HVS.com
HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
Manav Thadani, MRICS
Chairman – Asia Pacific
Juie S Mobar, MBA
Director – Special Projects
2017 EDITION
EXCERPTSGLOBAL | AMERICAS | EMEA | APAC
INCLUDES 2017 SURVEY RESULTS
PAGE 2 | EXCERPTS: HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
Foreword
Whyshouldyoureadthisguideandsurveyreport?
Thehotelmanagementcontract,thatwasintroducedasatoolforasset-lightgrowthofoperatingcompaniesmorethanhalfa
centuryago,istodayamongthemostpopularmodesofoperationsworldwide.Somuchsothatithasunfastenedarealmof
opportunitiesforoperatorstoexpandatarapidpacewithoutbeingexposedtodevelopmentandownershiprisks,forownersto
outsource themanagement of the hotel to the “experts” in the field while enjoying enhanced financial returns, and for
stakeholderssuchasconsultantsandlawyerstodevelopadedicatedservicelinearoundthismodel.
FromthefirstcontractHVSevernegotiatedonbehalfofthedevelopertothenumerousagreementsthatwehelpstructureand
negotiatenow,thislegallybindingdocumenthastransformedmanifoldbecomingmoresophisticatedandindividualizedthan
inthepast.Particularlystrikingistheshiftfromleaningheavilyinfavoroftheoperatortothecontractbecomingalotmore
balancedinpresenttimes.Whilethereareseveralreasonsforthischange,amongthemostprominentare,firstly,theevolution
ofthehotelowner,whoisalotmorediverse,aware,knowledgeable,andexperiencedinnegotiatingcontractswithanoperator
and,secondly,thenotableriseinthepresenceofconsultingfirmslikeoursthatnotonlyhelpmaketherightmatchbynegotiating
abalancedagreement,butalsoeducatetheindustryofthelatesttrends,opportunitiesandoptionsonthesubject.
TheHVSGuidetoHotelManagementContractsbyManavThadaniandJuieMobarisonesuchsubstantivedocumentthatwillhelp
industryplayerstounderstandthekeytermsandprovisionsofcontemporarymanagementagreements.Itincludesexclusive
HVSinsightsoncriticalcontractprovisionsinadditiontotheresultsofaninvaluableandextensivesurveythattrulyoffera
globalperspectivebyhighlightingthecommonaswellasuniquetrendsintheprimarygeographiesoftheworld.Theauthors
havesignificanthands-onexperienceinthehotelsectorandinnegotiatinghotelmanagementcontracts,placingthemina
relevant position to conduct, analyze and publish this comprehensive topical research. Covering ten principal areas of
discussion–managementcontractterm,territorialrestrictions,operatorfees,operatorperformancetest,budgeting,owner
approvals,employees,indemnification,operatorinvestmentinpropertyandterminationoftheagreement–theendeavorofthe
authorstoprovideaneminentreferencedocumentisfullyrealized.
Finally, thisguideandsurveyreport isaproductof thecollaborationofmanyHVSregionalofficesshowcasing the firm's
unrivaledhospitalityintelligence,worldwide.IcommendThadaniandMobarforsharingthisincrediblepieceofresearchwith
theindustrythatshallcertainlybenefitfromtheirexcellentwork.
SteveRushmore,MAI,FRICS,CHA
Founder
HVS
August21,2017
NewYork
SteveRushmorefoundedHVSin1980,whichhasprovidedconsultingservicesforthousandsofclientsinmorethan60countries.
Duringhis40-yearcareer,Stevehasprovidedconsultationservicesforover15,000hotelsthroughouttheworld,specializingin
complexissuesinvolvinghotelfeasibility,valuations,andfinancing.Asaleadingauthorityandprolificauthoronthetopicofhotel
feasibilitystudiesandappraisals,StevehaswrittenallfivetextbooksandtwoseminarsfortheAppraisalInstitutecoveringthis
subject.Hehasalsoauthoredthreereferencebooksonhotelinvestingandhaspublishedmorethan300articles.Stevelectures
extensivelyonhoteltrendsandhastaughthundredsofclassesandseminarstomorethan20,000industryprofessionals.Heisalsoa
frequentlectureratmajorhotelschoolsaroundtheworld,includingLausanne,Cornell,Houston,andIMHI.
TheHVSGuidetoHotelManagementContractspresentstheresultsofanextensivereviewofhotelmanagementagreementsconductedacrossthe
Americas(USA,CanadaandSouthAmerica),Europe,theMiddleEast,Africa(EMEA),andtheAsiaPacific(APAC)regions,inadditiontoofferingan
in-depthunderstandingofthekeytermsandclausesofsuchagreements.
INTRODUCTION
Theproperexecutionofahotelmanagementcontractbetweentheownerandtheoperatorisacriticalstepinthedevelopmentofasuccessfulhotelventure.Intoday'shighlycompetitiveenvironment,operatorsarekeento“sealthedeal”asquicklyaspossible,sometimesoverpromisingperformanceresults.Owners,however,arenowmoreawareandandknowledgeable,wantingtosafeguardtheirinvestmentbyunderstandingthemanagementcontracttermsandconditionsthoroughlypriortosigning.
