Hotel Management Agreements (Part-4) Comparison

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This is the fourth article on “Hotel Management Agreements”, in this article, we will compare Hotel Management Agreements which we have reviewed so far, in particular, Franchise and Management Agreements.


Let’s summarise each model with key takeaways;


1. Freehold Model


The owner has the hotel and operates as an independent hotel with all responsibility risk and benefits. It is less and less used model unless it is niche boutique or established companies.


2. Lease Model


Income : Owner received rent and tenant has any profits after the rent

Term : 20 years or more

Financials : Employees, operating and FF&E responsibility of tenants while large renovations, property tax and insurance (negotiable) owner’s responsibility.


Owner point of view


Pros;

  • Easier to predict returns

  • Lower risk associated

  • Easier to obtain financing

  • Short Term

  • Good choice for institutional investors such as banks.

Cons;

  • Difficult to get brands and operators to interest comparing to other models

  • No control over how the hotel operates and positioning

  • If they lease an established hotel, risk to loss reputation for the future.


Tenant point of view:

Pros;

  • The growth of the brand and/or operating company

  • Total control over the quality of product and CapEx to position according to their structure

Cons;

  • Operating risks and eventually rent payments

  • Full liability on balance sheet

  • Direct impact on brand/operator’s credit rating and share price


3. Management Model


Income : Brand receives base and other agreed fees, Owner has remaining profits

Term : 15-30 years or more

Financials : All employees and property related costs are the owner’s responsibility, the brand has no responsibility


Owner point of view:


Pros;

  • Easier to finance with strong brand/operator involvement

  • No involvement in operations or management

  • Positive return potential

  • Potential asset improvements by brand-leading design, development and operational support


Cons;

  • No control over hotel operations