term occupancy, by either
proprietor, renter or authorized third party and in which hospitality services are
offered. The commercialization of this type of property must be approved by
the municipal authorities as residential property, residential property with
services, flat or flat hotel or any other similar terminology. The proprietor can
use his unit as his personal residence or lease it to third parties, but may not
compete with the room pool. The condominium must be administered by a
hotel operator who will also be commercially responsible for the units in the
pool.
b. Condo-Hotel – a residential property that has been approved by the municipal
authorities for use as a commercial hotel, but at the same time, is legally
structured on a condominium platform. The proprietor may not use his unit as
a residence, nor can he lease it to third parties other than the hotel operator. In
this manner, all units must participate in the room pool.
c. Condo-Resort – a residential property, located at a tourist destination, and is
legally structured on the condominium platform. The property must be
administered by a hotel operator and offer leisure facilities, leisure equipment,
basic hospitality services (reception, reservations, housekeeping), and pay-peruse services, such as room service, concierge, laundry, spa, beach service,
among others. In the condo-resort, it is not necessary that all the units
participate in the room pool.
d. Residence with Services - a residential property, legally structured on the
condominium platform, in which a variety of hospitality services are offered.
Normally, the residential units are significantly larger than those offered in
flats, flat-hotels, hotel-residences, apart-hotels or apart-services. The property
is not administered by a hotel operator, but by a building administrator who
oversees contracted third party service. There is no room pool or any short
term leasing services. This Residence with Services designation is open to
properties in both urban and tourist destinations.
e. Loft – is a type of residential unit created by the subdivision of a larger open
space. The unit is usually without internal divisions, but with the determining
characteristics of high ceilings and windows. It is only considered a hospitality
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Best Practices Handbook
property when it is commercially exploited by a hotel operator and has a pool
of apartments for transitory occupation.
f. Pool – is a group of independent proprietors who bundle their residential units
together with the objective to exploit them commercially in a uniform and
homogeneous manner, usually through a hotel operator or specialized
company. The legal status for the commercialization and administration of the
Pool is defined by the hotel operator in conjunction with the property
developer and preferably the Asset Management Company.
1.4 General Principles
Every entrepreneur, developing a hotel property to be sold on the private investors
market, must prioritize the fact that the project is a Real Estate investment product
and, therefore, must be:
a. Structured as a business – a hospitality property;
b. Economically feasible with positive cash flows originating from the operation of
the property. Return on investment must compare favorably to other real
estate investments available on the market. The economic feasibility must be
carefully documented and explained to the investor;
c. Constructed, furnished and equipped with the quality of materials and
equipment equal to the level of service that will be offered in the hospitality
operation;
d. Adequately structured hospitality operation, especially when considering that
the operator will not only have to be competent in running the property, but
also must deal with a multi-owner environment with the obligation of reporting
financial information and coddling to investors.
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Best Practices Handbook
CHAPTER 2: BEST PRACTICES FOR THE DEVELOPMENT OF HOSPITALITY
PROPERTIES FOR PRIVATE REAL ESTATE INVESTORS
Stages in the development of a hotel property intended for the Private Real Estate
Investors Market
Typically, the stages in the development of a PREIH are the following:
2.1 Product definition
2.2 Development of a sales strategy, market launch and sales to private real estate
investors
2.3 Construction, decoration and furnishing the hospitality property
2.4 Installation of the hotel operating structure
2.5 Commercial operations of the hospitality property
2.1 Product Definition
During the development process, it is important that the entrepreneur understands
that he is developing a commercial product in the form of a hotel, and that the
hospitality product must be adequate to fit into the market in which it will operate.
From the point of view of an investment, the object is to offer the future investors a
profit/risk relationship that is compatible or superior to other similar Real Estate
investment options existent in the market.
The important phases in this initial product structuring stage are the following:
2.1.1 Identification of the Market Segment or Market Niche
The first task is to identify the market segment or market niche, into which the
hospitality product will be inserted. At this point, there should be initial evidence that
the introduction of a new property into this market is feasible.
2.1.2 Identification of the Site
There are various sites scenarios, at which a hospitality product can be located. Viable
options include: an undeveloped lot, an existing building with the propensity to be
transformed into a hotel, an existing hotel with an individual proprietor, or any other
situation in which the developers determine to be an interesting opportunity to
develop a hotel project.
