Hotel Management Agreements (Part-4) Comparison

#hotel, #managementagreements, #assetmanagement, #hotelmanagement, #franchise, #license #lease #hotelowner


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

  • Operating loss risks and guaranteed fee payments

  • Need to accept brand related global initiatives regardless


Brand point of view:


Pros;

  • Continuous brand growth with minimal investment

  • Automatic support to the Brand structure with brand and management related fees with minimal investment

  • Lower market risk and opportunity to earn additional incentive fees


Cons;

  • Brand risk due to dependence on owners for developments and CapEx

  • Limited earning potential with fees


4.Franchise Model


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

Term : 10-20 years

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


Owner point of view:


Pros;

  • Full Operational Control other than brand standards requirements

  • For a new hotel, instant recognition in the market

  • Direct access to brand GDS, reservation and Marketing systems/programs

  • Direct support from the brand for design and operational support


Cons;

  • Higher market/operating risks

  • In case of any loss, fees are still payable

  • Need to accept brand related global initiatives regardless

  • Either need to put a strong team or a third-party operator to manage the property


Brand point of view:


Pros;

  • Continuous brand growth with minimal investment

  • No operating or market-related risks

  • Ability to terminate if non-compliant with brand standards without any penalty

  • Automatic support to the Brand structure with brand and management related fees with minimal investment and effort


Cons;

  • Risk of brand image, reputation and guest satisfaction if hotel managed badly

As mentioned in one of the previous articles risk and return comparison is as follows; more owner takes the control and operations of the hotel, more the risk they take on board (adversely if they manage well, they do not need to share the benefit with any third-party). Owner’s return is looking best when they associated with a known brand with their proved brand, GDS, marketing, reservation and operations in their properties.


Differences Between Franchise and Management Agreements


We would like to review two of the models (Franchise and Management), as there are more and more hotels prefer due to more secure and better return opportunities.


We will now compare these two popular agreement models by key areas;


1. What is Granted?


a. Franchise Agreements:

  • Hotel owner licenced a package of IPR’s, essentially relating to the brand of the operator.

  • The IPRs are to be used in the management and operation of the hotel.

  • Centralised marketing, advertising and reservation services are provided for a further fee.

  • Management and operation of the hotel remain the obligation of the owner.


b. Management Agreements: Operator will;

  • Manage and operate the hotel on behalf of the owner

  • Provide technical services

  • Licence its brand

  • Provide centralised advertising/marketing/ reservation services

  • Clearly, under this structure, the hotel benefits from the “hands-on” experience of the operator.


2. What are the Owner’s Obligations?


a. Franchise Agreements: Whilst the overall management of the hotel remains with the owner, the owner is required to;

  • Adhere to the operator’s brand standards

  • Participate in group marketing and advertising

  • Participate in the group’s reservation system

  • Open the hotel on a specific date

  • Prepare and maintain records and accounts to be shared with the operator

  • Comply with all legal requirements and provide the operator/franchisor with protection against any claims


b. Management Agreements: Although the management and operation of the hotel is provided by the operator, the owner will remain responsible for;

  • Compliance of the hotels with the operator’s brand standards and cost of renovations associated with them

  • Cost of maintenance and repairs

  • Insurances

  • Employment of non-management employees

  • In some cases, obtain licences

  • Real estate issues

  • Some owners will seek the right to approve annual budgets, capital and FF&E budgets, approve key personnel positions, review accounts etc.


3. What are Operator’s Obligations?


a. Franchise Agreements:

  • Training on the operation of the hotel according to the ‘system’ (some training maybe incorporated in fees, some may involve additional charges,

  • Providing and updating the brand standards

  • Occasional pre-opening services,

  • Access to the operator’s marketing, advertising and reservation systems

  • Technical services may be provided for other areas albeit this is likely to be for additional fees.


b. Management Agreements:

  • Operate the hotel to brand standards

  • Include the hotel in the operator’s marketing, advertising and reservation systems

  • Have the authority to conduct the day-to-day operation of the hotel including purchasing goods and services, conducting litigation, managing staff etc.

  • Provide technical services relating to the design and development of the hotel (this is often a separate fee)


4. How is the Fee Structures Works?


a. Franchise Agreements:

  • An initial fee (this is often linked to the size of the hotel). In some cases, this fee is non-refundable.

  • Continuing or royalty fees (this is based on the room revenue). Typically, this is between 3% and 5% of the room revenue

  • Advertising/marketing contribution (also based on the room revenue). This fee generally goes towards a fund for group (not necessarily local or regional) marketing. Typically, between 2% to 4% of room revenue.

  • Reservation


b. Management Agreements:

  • “Base Fee” typically between 2% and 4% of gross revenues

  • “Incentive Fee” typically around 10% of gross operating profit

  • Technical services fees; lump sum or payable on time and materials basis for relevant services

  • Centralised services fees, often made up of;

  • Marketing fees; typically, in the region of 2% of room revenues

  • Reservation fees; calculated per room or against room revenue

  • Loyalty and other programmes provided


The content of this article is a compilation of our first-hand experience, several well-known books, industry related articles as well as research reports. Our intention to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


This is the fourth and last part of Hotel Management Agreements series, aim to provide a detailed and comprehensive information on the subject matter.


We hope you find this article useful. Please feel free to contact us to get advice, assess your property needs and help to optimise the usage of the hotel's physical and human assets to achieve superior standards of service and deliver maximum value to owners and investors within agreed profit objectives. You can reach us either Contact tab on my website or via email directly on harundagli@hospitalitycode.com to arrange a private chat.


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