The Expert: Owners, Operators & Management Agreements

Hotel management contracts have progressed considerably over the past decade, focusing on the fair and equitable distribution of returns between owners and operators. Having pursued an asset-light strategy, operators now seek to grow by increasing RevPAR, adding additional management contracts and building brand equity.Jones Lang LaSalle Hotels conducted a review of 139 hotel management contracts globally, all executed since 2005. The overlying trend in the United States is that the length of the initial terms has increased, indicative of the strength of operators’ negotiating power. Upscale and luxury hotels tend to have a longer initial term than midscale properties.The length of the initial term often inversely correlated to the level of base and incentive fees, operators requiring higher compensation for shorter contract periods. Incentive fees have become common as owners seek an alignment of interests with the operator through clauses whereby the incentive fee is subordinated to a priority return to the owner.The proportion of contracts that allow the owner to terminate at any time without cause or upon sale has declined. Hotel operators want to limit the ability to terminate contracts even when an asset is sold, and termination fees have become more complex as operators seek greater compensation for reduced tenure. Investors increasingly weigh the impact of higher fees throughout the contract period with a potentially lower sale price if selling the hotel encumbered by a long-term management contract.Operators exerted strong negotiating power during the years of rapid RevPAR growth and burgeoning hotel development, but a new era may dawn. With weakening global economies, the scales may once again start to tip back in favor of owners as growth opportunities for operators dry up. As more operators compete to secure management agreements in the face of fewer new developments, operators will in some cases exhibit significantly more flexibility.