ThisguideandsurveyreportisanHVSendeavortoprovideasubstantialreferencedocumentthatpresentsanddistinguishesthekeytermsandclausesofmanagementcontractsacrossthefollowingprimarygeographicareas–Americas (USA,CanadaandSouthAmerica);Europe, theMiddleEast, andAfrica (EMEA);and theAsiaPacific(APAC).Pleasenotethattheaimisnottomakehotelownersinanypartoftheglobefeelshortchanged;instead,weurgethereaderstobearinmindlocalfactorsandinfluencesthatcouldimpactregionalcontractclauses,inadditiontoassetspecificconsiderationsthatmayaffectowner-operatornegotiations.
SURVEY METHODOLOGY
Thefollowingmethodologyhasbeenadoptedforthesurvey:
DataCompilation:Datacollectionforthesurveywasimplementedusingacombinationofdifferentways.Welookedatcontractsfromthe HVS global database, dispatched an online self-reportingquestionnairetoownerswhowishedtoparticipatevoluntarily,andhelddiscussionswithhotelownersaswellasoperators.Eventually,theglobal surveysample set comprised475hotelmanagementcontracts representing close to 120,000 rooms. RegionalbreakdownisdepictedinFigure1,alongside.
DataAnalyses:Primaryindependentvariables(definedasinputsor causes) that were chosen for the data analyses are MarketPositioning,RoomInventoryandAgeoftheContract.FortheUSAandCanadasamplesets,wealsolookedatTypeofManagement,sinceboth first-tier and second-tier management companies arewidespreadinthesemarkets.Moreover,itisimportanttonotethatthesurveycapturedinformationonsecondaryindependentvariablesaswell,whichhavebeendiscussedinthisreporttoexplainresults“only”whereapplicable.Figure2,below,depictsalltheindependentvariablesusedfordataanalyses.
FIGURE 2: VARIABLES USED FOR ANALYSES
INTRODUCTION - EXCERPTS: HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS | PAGE 3
Budget, Mid Market, Upscale, Upper Upscale, Luxury, Extended Stay
Variables Parameters
Primary Independent Variables
Market Posi�oning
Room Inventory
Age of the Contract Before Year 2005, In or A�er Year 2005
Type of Management (for USA and Canada Sample Sets) Brand Managed (First-�er), Third-Party Managed (Second-�er)
Secondary Independent Variables
Type of Management Brand Managed (First-�er), Third-Party Managed (Second-�er)
Type of Property New Development, Conversion/Rebranding
Year of Property Opening Before Year 2005, In or A�er Year 2005
Loca�on of the Property By City, By Country
Less than 100 rooms, 100-299 rooms, 300-500 rooms, Above 500 rooms
Region No. of Contracts Rooms Represented
Americas 257 70,862
USA 150 42,754
Canada 76 22,197
South America 31 5,911
EMEA 111 27,610
Europe 73 18,945
The Middle East 24 5,755
Africa 14 2,910
APAC 107 21,454
India 64 12,132
Rest of APAC 43 9,322
Global 475 119,926
FIGURE 1: SURVEY SAMPLE SET
Principal Discussion Areas Key Aspects
Management Contract Term Ini�al TermExtensions/Renewals
Area of Protec�on/Territorial Restric�ons
Inclusion/Exclusion of this ProvisionKey Considera�ons
Operator Fees Ini�a�on/Joining/Commitment Fee
Base Management FeeOwner’s Priority ReturnIncen�ve Management FeeOther Fees/Charges/Reimbursables
Operator Performance Test Commencement YearTest PeriodType of TestPerformance ThresholdsProvision for Operator to Cure
Budge�ng Annual PlanExpenditure ThresholdsFF&E Reserve Contribu�on
Owner Approvals Items Subject to Owner’s ApprovalEmployees Employer
Senior Management Hiring ProcessIndemnifica�on By Owner
By OperatorOperator Investment in Property
Key MoneyDeferred Fees
Operator LoansTermina�on of Agreement Standard Condi�ons
Termina�on by OwnerTermina�on by Operator
Technical Services Fee and Pre-Opening Fee
Control of Receipt/Opera�ng/Revenue Account
Owner's Priority Return and Operator Profit Guarantees
Figure5 liststhe55first-tier(branded)hotelmanagementcompaniesrepresentedinthesurvey.Several
second-tiermanagementcompanies(third-party)alongwithafewindependenthotelsalsofeatureinthesample
set,butasthesemaybelinkedtoonlyoneorfewassets,wehavenotlistedthemfordataconfidentialityreasons.
FIGURE 5: FIRST-TIER (BRANDED) HOTEL MANAGEMENT COMPANIES REPRESENTED IN THE SURVEY
Sec�on Region and Major Contents
I Global
Global Sample Set Profile and Survey Results
(Includes Defini�ons and Discussions)
II Americas
USA Sample Set Profile and Survey Results
Canada Sample Set Profile and Survey Results
South America Sample Set Profile and Survey Results
III EMEA
Europe Sample Set Profile and Survey Results
The Middle East Sample Set Profile and Survey Results
Africa Sample Set Profile and Survey Results
IV APAC
APAC Sample Set Profile and Survey Results
(Separate Discussion on India where applicable)
ReportPresentation:Themajortermsandprovisionsofsurveyedhotelmanagementcontractswereanalyzed
acrossalltheprimarygeographicregions;thesetermsandprovisionsarerecognizedtobecriticalareasforowner-
operatornegotiations.Intermsofpresentation,theguideandsurveyreporthasfourmajorsectionsasshownin
Figure3,withthesurveyresultsbeingpresentedbytheprinicipalareasofdiscussionaslistedinFigure4.
