How Are US Hotels Going to Operate in Cuba?

Marriott International announced today that the the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury has approved its application to pursue a business transaction in Cuba.

And yesterday Starwood Hotels & Resorts Worldwide announced it has partnered with several Cuban entities to manage hotels in the island nation. Reports indicate Starwood received its US government approval last week.

The Starwood and Marriott deals, made possible through what appears to be unique approval from the Obama administration, marks the first US hoteliers to operate in Cuba since the 1959 revolution.

The Starwood sites include: Hotel Inglaterra, owned by Gran Caribe, which will become one of Starwood’s Luxury Collection hotels; the Quinta Avenida, run by Gaviota SA, which will become a Four Points by Sheraton hotel. A third undisclosed location is reported to be under letter agreement. Both Gran Caribe and Gaviota SA are owned by the Cuban government.

Starwood’s Jorge Giannattasio, chief of Latin American operations, said the deals included a “multimillion-dollar investment to bring the hotels up to our standards.”

What remains to be clarified is how these US hotel operators gained approval to operate in Cuba while the US embargo, most of which was erected by the US Congress, restricts US firms from operating in Cuba – with a few exceptions. Furthermore, travel restrictions remain in place for US citizens, who cannot travel to Cuba for vacation purposes. Is there a carveout for US hotel customers who violate US travel restrictions?

Obama has used his executive authority to dismantle some of the Cuba-related business restrictions. Cubamacare is how the Cuba Journal refers to Obama’s special actions concerning Cuba.

Here is a summary of Obama’s Cuba-related actions as of March 16, 2016, prepared by Engage Cuba.

Hotel management contracts, the most likely form of US hotel business deals in Cuba, typically do not require the motel manager (ie. Starwood and Marriott) to invest in the hotel property itself. Today, hotel properties are almost always owned by an entity separate from the hotel operator. This form of ownership, which has roots in US tax regulations that offer special tax status to real estate companies, has spread worldwide as hotel managers and hotel owners differentiate into entirely separate industries.

In fact, more than two decades ago, Marriott separated its hotel properties in a spin off that became a real estate investment trust (REIT) called Host Marriott. Host Marriott’s first CEO, Chris Nassetta, is today the CEO of Hilton, a name noticeably absent from the current Cuban hotel bonanza.

It is likely the case that the Cuban entities party to the hotel management contracts have agreed to provide the hotel’s capital, leaving the US party to operate the hotel upon completion. Under this scenario, the hotel owner enjoys the benefits of a massive hotel company’s marketing network and management expertise. And a hotel management contract would likely be easier to gain US approval for than a deal involving hard dollar investment in Cuba.

Hotel management contracts are complex documents that require capital commitments, timely construction completion and international standards for food and beverage. For example, there are often strict requirements to reserve cash annually as a way to ensure repair and replacement of furniture, fixtures and equipment (FF&E) so that the hotel property maintains a standard consistent with the hotel operator’s brand.

Cuba’s communist, single-party government retains almost complete control over the economy. Foreign investors must joint venture with a state-owned entities in order to do business in country.

Nevertheless, Starwood, and presumably Marriott, are contracting with Gaviota SA, an arm of the Cuban military, and other Cuban government entities, that have a long history of partnership with foreign hotel management companies. There are presently no private hotel owners in Cuba.

Gaviota, led by General Luis Perez Rospide for the Cuban military, is emerging as the most important entity driving growth in the tourism sector. It has been the partner for most of the country biggest foreign join venture projects involving Meliá Hotels International, Kempinski, Iberostar, Riu, Blau, H10, Blue Diamond, Hotusa and Pestana.

Gaviota operates numerous businesses in various verticals of the tourism sector including hotels, resorts, marinas, tours, car rentals and travel agencies. At its 27th anniversary celebration last year, Gaviota announced more 55 hotels in operation, more than 24,000 rooms, sales greater than $650 million and 24,376 workers.

According to state television reports, Gaviota has plans to nearly double its number of hotel rooms to 50,000 by 2020.

Finally, Cuba’s infrastructure is completely inadequate for existing capacity, mush less for addition burdens on waste, sewage, water and electricity. Reliable food supplies will likely have to be imported.

Here is Cuba’s Q1 2016 Hotel Pipeline

Check out Meliá Hotels, Cuba’s largest foreign hotel operator.

How Are US Hotels Going to Operate in Cuba? was last modified: April 8th, 2016 by Simons Chase