Hotel Management Agreements (Part-2)

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This is the second article on “Hotel Management Agreements”, the first article lay the foundations and provide brief information on available options on the market. In the next couple of articles, I will review most used/popular agreements and compare them accordingly.

When a hotel owner decides to bring in a management or operating company to run its hotel business then the main concern will be to find one that has the correct "fit" for the hotel. There are several quality hotel operators in the market and therefore, a well-established track record in similar hotels, expertise in key areas and a competitive fee structure will be important considerations during the research.

Management contract: Agreement between hotel owners and hotel management company under which, for a fee, the management company operates the hotel.

To give you an idea, below-highlighted areas managed by the operator under a management contract:

  • The overall operation of the hotel according to the company and brand standards.

  • The day-to-day running of the business.

  • Hotel administration.

  • The performance of managers and employees including training and employment.

  • Secure, and if it has closed, reopen the hotel

  • Implement sales and marketing plans to maximize the hotel’s short & long-term profitability

  • Generate reliable financial statements

  • Establish suitable staffing to maximize customer and employee satisfaction

  • Show hotel to prospective buyers

  • Report regularly to owners about the hotel’s condition

  • Manage/directing major renovation of the hotel

It is important to examine the management company to understand whether it’s fit for the hotel, owners and business. Therefore, there are simple criteria’s you need to check; are they first or second tier management company, the number of hotels they operate, they of engagements they are in other establishments?

Once you reduce down to a couple of potential operators then you need to enter negotiation stages with several of them to find the right fit. Management companies have detailed agreement templates and as you can expect, all design to protect operating company for all eventualities. Of course, it is negotiable and we will highlight the key issues you need to be aware and even though these issues are not exhaustive, we would suggest getting professional advice should be sought in each case.

Negotiating a well-structured and customised Hotel Management Agreement should bring benefits to both the owner and operator of a hotel by clearly setting out roles and responsibilities and flushing out any areas of potential dispute at an early stage.

Major Elements of a typical Management Agreement Include;

  • Length of the agreement (on average Brand operators 17.4, Independent operators 11.3 years) *Source HVS Research

  • Procedures for early termination by either party

  • Procedures for extending the contract

  • Contract terms in the event of a hotel’s sale

  • A base fee (usually a percentage of gross revenues)

  • Management/Incentive fee (based on a percentage of -adjusted- gross operating profit) or penalties assessed related to operating performance

  • Marketing fee (based on rooms revenue)

  • Management company investment required or ownership attained

  • Reservation fee (based on the number of reservations made)

  • Reporting relationships and requirements

  • Insurance requirements of the management company

  • Status of employees

Let’s review them in detail;

The Term, Renewal periods and Exit

The initial term of a Hotel Management Agreement will vary from case to case, often due to the respective bargaining positions of the parties. Operators, particularly branded operators will generally look for, and be able to secure, a longer initial period; citing the investment made by the operator in establishing the reputation of the hotel and the need to ensure that their brand reputation and income flow is not compromised if replaced within a short period of time.