FIGURE 3: MAJOR REPORT SECTIONS FIGURE 4: PRESENTATION OF SURVEY RESULTS BY PRINCIPAL AREAS OF DISCUSSION
One&Only Luxury Resorts
Peninsula Hotels (HSH Group)
Rosewood Hotels and Resorts
Rotana Hotels and Resorts
Sarovar Hotels and Resorts
Shangri-La Hotels and Resorts
Shaza Hotels
Six Senses Hotels, Resorts and Spas
Starwood Hotels and Resorts (Marrio� Interna�onal)
Staybridge Suites
Taj Hotels, Resorts and Palaces
The Fern Hotels and Resorts
The Leela Palaces, Hotels and Resorts
Trump Interna�onal
Whitbread PLC
Wyndham Worldwide
Hampshire Hotels
Hilton
Hya� Hotels Corpora�on
InterCon�nental Hotels Group
Jumeirah Group
Kempinski
La Quinta Inn and Suites
Langham Hotels and Resorts
Le Germain Hotels
Lo�e Hotels and Resorts
Louvre Hotels
Mandarin Oriental Hotel Group
Marrio� Interna�onal
Melià Hotels Interna�onal
Minor Hotel Group
Morgan's Hotel Group
Mövenpick Hotels and Resorts
Oakwood Serviced Apartments
Omni Hotels and Resorts
Accor
Ace Hotel
Adina Apartment Hotels (TFE Hotels)
Aldesta Hotel Group
Aman Resorts
Americas Best Value Inn (Vantage)
Banyan Tree Hotels and Resorts
Best Western Interna�onal
Cambridge Suites
CampbellGray Hotels
Carlson Rezidor
Caesars Hotels and Casinos
Choice Hotels
Club Méditerranée
Delta Hotels and Resorts (Marrio� Interna�onal)
Dusit Hotels and Resorts
Fairmont Raffles Hotels Interna�onal
Fortune Hotels
Four Seasons Hotels and Resorts
PAGE 4 | INTRODUCTION - EXCERPTS: HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
WHAT IS NEW IN THIS EDITION?
Tobeginwith,thiseditionhasabiggersamplesetwith239morecontractsthanthe2014edition.Altogethercloseto120,000roomsarerepresented,whichismorethantwicethefigurelasttime.Allprimarygeographicregionsdepictedinthissurvey–Americas,EMEAandAsiaPacific–haveover100hotelmanagementcontracts,whichwebelieve is a credible threshold toeffectively represent thenatureofoperating termsandconditionsprevalentintheseareas.Additionally,
l Thekeytermsandclausesofhotelmanagementagreementshavebeendefinedandexplainedingreaterdetailthanthepreviousedition.Werealizethatasizeableportionofourreadershipincludesnewownersandmanagementcompanies,whoarekeentounderstandthebroadareastheyneedtofocusonduringnegotiations,alongwiththerecenttrends,commonvariationsandemergingconceptsrelatedtothese.
l Moreover,theUSAandCanadasamplesetshaveanearequalrepresentationofcontractssignedbyfirst-tier(brandedhotelmanagementcompanies)andsecond-tier(third-partyhotelmanagementcompanies)operators,which is intentional, as we wanted to compare and contrast the key terms offered by the two types ofmanagementcompanies,particularlyinNorthAmerica,wherebotharecommon.Theguideandsurveyreportcarriestherelatedfindingswithintheregionalsub-sections.
l Although Europe, the Middle East, and Africa are not represented by 100 contracts each, together EMEAsurpassesthethresholdandhence,hasbeenincludedasaprimarygeographicarea.Furthermore,thisreporthasindividualsub-sectionsonEurope,theMiddleEast,andAfrica,unlikethepreviouseditionwhereEMEAwasdiscussedasawhole.
l Finally,eachregionalsub-sectionisaccompaniedwithaforewordbyanHVSexpertpracticinginthearea,andthesub-setresultsaresupportedbydiscussionsandinsightstoprovidethereaderwithusefulandrelevantinformation.
INTRODUCTION - EXCERPTS: HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS | PAGE 5
ORDER YOUR COPY TODAY!
Thepurchaseandorderinginstructionshavebeenprovidedbelow:
-Thefullguideandsurveyreportcomprisingaround100pagescanbepurchasedforUS$3,000.
-Anyregionalreportcomprisingtheglobalsection(withdefinitionsandadetailedexplanationofthetermsand provisions of a management contract) and any one regional sub-section – Americas, EMEA, orAsiaPacific–canbepurchasedforUS$2,000.
Allreportswillbeavailableboth inPDF(softcopy)aswellas inprint(hardcopy).Youmaychoosethepreferredformatatthetimeofplacingyourorder,postwhichapersonalizedcopyofthereportwillbesentacross.
Additionally, we will be happy to conduct customized research on your behalf to meet any specificrequirementsyoumayhavepertainingtohotelmanagementcontracttermsandprovisionsinvariouspartsoftheworld.Shouldyoubeinterested,pleasereachouttous,andaseparatemandatewillbeundertakentoperformthespecificassignment,afteranunderstandingofyourobjectivesandexpectations.
