Hotel Owners vs. Operators

In addition to my involvement in hotel management, I engage in global collaborations with clients on various hospitality studies and owner representation endeavors. Throughout these projects, I often encounter common risks that emphasize the critical need for dependable owner representation:

• Owners and investors frequently face a challenge due to their limited understanding of hospitality operations, placing them at a disadvantage when negotiating with operators. Many investors originate from backgrounds such as real estate development or other fields, possessing minimal familiarity with the intricacies of the hospitality sector. Managing a hospitality asset involves meticulous attention to detail and adhering to specific operational and financial protocols. For those unfamiliar with the industry, navigating its complexities can resemble traversing a labyrinth.
• Usually operators employ a multi-contract strategy, integrating brand royalties, technical services and hotel management agreements in one closed loop. These interdependent contracts entail that any dispute or payment delay within one contract will have repercussions across all agreements, potentially leading to automatic termination. Consequently, this arrangement places the owner in a highly precarious position.
• Operators are raising fees, prompting owners to allocate a portion of their revenue, typically ranging from 5% to 10%, to cover expenses for the operator and brand, regardless of how well the business is doing. To breakdown these fees we can allocate fees of royalty licence fee which is usually 1.5-3% to secure the brand followed by a mandatory group marketing service fee that reach to 1.5-2% on revenue. Add to this a base management fee of 2-5%.

To tackle these issues and to enable the security of owner's interest I always recommend the following:

• Owners with no prior hospitality experience should seek expert representation from the industry, whether during the pre-contract phase, contract negotiations, or overseeing pre-opening and launch activities. Following the completion of these essential stages, an owner's representative should ideally oversee the business on the owner’s behalf for the initial 12-18 months.
• A meticulously crafted performance clause is a crucial component that should consistently be integrated into a hotel management agreement. This clause should ideally span a duration of 15 to 18 months from the hotel's opening date, allowing the operator a fair opportunity to establish market presence, cultivate customer loyalty, enhance revenue generation, achieve a competitive ADR and manage expenses effectively, and ensure stable financial performance.

In essence, the above details serve as key highlights, representing only a fraction of the extensive array of topics and legal considerations to be mindful of when interacting with an operator. Stay tuned for more!