Location is fundamental for the success of a hotel property and should be chosen with
regard to its accessibility to future clients. In this regard, the following aspects should
be considered:





Visibility of the building;
Accessibility to the site;
Quality of the surroundings and existing nearby services;
Proximity to the primary hotel demand generators; and
Other aspects related to the concept of the hospitality product.
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Best Practices Handbook
2.1.3 Concept Development of the Hospitality Product and the Preparation of the
Feasibility Study
The description of the basic concepts of the hospitality product should be elaborated
in conjunction with the feasibility study, allowing for better product/market aligning
and, consequently, a maximization of profitability and return on investment.
The description of the principal concepts of the hospitality product is fundamental to
the business structure, and therefore, it is recommended that the developer employ
specialists to help orient the project from a technical stand point, while simultaneously
aligning the project with investor interests.
The feasibility study of the PREIH should be executed by a highly regarded hotel
consultant, renowned for his independence, reliability, and experience. He should have
a significant group of important clients and have recommendations from the principal
hotel chains in the country. The consultant should use the universally accepted
methodology set forth by the Appraisal Institute of the United States, which allows for
the reliable projection of cash flows of the future property. This methodology is well
known in Brazil and has been in use by consulting companies and hotel chains for more
than a decade. Feasibility studies, based solely on the scenario speculation that avoid
the use of the Appraisal Institute methodology, do not permit a precise evaluation of
the economic viability of the project, and therefore, are not recommended as input in
the decision process, much less for use in presentations on profit perspectives to
future investors.
The feasibility study should cover the following topics:
a.
b.
c.
d.
e.
f.
Site description and evaluation;
Neighborhood analysis;
Primary and secondary supply analysis;
Macroeconomic tendencies and perspectives;
Product recommendations;
Demand segment analysis including growth projections and penetration
analysis;
g. Revenue and expense projections with a five year pro forma statement;
h. Project cost estimates including construction, equipment, decoration, utensils,
pre-operation and working capital;
i. Project financial analysis including internal rate of return calculations based on
a typical ten year cash flow;
j. Conclusions and recommendations with respect to the financial feasibility of
the project, including suggestions as to hotel brands that suitable to the
concept of the future hotel;
k. Formal opinion on the quality of the project from the point of view of an
investment product for the private investor market.
It is important to mention that the application of the Appraisal Institute methodology
for innovative projects, also known as green field, is greatly impaired in that, as yet,
there are no market references directly comparable to the project being studied. The
projections generated in these cases are less reliable, and therefore, create a greater
risk to the investor. When offering an investment opportunity of this nature to private
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investors, the higher risk characteristic must be clearly communicated during the sales
process.
2.1.4 Selecting a Hotel Operator
Theoretically, the selection of a hotel operator is not a sine qua non condition to
structure a PREIH. However, in the scenario that involves the PREIH, it is imperative
that the hotel operation be as stable as possible. To insure this stability, an
experienced hotel operator is recommended.
When selecting a hotel operator, certain aspects should be analyzed:
a. Complicity of the hotel brand offered by the operator to the concept of the
hotel product;
b. Experience in the operation of PREIHs;
c. Performance history in other properties;
d. Proposed contractual framework through which to manage the PREIH. Usually,
the contractual agreement between the operator and a single owner property
is solidified through management contracts or lease contracts. With PREIHs and
partnerships (Sociedades em Conta de Participação - SCP), however, these
contracts can become very complex, which makes the analysis of the proposed
contractual framework very important. Analysis of the proposed contractual
framework should be done by a lawyer, experienced in contract law, to avoid
potential liabilities to the investors;
e. Operator’s and/or parent company’s financial stability;
f. Company strategies, including plans for future development, growth
perspectives, access to sources of funding, etc.
2.1.5 Selecting a Hotel Asset Manager
The function of the Hotel Asset Manager (HAM), company or individual, is to
systematically monitor the operation of the hospitality property, propose changes in
direction when deemed strategically necessary, and report to investors, in a clear and
concise manner, aspects of the operation, investment perspectives and, especially,
profitability.