Fororderinginstructionsoranyotherassistance,pleasecontact:
JuieSMobar,MBA
Director–SpecialProjectsHVSEmail:[email protected]
PAGE 6 | EXCERPT I - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
EXCERPT IManagement Contract Term
ManagementContractTermcanbedefinedasthelengthoftimethattheagreementistoremainineffect.Bothacommencementdateandaterminationdateareusuallyspecifiedinthisprovision.Thecommencementdatemaybeeitheraspecificdateoritmaybeasofacertainoccurrence,suchasthedatethehotelofficiallyopensforbusiness.Whateverthecertainoccurrencemaybe,thepartiestothecontractmustbecarefultodefineitclearly.Thecontracttermmayconsistofaninitialtermandoneormorerenewaltermsthatextendthetotallengthoftheagreement.
Initial Term: The initial term of a managementcontractforanewhoteltypicallycommencesfromtheEffectiveDate (dateofexecutionof themanagementagreement) and continues until the expiration of aspecifiednumberofyearsaftertheOpeningDate. Inthecaseofexistinghotels,theinitialtermisgenerallycalculatedfromtheEffectiveDateuntiltheexpirationofaspecifiednumberofyears.Theaveragelengthoftheinitialtermfortheglobalsamplesetisaround18 years, with nearly one-third of the contractsaveraging10yearsorless.
It is common knowledge that operators prefer alonger contract term with automatic renewals (orthoseexercisablebytheoperatoratitsoption)citingtheneedforstability,toprotecttheirbrandimageaswellastoobtainthedesiredreturnontheirinvestment.Ahotelcompanygenerallyincursstart-upcostswhentakingovernewcontracts;so,thecompanyneedsatermlongenoughtorecouptheinitialone-timeexpenses.Inaddition,mostmanagementfeesarestructuredsothattheyrewardprofitableoperatingresults,andasaconsequence,itmaytakeanoperatorseveralyearstoachievethelevelofprofitabilityneededtoearnareasonableamountofcompensation.Ontheotherhand,ownerspreferashorterinitialtermwithmultiplerenewaloptionsonmutualconsent,seekingflexibility, andmore importantly enhancing their ability to sell thepropertyunencumberedby amanagementcontractaftertheexpiryoftheinitialterm.
Besideswhichsideofthetableyouareon,thelengthoftheinitialtermisalsodependentontheregionofoperation,hotel'smarketpositioning,typeofmanagement,roominventoryandtheyearofsigningthecontract,amongothers.Forinstance,operatorsinUSAandCanadaappearmorecomfortablewithashorterinitialtermthanotherregions.Conversely,EMEAwitnessesmaximumnumberofcontractswithaninitialtermof30yearsormore.Theregionaldifferenceshavebeenhighlightedingreaterdetailintheforthcomingsectionsofthereport.
Typically,higherthehotelmarketpositioning,longertheinitialterm–bothownersandoperatorswouldprefergreatercontinuityandstability forpropertieswithahigher investmentsuchasupscale/upperupscale/luxuryhotels,thanforbudget/midmarkethotels,whicharemorevulnerabletomarketconditions.Also,asthesurveyreveals,thehighertheroominventory,thelongertheterm.Usually,operatorsstandtogainfromalongertermforhighernumberofroomsasmostoftheirfeesforsupport/centralizedservicesareonaperroombasis.Intermsoftheageofthecontract,wenotethatincreasedcompetitionowingtomorenumberofplayersinhotelmarkets,besidestherisingawarenessofhotelowners,havetogetherwithotherfactorsresultedinrecentmanagementcontractsoverallhavingashorterinitialtermthanthosethatweresignedbeforeYear2005.
Moreover,theaveragelengthoftheinitialtermforconversion/rebranded(existing)hotels(46%oftheglobalsampleset)isfoundtobe17.4yearsvis-a-visnewdevelopments(53%oftheglobalsampleset)thathavealongeraveragetermof18.8years.Thisdataisparticularlyimportantwhenoneconsidersthesurveyresultsbyregionlaterinthisreport.Toofferanexample,USA,amaturedhotelmarketwith69%ofthesamplesetbeingrepresentedbyconversionproperties,hascontractswithashorterinitialtermthanthoseintheAPACregionthatcomprisesseveraldevelopinghotelmarkets,with80%oftheregionalsamplesetcorrespondingtonewdevelopments.
12%
18%
13%30%
12%
12%
3%
GLOBAL | Average 18.1 Years
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
FIGURE 6: LENGTH OF THE INITIAL TERM
EXCERPT I - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS | PAGE 7
FIGURE 7: LENGTH OF THE INITIAL TERM BY MARKET POSITIONING, ROOM INVENTORY AND AGE OF THE CONTRACT
11.2
15.9
17.7
21.1
22.2
15.5
- 5 10 15 20 25
Budget
Mid Market
Upscale
Upper Upscale
Luxury
Extended Stay
Years
GLOBAL | Ini�al Term by Market Posi�oning
12.6
17.9
19.6
24.2
- 5 10 15 20 25
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Years
GLOBAL | Ini�al Term by Room Inventory
18.8
17.8
- 5 10 15 20 25
Contracts signedbefore Year 2005
Contracts signed in ora�er Year 2005
Years
GLOBAL | Ini�al Term by Age of Contract
-
5
10
15
20
25
30
35
1980-1990 1991-2000 2001-2010 2011-2016
Figure 8: Average Length of the Ini�al Term (Years)
Global Average First-�er Second-�er
TrendintheInitialTerm:Hotelmanagementcontractsusedtohavea
longinitialtermbackinthe1980saveraging30+years,witheven50to
60-yeartermsbeingcommon,especiallyforupperupscaleandluxury
assets.
