Types of Hotel management agreements

Small independent hotels face critical decisions that impact business competitiveness and customer awareness; one such decision is to remain independent or to affiliate with a hotel chain. Many hotel owners value their independence and need only some of the brand's offerings.?

Independent hotels that want to affiliate face yet another dilemma, namely the type of affiliation that best fits their profile and needs. ?Franchising (soft brand or hard brand), marketing consortium, manchise and leasing contracts are the types of affiliation applied in the hotel industry. These contractual non-equity modes involve less financial investment and management interference than equity modes, such as full ownership & joint ventures, require greater investment and restricted management flexibility.?

Management agreement        

The hotel management contract, is historically perceived as an attractive model for both owner and operator. It allows the operator to expand significantly into different markets without being exposed to ownership and development risks while allowing the owners to enjoy maximized financial returns by outsourcing their property’s management rights to an operator in exchange for a fee.

That owner does not make operational decisions but is responsible for providing the required capital and for paying expenses and debts. The management company receives payment for its services and the owner receives the profits after deducting costs.

Manchise        

Manchising is a unique business model that’s well suited to hotel owners who are looking for more flexibility or an independent hotelier seeking the support of a well-known brand, recent trends suggest that this could be a win-win proposal for both parties. On one hand it provides the operators with further growth opportunities in the region while hotel owners acquire the know-how and experience in running hotels for a limited number of years without being tied to continuous costs and limitations of a management contract. Manchising provides the owners more control over their property and potentially lower fees after a certain number of years, the cost of building capable management teams and the potential risks of underperformance under a franchise operating model remain important factors to be considered.

Typically, a manchise agreement is consistent with the term of a franchise agreement. If the owner elects to convert to a franchise, a third-party manager is brought in to replace the brand manager. In this case, both the brand and owner win as the brand can maintain its distribution and royalty fee stream while the owner benefits from the uninterrupted brand affiliation and minimal costs to replace the manager.

Franchise Soft v Hard brand
        

Hotel franchising is an arrangement between a business owner in which hotel property is operated under a hotel chain franchise agreement.?The franchisor's brand, distribution channels and intellectual property are used by the business owner – freeholder (property owner) or tenant – to operate the property while retaining the risks, liabilities and control of the property.

The hotel business owner (franchisee) signs an agreement with a hotel brand (franchisor) to operate the property under a franchise agreement in exchange for a franchise fee.?Hotel owners or tenants set up their own team or entitle an independent operator to run their hotel business, with whom they enter into an operating agreement. Franchising?is simply a method of distribution whereby one entity that has developed a particular pattern or format for doing business. The franchiser usually provides a strong brand name, national and international central reservation system, management training programs, advanced technology, and central purchasing services.

Hard Brand

refers to a hotel that has a franchise agreement with one of the major franchise companies such as Hilton, Marriott, or Hyatt and bare the name of that brand. A self-managed franchise. In this case, the owner obtains a license or franchise to operate under the brand, but manages the property itself. The major brands establish standards, which are intended to be consistent across all operations so that guests are better assured that they will receive the level of service and amenities they desire and expect, wherever the property is located. Along with standards, brands provide operating manuals, which are intended to provide a "turnkey" approach to the operation of the property.?Importantly, brands provide services that drive occupancy, such as reservations systems, websites, brand marketing, loyalty programs, and quality control.

While they are often cited as important reasons to affiliate with a brand, they can be costly to establish and maintain, and the direct benefit to the property is not always apparent. ?Brands charge a variety of fees - management, royalty or license fees, loyalty program fees, marketing fees, reservations fees, training fees - the list can seem endless. Moreover, many of the fees are unrelated to the brand's actual performance. Base management or license fees and marketing fees are paid on gross revenues, regardless of the source of the revenues.?

Soft Brands

owned by the major Hotel Chains (eg Hilton and Marriott) but do not necessarily carry the brand’s name. Examples of Franchise Soft Brands include: Autograph Collection, Design Hotels and Luxury Collection (Marriott), LXR and Curio Collection (Hilton), Alila Hotels & Resorts (Hyatt). Many of these Independent Hotels work with Independent Soft Brands such as Leading Hotels of the World, Relais & Chateaux, Belmond Hotels amongst others.

Hotels affiliated with the soft brand?benefit?from reservation and marketing platforms of a large hotel company, and, at the same time, maintain control of business strategy, yield management, amenity offering, and creative design elements. This affiliation model fits hotel owners who do not want to be constrained by strict standards of the traditional brand but want to benefit from a large hotel company's sales, marketing, loyalty, and distribution networks, technology systems, and other resources

Among the?drawbacks?of the soft brands, hotel quality standards and brand initiatives reduce the autonomy of the hotel owner, costly loyalty fee per booking, mixed return results from loyalty programs, benefits from reduced OTA commissions could be reduced by new fees that hotel must pay to the brand on every booking, The cost of affiliation is high even relative to traditional franchise and there are brand recognition difficulties as consumers are not well familiar with soft brand collections

Lease agreement        

A hotel lease is an agreement between the owner of a hotel property (landlord) and the hotel operator (tenant) where the operator rents a hotel property and uses it to run its hotel business. A hotel lease typically has a term of 20 years or longer for a fixed rental rate. The landlord is usually responsible for property maintenance while the tenant is responsible for management of the hotel business and bears all the operational risk.

Hotel brands tend to avoid leasing property directly and instead enter into a franchise agreement with the tenants. Common issues for negotiation of property leases are build-out/construction issues, where the premises are either turn-key or built out by the tenant, as well as capital expenditures and repairs.?Either the landlord or the tenant owns the furniture and equipment and bears the cost of insurance for business interruption coverage and indemnity for personal injury or negligence claims

Consortium        

Consortium can be groups of independent travel agencies that come together under one umbrella, Franchise groups or wholly owned chains. They often negotiate preferred rates with hotels for the benefits of their corporate clients. The goal of a travel consortium is to create relationships between travel agencies, vendors, and other relevant entities.

Why You Need to Join Consortia and TMCs?

• Increased visibility for your property via exposure through the consortia’s marketing communications and rate plans in the GDS.
• Greater booking potential as travel agents first look at the selected hotels in the consortia programme. If the rates in that are more competitive than the best available rate (BAR) in the GDS, it’s their preferred option.
• Increased revenue via exposure to travel agents who may book at a higher average daily rate. Also, these typically are business travellers who are high spenders, and stay longer.

Hotels are complicated investments and therefore selecting an appropriate hotel agreement for a property requires exhaustive research and investigation by an investor. The choice of an operator as well as the hotel operating agreement has a significant impact on the cashflow and the potential value of the property. Evaluating the most suitable hotel operating model for a hotel investment is crucial to ensure that the owner’s return is optimized. There is no one-model that fits all and therefore hotel owners should investigate, evaluate, negotiate, and assess the most suitable operating model and brand that will allow them to successfully operate in the ever-changing hospitality market.??