As with the hotel operator, the selection of a HAM is not a sine qua non condition to
the structuring of a PREIH. In hospitality real estate investments with many investors,
not all have the time or knowledge to accompany the development and operation of
the property; consequently, the selection of a HAM at the earliest moment is highly
recommended, as he will be “the owner’s eyes” during the lifetime of the property.
The primary responsibility of the HAM is to represent the owner’s interests in the
operation of the property. In virtue of this role, he will frequently perform the function
of investors’ representative, counselor to the board of directors, or counselor to the
administrator of the investment fund.
When selecting a hotel asset manager, the developer should take into consideration
the following aspects:
a. Experience in the hotel asset management of PREIHs;
b. Performance history in other properties;
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c. Contractual framework proposed by the HAM to perform his services for the
PREIH.
2.1.6 Developing the Architectural Plans and Detailing the Physical Characteristics of
the Project
Having completed the previously described projects phases, the developer will have
accumulated the necessary product information and data to initiate the design phase
of the project. In addition to architects and designers, the design phase should also
count on the input of the following professionals:
a. Consultants responsible for the development of original hospitality concept and
the execution of the feasibility study;
b. Future hotel operator responsible for providing brand design standards and
technical recommendations;
c. Hotel asset manager to represent future investor’s interests during the design
process.
Given the large volume of information and the number of people involved in the
structuring of the PREIH, the coordination skills of a Project Manager with experience
in the development of hotels in Brazil is highly recommended.
2.1.7 Developing the Legal Structure of the Project
The definition of the legal structure of the property should consider, among other
things, the following topics:



Legal security to insure that all the rights and obligations agreed to by the
participants in the structuring process are addressed;
Operational necessities to guarantee that the property can function as a PREIH
as initially conceived;
Applicable taxes without generating an unnecessary burden on the investors.
The most common legal structures for PREIHs are:



Condo properties that have formed Partnerships (Sociedades em Conta de
Participação - SCP) for the purpose of pooling their units and operating as a
hotel – units are bought and sold individually;
Real Estate Investment Funds – participation through the sale of shares; and
Specific Purpose Society (Sociedades de Propósito Específico - SPE) –
participation through the sale of shares.
Each structure has its own applicability, in that the decision on the ideal structure for a
project should be analyzed by lawyers specialized in this area.
2.1.8 Litmus Tests for the Quality of the Hospitality Real Estate Investment Product
The final objective of the project structuring process is to create a hospitality product
that is a good investment. The notion of quality in a hotel investment product is
related to two important factors:


Risk; and
Return on Investment
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These two factors should have been amply discussed in the feasibility study performed
on the property.
Risk – The analysis of risk is very complex as it deals with the unknown. Preliminary
studies on the project should contemplate the development risk (the property is not
completed) and the risk of new competitors (the unforeseen entrance of new
competitors into the market, which in effect reduces market share and consequently
decreases the projected return on investment). Given its complexity, risk should be
thoroughly analyzed and debated before advancing to subsequent stages.
Return on Investment (ROI) – A number of indicators can be used to evaluate the
profitability of an investment, but two stand out as simple but effective.


The prospect of the distribution of profits (monthly profitability); and,
The prospect of increased property value.
1:1000 Rule
A “thumb rule” used in the hospitality industry since the beginning of time is the
1:1000 Rule, which, in spite of its limitations, is a simplistic but practical indication of
project profitability.
The thumb rule states that the effective room rate (not to be confused with the
published room rate) should be at least one thousandth of the investment cost of a
hotel unit. If the effective room rate is greater than one thousandth of the investment
cost, profitability is high; if less than one thousandth of the investment, the investment
is questionable.
This thumb rule is not a precise indicator of profitability, as it does not consider any
appreciation or devaluation of assets; but, on the other hand, it is an easy to calculate
preliminary indicator.
Secondary Flat Market Indicators
Especially active in large cities, the secondary resale market for PREIHs functions on
very consistent parameters. There is a very clear correlation between the cash flows
generated by the operation of a property and the unit resale price. A consistency in
this relationship can be observed in the resale markets of both flats or apart-hotels
and condo-hotels, in which investment fund shares are traded.
The relationship between profit and the price of the asset in the secondary market is
defined as the capitalization rate (cap rate) practiced at any particular moment on the
market.