Thenext twodecadessawthe initial termshrinkingprogressivelyas
moremanagementcompaniesenteredthemarketplace,resultingina
highlycompetitiveenvironment.Thisperiodalsosawaproliferationof
second-tier (third-party) management companies in North America,
whicharemoreflexibleinnegotiatingashorterinitialterm–atrend
validatedbythesurveyresultsthatshowcontractssignedbyfirst-tier
hotelmanagementcompanieshaveanaverageinitialtermofnearly21
years,while the initial term for second-tiermanagement companies
averagescloseto11years,globally.
More recently, in the last six years since 2011, the initial term has
averaged around 20 years, globally, up from the past decade,which
couldbeattributedtotheincreasingnumberofcontractsgettinginked
innewerhotelmarketsinAPAC,AfricaandSouthAmerica,wherethe
brands (first-tiercompanies)havesubstantialbargainingpowerand
canimposestrictertermsonless-experiencedowners.
Figure8highlightstheoveralltrendbasedontheglobalsamplesetdata.
HVSInsight
Extensions/Renewals: Renewal terms extend the contract for a stated period beyond the initial term, and
may/maynotcontainthesameprovisionsastheinitialterm.Itistypicallystructuredasacontractextensionoption
thatmaybeexercisedbyeithertheoperatorortheowneractingaloneorinagreement.
Notably,58%ofthecontractssurveyedoffereitherone/tworenewals,withtheoverallaveragelengthofthe
renewedtermbeing7.9years(Figure9).Forconversionassetsintheglobalsampleset,theaveragelengthofthe
renewedtermis7.6years,whereasfornewhoteldevelopmentsitis8.1years.
FIGURE 9: RENEWAL/EXTENSION TERM(S)
24%
34%7%
16%
19%
GLOBAL | No. of Renewal Terms
One Two Three More than Three Not Defined/None
5.5
6.7
7.3
8.8
10.2
7.4
- 2 4 6 8 10 12
Budget
Mid Market
Upscale
Upper Upscale
Luxury
Extended Stay
Years
GLOBAL | Length of the Renewal Term
PAGE 8 | EXCERPT II - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
EXCERPT IIBase Management Fee
Thebasemanagement fee(akabasic fee) isusuallycalculatedasapercentageof thehotel'sGrossOperatingRevenue,creatinganincentivefortheoperatortoincreasemarketingeffortsandotheractivitiesthatincreasesalesvolume. The drawback to this arrangement is that the basic fee provides no incentive tominimize operatingexpenses.Iftheentiremanagementfeeisintheformofabasicfee,theoperatorcantheoreticallyincreasemarketingand sales efforts to the point atwhich the highest possible revenues are reached, but anymargin of profit iseliminated.
Base management fee could either be a single fee, or a sum of advisory/operating/management fee andlicensing/royaltyfee.Moreover,itisgenerallychargeablethroughoutthelifeofthecontract;however,itcouldbeeithercomputedasa “constant”percentageacrossallyears,or it couldramp-up in the initialyears,graduallystabilizingfortheremaindertermofthecontract.Thestabilizedaveragebasefeefortheglobalsamplesetis2.81%.Figure10discussesthesurveyresultspertainingtothisfeebymarketpositioning,roominventoryandageofthecontract.
3.21%
3.10%
2.59%
2.97%
2.37%
4.10%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Budget
Mid Market
Upscale
Upper Upscale
Luxury
Extended Stay
GLOBAL | Base Fee by Market Posi�oning
2.85%
2.91%
2.58%
2.63%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
GLOBAL | Base Fee by Room Inventory
2.99%
2.74%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Contracts signed
before Year 2005
Contracts signed in
or a�er Year 2005
GLOBAL | Base Fee by Age of Contract
FIGURE 10: STABILIZED BASE FEE BY MARKET POSITIONING, ROOM INVENTORY AND AGE OF CONTRACT
HVSInsight
BaseFeebyMarketPositioning:Basefeeismostlyseenfallingwith
an increase in the market positioning. Although 3.21% base fee for
budgethotels(limited-service)appearshigh,itisimportanttonotethat
unlikeluxuryandfull-servicehotels,budget/limited-serviceproperties
tendtogeneraterelativelyloweroverallrevenuesduetoaminimalfood
andbeveragecomponentandloweraverageroomrates.Assuch,these
propertieschargeacomparativelyhigherbasemanagementfeetoyield
adollaramount that isadequate tomake theoperationof thehotel
feasibleforthemanagementcompany.
BaseFeebyRoomInventory:Itisnecessarytocorrelatethedatafor
thischartwiththatillustratedformarketpositioning.Closeto50%of
thecontractsforhotelswithlessthan100roomscorrespondtobudget-
midmarketpositioning,and98%ofthecontractsforhotelswithover
500roomsrelatetoupscale-luxurypositioning.
BaseFeebyAgeofContract:Basefeeovertheyearshasgenerally
decreased. In our experience of negotiating hotel management
agreements,wehavecomeacrossbasefeetobeaslowas1.50%-1.75%
forstrategicprojectsinrecenttimes,withsomeoperatorsevenagreeing
toaramp-down–higherfeeintheinitialyearsandarelativelylowerfee
onastabilizedbasis.
