Hotel Management Contracts vs. Tourist Operation Leases

Hotel Management Agreements

Definition

A hotel management contract is an arrangement whereby a hotel's owner contracts with a separate company, or an operator, to run a hotel. The owner retains limited control over the operation of the asset, often through measurable performance standards, albeit that the owner retains more risk than if the hotel were leased to the operator.

An operator, or hotel management company, hired to run a hotel business will provide supervision, expertise, established methods and procedures, and normally also a track record of verifiable past performance. The operator runs the hotel for a fee according to specified terms negotiated with the owner.

Term

The initial term of a management contract is the length of time that the agreement is to remain in effect. Initial terms usually last 10, 15, or 20 years, depending on the brand and positioning of the operator selected.

Renewal terms generally extend the total length of an initial term. This is commonly done by mutual consent and is rarely unilateral. In general, renewal terms occur in multiples of 5 years, occasionally 10.

Operating Fees

An operator will typically receive remuneration from the owner, often termed a base fee, in exchange for performing the duties specified in the contract. Base fees typically range from 2% to 4% of total revenue.

In addition to the base fee, an operator usually receives an incentive fee based on a percentage of profits.

Operator Guarantees

An operator guarantee ensures that the owner will receive a certain level of profit. If this level of profit is not achieved by the operator, the operator guarantees to make up the difference to the owner through their own funds.

Owner Approval

Approval clauses set out the extent to which the consent of the owner is required for decisions affecting the operation of the hotel. These typically include the budget, employment of key management positions, outsourcing, capital expenditure, and leases and concessions.

Tourist Operation Lease

Definition

The person who undertakes to assign the use of tourist operation is called the lessor; the person who acquires the use of the tourist operation, which he undertakes to pay, is called the lessee.

Types of Lease

• Revenue-based hotel leases are linked to sales generated by the hotel business. To limit the risk, these leases often specify a minimum rent (guarantee/base rent).
• A result-based hotel lease implies that the hotel property owner receives a share of the hotel operator's operating net. This type of lease requires that the hotel property owner understands the operator's financial control system. Result-based hotel leases can also specify a minimum rent (guarantee/base rent).
• Fixed-fee hotel leases with an index linked to the development of the Consumer Price Index (CPI) are used in mature markets and in well-established hotel products. A fixed-fee lease limits the risk factor but also the potential.