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It is interesting to observe that the cap rate can vary in regard to the city in which the
property is located, the type of hotel product and the type of legal structure (real
estate fund or real estate partnership), but is quite stable within each segment.
In considering that assets traded on the secondary market offer immediate returns,
while new properties in development will only reach profitability in the future, it is
reasonable to assume that for a new product to be considered a good investment, the
projected return on investment must be superior to that practiced on the secondary
market.
15
The comparison of the projected investment return for a new property with the
average return of a property on the secondary market is an interesting parameter that
can be used for quick analyses.
The feasibility study should offer complete, detailed information on the property’s
projected investment return, as well as, profit data on similar products offered on the
secondary market.
The feasibility study should also discuss three important topics: the quality of the
location of the property; the future perspectives of the hotel brand to be used; the
impact of possible future appreciation of assets on the return on investment.
2.2 Development of a Sales Strategy, Market Launch and Sales to Private Real Estate
Investors
The PREIH market launch must focus on the fact that it is the sale of an investment
product and not a simple commercial or residential property; in other words, the
investor is purchasing a cash flow whose internal rate of return must be similar or
superior to other similar products on the market.
In virtue of this:
a. The launch material and brochures of the property must be written to focus on
the investment product, expounding the logic of the product and its
perspectives in the market;
b. The feasibility studies done on the property must be made available to
potential investors in summary form, so that they will have the information
necessary to make a correct evaluation of the investment product;
c. Real estate brokers must be trained to intelligently discuss the investment
product with potential investors, and more importantly, abstain from
formulating unfounded promises of profitability;
d. The launch material must offer information on:
i. The hotel operator (if there is one);
ii. The hotel asset manager (if there is one);
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iii.
iv.
v.
The set of contracts that create the legal structure of the property,
along with a summarized copy explaining the principal points, rights and
obligations of those involved;
Projected project timeline with critical dates:
 Construction deadline and tolerances;
 Hotel systems and equipment installation deadline;
 Pre-operation services deadline and soft opening;
 Grand opening date;
 Initial dividend distribution date;
Additional investment contributions (if necessary);
 Furniture, decorations, pre-opening expenses and working capital;
 Initial cash flow shortfalls in the beginning months.
2.3 Construction, Decoration and Furnishing the Hospitality Product
Construction of the property should be executed according to the set of architectural
plans, which were drawn up with the help of various specialists.
The hotel operator should accompany the entire construction process, assuming a
primary role in the definition of project details. The operator’s input is especially
important during the finishing phases when determining final adjustments, styles of
furnishing and types of equipment important to the future operation of the property.
It is the developer’s responsibility to deliver the hotel totally decorated, furnished and
equipped, in accordance to the specifications ordered by the hotel operator and
contributing specialists. The exception is when the investors sales contracts determine
that the decoration, furnishing and equipping will be executed by third parties after
the delivery of the building.
It is also the responsibility of the developer, in conjunction with the hotel operator and
the HAM, to oversee the installation of the operational structure, as well as, the
inauguration of operations.
2.4 Installation of the Hotel Operating Structure
Before the formal inauguration of the property, it is important that the hotel
operational structure be installed. The installation of this structure consists of the
selection and training of employees and installation of all the operational systems.
Toward the end of the construction phase, the developer and hotel operator must
agree on a date to initiate the hospitality installation process, which usually lasts for six
months. The costs for the installation of the hospitality structure (pre-operation costs)
should be estimated before the sales process begins and clearly communicated to the
investors.
2.5 Commercial Operations of the Hospitality Product
Once the operational structure is installed, the property is ready to begin operating. In
many cases, the hotel operator opts for a limited form of operation (soft opening) until
the employees are sufficiently trained to efficiently execute a high quality of service.
In many properties, it is common for the operation to register losses during the first
years. Depending on the market, this is perfectly normal and foreseeable; early
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negative cash flows should be forecast in the feasibility study and play a part in the
overall profitability of the property. This fact, however, must be clearly communicated
to the investor before the purchase of a unit.
2.6 Functions and Obligations of Participants
The participants involved in the process of development and sales of PREIHs are:






Real Estate Developer;
Hotel Operator;
Hospitality Consulting Company;
Hotel Asset Manager;
Financial Institutions;
Real Estate Brokers.