Inaddition:
l Basefeetendstohaveanegativecorrelationwiththeinitialterm,i.e.shortertheinitialterm,higheristhebasefeeandviceversa.
l Moreover, if any form of financial commitment is offered by thebrand such as key money, operator minimum performanceguarantee,oranowner'spriorityreturn,thenahigherbasefeeisusuallyapplicable.
l Lastly,wegather that for large formathotels (400/500keysandabove)thathaveahighrevenuegenerationpotentialdrivenbytheaveragerate,brandscanagreetoalowerbasefeethaniscommonlyacceptable.
EXCERPT III | USA - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS | PAGE 9
EXCERPT III | USAManagement Contract Term
ClosetohalfofthecontractsintheUSAsamplesethave
aninitialtermof10yearsorlower;understandably,of
alltheregionssurveyedinthisedition,USArepresents
the shortest initial term, averaging 15 years. A key
reason behind the short contract term is the strong
presenceofsecond-tieroperatorsinthismarket,who
tend to be more flexible in negotiating relatively
favorable commercial terms for the owner than the
first-tier/branded hotel operators. Validating this is
Figure11,below,thatillustratesthelengthoftheinitial
termofamanagementcontractbythetypeofoperator
forthisregion.
20.5
11.2
- 5 10 15 20 25
Contracts signed by
First-�er Operators
Contracts signed by
Second-�er Operators
Years
USA | Ini�al Term by Type of Operator
FIGURE 11: LENGTH OF THE INITIAL TERM BY TYPE OF OPERATOR
For first-tier hotel management companies, the
lengthofthecontracttermhasadditionalimportance
because of their name recognition and high start-up
costs.Suchcompaniesareinterestedindemonstrating
a stable, long-term commitment to amarket area in
generalandapropertyinparticular,sotheywillusually
negotiate forthe longest initial termpossible.Onthe
otherhand,second-tieroperatorsaretypicallymore
willing to accept shorter agreements. However, it
shouldbenotedthatsecond-tieroperatorsencompass
a broad variety of management companies, ranging
fromsmallfirmswithseveralexecutiveemployeesto
large,highlystructuredorganizationssimilartomany
first-tierchains.Thelengthoftermthattheseoperators
agreetooftenvariesconsiderablyfromonecontractto
another. When economic downturns occur in this
market and there is an increase in lender workouts
handledby second-tiermanagement companies, it is
notunusualtosee,onaverage,six-monthtotwo-year
contract terms, which enable the lender-owner to
quickly sell the property, unencumbered by a
managementcontract,intheeventabuyerisfound.
Note:Inlinewiththeglobalsamplesetresults,thelengthofthe
initialterminUSAcontractscanbeseenincreasingwitharisein
themarketpositioningaswellasroominventory.Furthermore,
contractsthatweresignedbeforeYear2005areforanoticeably
longerdurationthanthosethatweresignedinorafterYear2005
inUSA.Whilethishasbeenageneraltrendglobally,itmayalso
havetodowiththefactthat72%ofthenewercontractsinthe
region'ssamplesetweresignedbysecond-tieroperators.
FIGURE 12: LENGTH OF THE INITIAL TERM
17.1
13.3
- 5 10 15 20 25
Contracts signed
before Year 2005
Contracts signed in
or a�er Year 2005
Years
USA | Ini�al Term by Age of Contract
9.0
13.8
17.7
20.8
- 5 10 15 20 25
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Years
USA | Ini�al Term by Room Inventory
9.0
13.5
15.4
21.7
22.4
13.5
- 5 10 15 20 25
Budget
Mid Market
Upscale
Upper Upscale
Luxury
Extended Stay
Years
USA | Ini�al Term by Market Posi�oning
23%
23%
8%
27%
9%8%
1%1%
USA | Average 15.0 Years
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Not Available
4%
4%
8%
44%
40%
SOUTH AMERICA | Commencement Year
Year 2
Year 3
Year 4
Year 5
Year 6 and a�er
PAGE 10 | EXCERPT IV | SA - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
EXCERPT IV | SAOperator Performance Test
The majority of South American contracts (81%)
includeaperformance-based terminationclause that
permitstheownertoterminatetheagreementshould
theoperatorfailthetest(s)andleaveituncured.Alarge
number of these correspond to upscale-luxury
positionedhotelassets.
In addition, likeNorthAmerica (USA andCanada), a
collectivetestrequiringtheoperatortofailboththe
budget/profit-oriented test “and” the RevPAR test is
frequentlyfoundinSouthAmericancontracts(64%).
Also, theseparate test structure isquiteuncommon
hereaswellwithjust4%ofthesamplesetofferingit.
Now, in a striking contrast to contracts from North
America,only17%ofthesurveyedcontractsthathave
abudgettesthererequiretheoperatortoattainhigher
than85%ofthebudgetedGOP/AGOP/NOI,andjust
20%withaRevPARtestrequiretheoperatortorecord
a hotel RevPAR that exceeds 85%of theweighted
averageRevPARofthedefinedcompetitivesetduring
thetestperiod;theseratiosaremuchlowerthanUSA
and Canada. In fact, most of the contracts have a
performancethresholdof85%forboththebudgetand
RevPAR tests in South America. Figure 13 presents
theseresults.