These participants in the development process have specific functions and obligations
that impact on the quality of the investment product. Each participant must execute
his functions in such a manner that the final product will be considered a good quality
investment within the previously described parameters.
a. Real Estate Developer
The most important participant is the Real Estate Developer (individual or company), in
so far as, he is responsible for the project structuring and coordination. The principal
functions of the developer are: selecting the hotel operator; hiring the hotel consulting
company to execute the feasibility study; contracting the Hotel Asset Manager to
accompany operations as a representative of the owners; hiring the Real Estate
Brokers to intermediate the sale of the property; and coordinating the development
process, providing the project parameters and intermediating contact between the
various participants of the project.
b. Hotel Operator
In that the brand to be used by the property was developed by and belongs to the
hotel company, the hotel operator is obligated to contribute his knowledge and
experiences to the process of product development. In many cases, this will include
basic technical layouts, design standards and technical recommendations, as well, as,
furniture, fixtures and equipment lists, all necessary for the successful operation of the
future property. The hotel operator also brings an important sales component to the
project, in that the hotel investor often identifies the attractive investment
opportunity with the hotel operator or/and the hotel brand, anticipating that the
property in question will attain the same level of success as other hotels of the same
brand or run by the same operator.
c. Hotel Consulting Company
The consulting company, author of the feasibility study, also has an important role in
the development process; for the information and projections proffered by this
participant will determine the framework of the final product and determine the
financial viability and the probable return on investment.
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d. Hotel Asset Management Company
The company or consultant that performs asset management for the owner’s group is
hired in the beginning of the project because the he shares the responsibility to insure
that the hospitality product is a good investment opportunity. Involvement in the
project is perceived by the investor to indicate that the investment will perform in a
similar fashion to that of others represented by the company.
e. Financial Institutions
Generally, financial institutions (banks and investment funds) will only become
involved with PREIHs on those products that have to be approved by the Securities and
Exchange Commission of Brazil (CVM), typically PREIHs structured as REITs. The level of
requirements for this type of investment is very specific and transcends the objective
of this Best Practices Handbook.
f. Real Estate Brokers
Real estate brokers are the final link in the development process, appearing only in the
sales phase and not participating in product structuring or operation of the hospitality
property. The broker function, in spite of being restricted to the sales process, is no
less important, because the broker is responsible for contacts with the potential
investors and to transmit all the pertinent product information about the investment.
The correct dissemination of this information, in a clear and concise manner without
unfounded promises, is of fundamental importance to the project as future investors
have expectations of realistic profitability.
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Best Practices Handbook
ADVISORY BOARD
An Advisory Board will be constituted to accompany and disseminate the use of the
Best Practices Handbook for the Development of Hospitality Properties for Private Real
Estate Investors and to periodically up-date the contents. The Advisory Board will be
formed by board members indicated by the following organizations:




Secovi-SP – 3 members
ABIH – 1 member
FOHB – 1 member
ADIT – 1 member
Board members will be appointed by the president of each of the organizations and
formally nominated to the board by the president of Secovi-SP. For each effective
board member, each organization should also nominate an alternate.
The term of office for the board members will be one year, and board members can be
nominated for successive terms at the discretion of their respective organizations.
The president of the Advisory Board will be chosen by the sitting members of board by
a simple majority or votes.
The Advisory Board will meet at the Secovi-SP offices periodically, as determined by
the Advisory Board.
The Advisory Board, as a part of Secovi-SP, will be situated in the Vice Presidency on
Tourism Real Estate Affairs.
Primary Attributes of the Advisory Board
1.
2.
3.
To disseminate the use of the Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors in the market, publicizing
the handbook through the media and industry events;
To clarify questions as to the best means of structuring and commercializing
PREIHs;
To periodically up-date and revise the Best Practices Handbook.
The operational structure of the Advisory Board and the strategies for publicizing the
Best Practices Handbook will be defined the Advisory Board.
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Best Practices Handbook
WORKING COMMITTEE
The working committee was responsible for the elaboration of the Best Practices
Handbook for the Development of Hospitality Properties for Private Real Estate
Investors.
The present Best Practices Handbook for the Development of Hospitality Properties for
Private Real Estate Investors began at the initiative of Diogo Canteras, HotelInvest, and
the initial deliberation to elaborate this handbook occurred during meetings of the
Núcleo Hoteleiro e Imobiliário-Turístico do Secovi-SP, coordinated by Caio Sergio Calfat
Jacob. The undertaking received immediate support from the Directory of Flats Secovi-SP, coordinated by Heleno Haddad Maluf in whose meetings this handbook was
developed. The working committee, authors of this handbook, was formed by a
multidisciplinary group, composed of professionals that encompass the principal areas
of the hotel and real estate sectors, among which include hotel consultants, executives
of international and national hotel chains, lawyers, developers, and executives of some
of the principal organizations in the Brazilian hospitality sector.
Coordinator:
Diogo Canteras – HotelInvest
Working Committee:
Alberto M. Ribeiro – Sol Brasil
Ana Maria Biselli – Fórum de Operadores Hoteleiros do Brasil (FOHB)
Carlos Alberto Campilongo Camargo – Sol Brasil
Carlos Alberto de Carvalho – Ábaco Hotelaria e Serviços S.A
Fernando Zaccari – GJP Hotéis & Resorts
Flávio Straus – Grupo Posadas
Guilherme Terra – Advogado
Jean‐Urbain Hubau – Grupo Accor
João Annunciato – Grupo Artrax
Lucio Suriani – Grupo Concivil-Estanplaza
Manuela Gorni – Jones Lang La Salle
Márcia Rezeke – Advogada
Maurício Bernardino – Associação Bras. de Indústria de Hotéis (ABIH)
Nuno Constantino – Neoturis
Rafael Guaspari – Atlantica Hotels International
Ricardo Manarini – InterContinental Hotels Group (IHG)
Ronaldo Albertino – Bourbon Hotéis & Resorts
Virgílio Carvalho – Federação de Hotéis, Restaurantes, Bares e Similares
Viviene Boverio – Grupo Accor
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Best Practices Handbook
The Best Practices Handbook for the Development of Hospitality Properties for Private
Real Estate Investors received an important contribution from the Legal Council of the
Presidency of Secovi-SP, whose members worked diligently on the revision of the
proposed text and the polishing of the concepts herein presented.
Carlos Pinto Del Mar
Jaques Bushatsky
Marcelo Terra
Pedro Augusto machado Cortez
Ricardo Lacaz Martins
Ricardo Nacim Saad
Rodrigo Cury Bicalho
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Best Practices Handbook
SPONSORING ORGANIZATIONS
ABIH: Associação Brasileira da Indústria Hoteleira (Brazilian Hospitality Industry
Association)
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The Importance of Best Practices
For a sector to grow and develop, stakeholders must be motivated to insist on the
operational best practices. For through best practices, it is possible to minimize
common errors and acquire sustainable growth, which undoubtedly adds value to the
property and increases productivity.
At present, the hospitality industry in Brazil, which began with Portuguese initiatives in
São Paulo and Rio de Janeiro, is experiencing a special moment. Due to leisure tourism,
business trips and future mega events – the 2014 World Cup and the 2016 Olympiad,
the world is watching the tourism industry’s performance. “A Hora H da Hotelaria”
(“The Hotel Industry’s Twelfth Hour”), theme of the 53 rd edition of Conotel that
occurred in November 2011, reflects this sentiment.
In spite of having witnessed highs and lows in recent years, it is evident the Brazilian
hospitality industry experienced more conquests than losses. However, we must be
cognizant of internal and external influences and continually maintain our efforts to
improve the hospitality sector.
The Best Practices Handbook for the Development of Hospitality Properties for Private
Real Estate Investors is an initiative in excellence that aspires to contribute to hotel
development in our country, especially when one considers the importance of the
private real estate investor to the hospitality sector. The handbook, supported by the
objectives of the Brazilian Hospitality Industry Association – ABIH, emphasizes and
clarifies the most important concepts of our universe. Certainly, it is an indispensable
reference for industry professionals.
Enrico Fermi Torquato
President of the National ABIH
Best Practices Handbook
ADITBrasil: Associação para Desenvolvimento Imobiliário e Turístico do Brasil
(Brazilian Association for the Development of Real Estate and Tourism)
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Highway for Development
The mission to disseminate information and orient businessmen and investors is a
crucial task for the development of a healthy hospitality industry and is the one of the
primary objectives of Adit Brasil. For this reason and the dedication of its authors, we
enthusiastically support the Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors.