The test period is generally two consecutive years,
althoughthreeconsecutiveyears,andtwooutofevery
threeconsecutiveyearscanalsobefound.Inaddition,
the majority of South American contracts (96%)
havingaperformancetestallowtheoperatortocure
thefailureuponreceiptoftheterminationnoticefrom
theowner.Notably,84%oftheseallowtheoperatorthe
option tocure the failure thriceormoreduring the
initial termof thecontract–muchhigher thanthose
offeredbycontractsinUSAandCanada.
The survey results for the regional sample set offers
evidence for our argument that operators have a
definiteupperhandinthenegotiationsofmanagement
agreementsinSouthAmerica.Latecommencementof
theperformancetest(s),lowperformancethresholds
andanapparentlyhighnumberofcures allowedto
theoperator,make the terminationof theagreement
underthisprovisionmoreunlikelythanitalreadyis.
Note:Remarkably,only16%ofthecontractswithanoperator
performancetestprovisionhavethetestbeginninginorbefore
the fourth year – a larger number of contracts have the
commencementyearasYear5or6.Thisisincompletecontrastto
theresults fromUSAandCanada,wherethetest isapplicable
much earlier, including in the first year of operations. Also,
notably,therearenocustomizedteststructuresinthesurveyed
SouthAmericancontracts.
FIGURE 13: OPERATOR PERFORMANCE TEST
16%
16%
64%
4%
SOUTH AMERICA | Type of Performance Test
Linked to GOP/AGOP/NOI performance vs.Budget (Budget Test)
Linked to RevPAR performance vs.Compe��ve Set (RevPAR Test)
Linked to both Budget/Profit-oriented "and"RevPAR performance (Collec�ve Test)
Linked to Budget/Profit-oriented "or"RevPAR performance (Separate Test)
11%
72%
17%
SOUTH AMERICA | Thresholds - Actual vs. Budgeted (GOP/AGOP/NOI)
75%-80%
80.1%-85%
85.1%-90%
SOUTH AMERICA | Thresholds - Hotel vs. Compe��ve Set (RevPAR)
75%-80%
80.1%-85%
85.1%-90%
Above 100%
13%
67%
13%
7%
EXCERPT V | EUROPE - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS | PAGE 11
EXCERPT V | EUROPEOperator Fees
Theaverage basemanagement fee charged by the
contractssurveyedinEuropeis2.11%,lowerthanthe
globalaverageof2.81%,withjust38%ofthesampleset
charging 3.00% or more. Unlike USA and Canada,
bundlingofchargesforcentralizedservicesalongwith
thebasemanagementfeeisuncommonhere,although
instances of this fee being included in the incentive
managementfeecanbefound.
Moreover,itisimportanttomentionthatfor16%ofthe
Europeancontracts,wedonothavethelicensingand
royalty agreements that specify the remainder
componentofthebasicfeeasapercentageofthehotel's
topline,thereby,bringingdowntheregionalaverageof
thiscommercial term.Also tobenoted is thatavery
high number of contracts from the region are for
higher-positionedassetsthattendtohavealowerbase
feethanbudget-midmarkethotelsinpercentageterms.
Anowner'spriorityreturncanbefoundin44%ofthe
Europeancontractsthathavebeensurveyed.However,
dissimilar to USA, where it is defined mostly as
percentageoftheowner'sinitialandadditionalcapital
investment, in Europe the owner's priority return is
mostly expressed as an absolute monetary amount
varyingbyassetclassandpositioning,oftenarrivedat
bytakingintoconsiderationtheannualdebtserviceor
investmentmadeintheasset.
Asevident fromFigure14, a flat fee structure (often
witharamp-up) for incentivemanagement fee is the
mostpopularintheregionwith29%ofthesurveyed
contractsofferingit,followedbycustomizedstructures
thatoftenentailacombinationofflatandlinkedfees.
Only16% of the contracts subordinate the incentive
managementfeetotheowner'spriorityreturn,linking
it to theavailable cash flowof thehotel – a surprise
consideringthehighnumberofcontractsofferingan
owner's priority return. In fact, just 38% of the
contractsofferinganowner'spriorityreturn link the
incentivemanagementfeetotheavailablecashflowof
thehotel;theresteitherhaveflatfeestructure,orlink
the fee to theGOP/AGOPmarginperformanceof the
hotel,orhavecustomizedfeestructures.
FIGURE 14: TYPES OF INCENTIVE MANAGEMENT FEE STRUCTURE
29%
10%
16%
26%
19%
EUROPE Sample Set
Flat Fee
Linked to GOP/AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
Figure15,below,presentstheincentivefeerangefor
theflatandlinkedincentivefee(toGOP/AGOPmargin
performance)typesbasedontheregionalsampleset.
FIGURE 15: INCENTIVE FEE RANGE
8.49% 8.66% 8.97% 9.07% 9.07% 9.14%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6(or Stabilized)
EUROPE | Flat Incen�ve Fee Structure
7.38%8.13%
9.75% 10.00%10.75%
12.13%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
GOP/AGOPMargin lessthan 30%
Between30.1%-35%
Between35.1%-40%
Between40.1%-45%
Between45.1%-50%
Above 50%
EUROPE | Linked Incen�ve Fee Structure (GOP/AGOP Margin)
Theaverage feeof12.13%oftheGOP/AGOPof the
hotelonastabilizedbasisisthehighestforthistypeof
incentive management fee structure among all the
regionssurveyedinthisedition.