The education of the hospitality sector and public administrators is fundamental to
avoid the excesses that have occurred in the past. Whether it be the surplus of room
supply or the excess of poorly structured real estate products or unwarranted
restrictions levied by the public sector due to a lack of adequate understanding of the
industry, we must learn from our past mistakes.
A concept originating with the Brazilian hospitality industry, hotels with room pools are
legitimate instruments for hospitality development and can be one of the primary
means of hotel development in the country, especially when we lack inexpensive, longterm financing.
It is imperative that the sector be restrained to avoid distortions and excesses. It is for
this reason our enthusiasm for this handbook, an important step to reach this
objective.
Felipe Cavalcante
Board President of Adit Brasil
Best Practices Handbook
FOHB: Fórum de Operadores Hoteleiros do Brasil (Hotel Operators Forum of Brazil)
Challenges for Development
Every year, the Brazilian hotel industry grows, develops and professionalizes to such an
extent that industry professionals must be extremely well prepared and informed to
make the correct choices in important decisions. It is time to plan for the future in an
organized manner and not simply invest randomly, without considering subsequent
consequences. In this sense, FOHB is concerned with providing an increasing amount
of reliable information to the market. Our primary objectives are, through sectorial
relationships, the public sector and other auxiliary organizations involved with the
organized development of the sector, create practical knowledge and generate
industry data fundamental for the sustainable growth of the hospitality activity in
Brazil. The Placar da Hotelaria 2015 (Hospitality Scoreboard 2015) study is an example
of this participation. At the same time, this important initiative to author the Best
Practices Handbook for the Development of Hospitality Properties for Private Real
Estate Investors, targeted at developing properties funded by individual private
investors, is aligned with scope of objectives of FOBH. Besides contributing to the new
cycle of hotel development, the handbook reflects the total integration among the
participants in the process; or in other words, companies and organizations that
comprise the Núcleo Imobiliário-Turístico e Hoteleiro do Secovi-SP. The democratic
conception of the material is another positive point that contributes to the quality of
the final text.
We hope that this document is a constant source of information for developers,
entrepreneurs and everyone interested in investing in the hospitality sector. The result
will be a strengthening of the industry as a whole.
Roberto Rotter
President, Fórum de Operadores Hoteleiros do Brasil - FOHB
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Best Practices Handbook
FHORESP: Federação de Hotéis, Restaurantes, Bares e Similares do Estado de São
Paulo (Federation of Hotels, Restaurants, Bars of the State of São Paulo)
25
Security for Investors and Market
The Federação de Hotéis, Restaurantes, Bares e Similares do Estado de São Paulo
heartily supports the Best Practices Handbook for the Development of Hospitality
Properties for Private Real Estate Investors.
We are certain that the procedures and proposals are the best alternatives with which
to develop new hotel projects.
The regulations, even though informal, offer greater security to investors and,
consequently, to growth in the market, generating more jobs, stimulating greater job
specialization, and nurturing better job training for hospitality professionals.
We would like to thank and congratulate the Núcleo Imobiliário-Turístico e Hoteleiro
do Secovi-SP for their initiative and hope that the handbook will be useful to those
involved with new hospitality projects.
Maurício Bernardino
Vice President of Hospitality, FHORESP
Best Practices Handbook
TECHNICAL INFORMATION
Coordination:
Diogo Canteras
Caio Calfat Jacob
Secretary:
Márcia Lima D’Avanzo
Communications Department of Secovi-SP
Marketing Department of Secovi-SP
The partial reproduction of the Best Practices Handbook for the Development of
Hospitality Properties for Private Real Estate Investors is authorized, provided that the
original source is cited.
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Best Practices Handbook
HANDBOOK SPONSORING ORGANIZATIONS
Sponsors
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Best Practices Handbook
Produced by
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Sponsoring Organizations
Best Practices Handbook
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Secovi-SP Headquarters
Rua Dr. Bacelar, 1043 - Vila Mariana
São Paulo – SP – CEP: 04026-002
[email protected]
www.secovi.com.br