PAGE 12 | EXCERPT VI | APAC - HVS GUIDE TO HOTEL MANAGEMENT CONTRACTS
EXCERPT VI | APACControl of Operating Account
AlthoughagreaterpartoftheAPACsampleset(66%)
allowstheoperator tohave fullcontrolof thehotel's
receipt/operating/revenue account , with its
designeesbeingtheonlypersonsauthorizedtomake
withdrawals,severalotherspermittheownertohave
fullcontrolorgrantjointauthoritytobothparties.
This is significant, because APAC is the only region
where the operators appear somewhat willing to
be flexible on this clause. Nonetheless, all contracts
granting the operator full control mention certain
expenditure thresholds beyond which the operator
isrequiredtoobtaintheowner'spriorconsent.
feeandinsteadsimplymention“potentialbusinessloss
thatmaybeincurredbytheoperator”.
Approximately10% of the sample set allows for an
atwill/withoutcause terminationof theagreement
by the owner, requiring a severance payment to be
made that is commonly a multiple of the past fees
earned.
Notably, 87% of the region's contracts permitting
terminationuponhotelsaleand90%ofthecontracts
allowing atwill/without cause termination are from
India.
Toend,allcontractsthathaveaperformance-based
terminationprovisionintheAPACsamplesetdonot
seek a termination fee from the owner should a test
failureoccurandbeleftuncured.
Termination of Agreement
About 14% of the surveyed APAC contracts permit
terminationuponhotelsale,which ismarkedly lower
thantheglobalratio(32%).Allofthesecontractsseeka
termination fee on the occurance of a hotel sale,
definedeitherasamultipleoftheaveragefeesearnedby
theoperatorduringthelastfew2-3yearspriortosuch
anevent,orintheformofanabsolutemonetaryamount.
Someoperatorsrefrainfromdescribingthetermination
7%
66%
12%
APAC Sample Set
Owner Operator Both Not Available
15%
11%
64%
14%
11%
INDIA Sample Set
Owner Operator Both Not Available
14%
86%
APAC | Termina�on Upon Hotel Sale
Yes No
9%
91%
APAC | Termina�on Without Cause
Yes No
FIGURE 16: CONTROL OF RECEIPT ACCOUNT FIGURE 17: TERMINATION OF AGREEMENT
ACKNOWLEDGEMENTSFirstandforemost,weareverythankfultothevarioushotel
owners and operators who frequently shared their views
withus,enablingustopresentabalancedoutlookofcritical
negotiationelementsofahotelmanagementcontract.
Additionally,thisguideandsurveyreportisaglobalresearchdocument, which wouldn't have been possible to createwithout collaborating with various HVS offices. Weappreciatethesupportextendedbyalltheregionalexperts.
HVS.com
About HVS
HVS, the world's leading consulting and services
organization focused on the hotel, mixed-use, shared
ownership, gaming, and leisure industries, celebrated
its 35th anniversary in 2015.
Established in 1980, the company performs 4,500+
assignments each year for hotel and real estate
owners, operators, and developers worldwide. HVS
principals are regarded as the leading experts in their
respective regions of the globe.
Through a network of more than 40 offices and more
than 350 professionals, HVS provides an unparalleled
range of complementary services for the hospitality
industry. HVS.com
Superior Results through Unrivaled Hospitality
Intelligence. Everywhere.
HVS BRAND & MANAGEMENT SELECTION AND
CONTRACT NEGOTIATIONS TEAM enjoys impeccable
worldwide reputation for credibility, excellence
and thoroughness. With our global search
and negotiation resources and, the world's most
comprehensive database of f ranchise and
management agreements, our clients benefit from
local insights and international expertise.
HVS associates are available to help you find the
brand, franchise or operator that will maximize your
hotel's value.
About the Authors
ManavThadani,MRICSManav Thadani, Chairman – HVS Asia Pacific,
joined the company in 1995 in its New York
Office.HewentontostarttheIndiaoperationsin
1997andwasHVS'firstemployeeinAsia. Over
the last20years,HVSIndiahasexpandedinto
multiple verticals including Strategic Consulting, Executive
Search,MarketingCommunications,Energy&Sustainability
and Professional Skills Development. In his current role,
ManavoverseesalleightofficesacrossAsiaPacific,ensuring
that theyoperatecohesivelyandeffectively.Additionally,he
runs four conferences in the region – Hotel Investment
Conference - SouthAsia (HICSA);HotelOperations Summit
India (HOSI); Tourism, Hotel Investment & Networking
Conference (THINC) Indonesia, and Tourism, Hotel
Investment & Networking Conference (THINC) Sri Lanka.
Manav was recently the Chairman of the World Travel &
TourismCouncil-IndiaInitiative(WTTCII)[email protected]
JuieSMobar,MBAJuieSMobarisDirector-SpecialProjectswith
HVS.Shehasspenteightyearswiththecompany
startingintheConsultingandValuationdivision,
andthenmovingontoAssetManagement.Inher
currentrole,Juieisaglobalresourceforcomplex
research-based assignments and, operator search and
management contract negotiations. She co-authored the
pioneering HVS Global HotelManagement Contract Survey,
andregularlysupportsotherHVSofficeswithassignmentson
the subject. In addition, Juie assists with HVS South Asia
Conferences, and select requirements for HVS Energy &
