AUGUST 2014
EXCERPTS
USA | EUROPE | APAC
HVS HOTEL MANAGEMENT
CONTRACT SURVEY
Manav Thadani, MRICS
Chairman – Asia Pacific
Juie S. Mobar
Associate Director – Special Projects
HVS.com
HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA
ForewordbyJanA.deRoos
WhydoesthisSurveyaddtoourUnderstandingoftheHotelIndustry?
Neverhastherebeenamorediversesetofhotelmanagementagreementsinuse.Managementagreementswereoriginallyborn
ofadesiretoallowfinancialorpassiveownerstoparticipateintheownershipofhotelrealestatewhilecontractingwith
brandedmanagerstooperatethehotelontheowners'behalf.Thisdesirehasevolvedintoaverysophisticatedmarketinwhich
ownersoftherealpropertycontractwithownersofintellectualcapitalovertheuse,branding,andlong-termcontrolofhotel
assets.Itisclearthattwofundamentalforcesdrivemanagementcontractnegotiation:theexperiencegainedfromthe
recenteconomicstressesappliedtotheentireindustry,andmattersspecifictoagivenhotelinagivenlocation.Thecurrentand
nextgenerationofcontractsmustanticipatebothforces.
Today'shotelownersincluderealestateinvestmenttrusts(REITs),realestatehedgefunds,realestateprivateequityfunds,
sovereign wealth funds, life insurance companies, pension funds and private wealth clients. Operators include global
corporationswithmultiplebrandsforeachmarket,globalsingle-brandcompanies,andregionaloperators(bothwithand
withoutbrands).Whiletherelativestrengthsofthepartieshaveagreatinfluenceoncontractnegotiations,itisnot
necessarilythecasethatthepartywiththegreatestmarketcapitalisationhasthegreatestpowerinanygivenhotelat
anygiventime.Withsomanypotentialoutcomes,howcanoneseethe“bigpicture”andunderstandacontract'sstrategic
levers?
Fortunately,aworklikethe“HVSHotelManagementContractSurvey”byManavThadaniandJuieMobarprovidesanexcellent
and invaluable survey that helps us understand the terms and language in contemporary hotel management agreements
(HMAs).Theirsisthefirstsurveywithatrulyglobalperspectiveonthestructureofmanagementcontracts.
TheauthorspresentandaddresstheuniquefeaturesofHMAsinadirectandcandidwayprovidingowners,investorsand
lenderswithauniqueperspectivethatonlycomesfromhands-onexperienceinthehotelsectoroveralongperiodoftime.This
depthofknowledgecomesfromaconsultingandadvisoryteamthatworkssolelyonhospitalityassets.Theauthorsprovide
insightintothefiveprincipalsectionsofamanagementcontract:termandrenewals,operatormanagementfees,performance
test,budgetandexpenditures,andterminationofthecontractbyowner.
Theauthors'objectiveofprovidinginsightintocontemporaryHMApracticeisfullyrealisedinthisimportantwork.Inaddition,
bymakingthisavailableforpurchaseviatheHVSBookstore,theyhavecommittedtoeducatingabroadaudiencewithrelevant
andcurrentpractice.IcommendThadaniandMobarfortheirexcellentandinvaluablesurvey.
JanA.deRoos
Ithaca,NewYork
July28,2014
JanA.deRoosistheHVSProfessorofHotelFinanceandRealEstateatCornellUniversity'sSchoolofHotelAdministration.Heiscoauthor of The Negotiation and Administration of Hotel Management Contracts, long considered to be the industry's leading
referenceonhotelmanagementagreements.Thecurrentfourthedition(2009),co-authoredwithJamesEyster,isavailableat:
general_books@cornell.eduor(607)255-2933.
PAGE 2 | EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
HVSHotelManagementContractSurvey(HMCS)isanextensivecollationandcomparisonofkeytermsand
clausesofmanagementcontractsacrosstheUnitedStatesofAmerica,EuropeandtheAsiaPacificregion.
Whilethefullreportpresentsthecriticalsurveyresultsinentirety,thisdocumentprovidesanintroduction
andsomeexcerptsofthesurvey.
Survey Methodology
DataCompilation:Datacollectionforthissurveywas
implementedusingacombinationofdifferentways.We
looked at contracts from the HVS global database,
dispatchedanonlineself-reportingquestionnaire,and
held discussions with hotels owners as well as
operators.Eventually,theuniversalsurveysampleset
comprised 236 management contracts (57,055
rooms);regionalbreakdownisdepictedinFigure1.
Data Analysis: Primary independent variables
(defined as inputs or causes) chosen for the data
analysis are Market Positioning, Room Inventory and
AgeoftheContract,ashighlightedinFigure2.Here,itis
importanttonotethatthesurveycapturedinformation
onadditionalindependentvariables(Figure3),which
havebeendiscussedinthefullreporttoexplainresults
“only”whereapplicable.
ReportPresentation:Thefullsurveyreportconsists
of six major sections, which are recognised to be
significantareasforowner-operatornegotiations.
Figure 1: Survey Sample Set
Region
Figure 4: Survey Sections and Report Presentation
Contracts
Total Rooms Represented
USA
80
22,917
Europe
76
19,232
Section
APAC
80
14,906
I
Management
Contract Term
236
57,055
• Length of the Initial Term
• Number of Renewals/Extensions
• Length of the Renewed/Extended Term
• Provision for Area of Protection/
Restricted Area/Non-Compete Area
II
Operator Fees
• Initiation/Joining/Commitment Fee
• Technical Services Fee and
Pre-Opening Fee
• Base Management Fee
• Owner's Priority
• Incentive Management Fee
• Reservation, Marketing, Loyalty
Program and Training Fees
III
Operator
Performance
Test
• Commencement Year
• Test Period
• Type of Test (GOP/RevPAR/Both)
• Performance Thresholds
• Provision for Operator to Cure
IV
Budget and
Expenditure
• FF&E Reserve Contribution
• Control of Receipt/Operating/Revenue
Account
• Expenditure Thresholds
V
Contract
Termination
by Owner
• Operator Non-Performance
(No Cure Made)
• Upon Hotel Sale
• Without Cause
• Termination Fee Payable to the Operator
VI
Others
• Operator Key Money
• Senior Hire
Universal
Principal
Discussion
Figure 2: Primary Independent Variables
Independent Variable
Parameters
Market Positioning
Budget
Mid Market
Upscale
Upper Upscale
Luxury
Extended Stay
Room Inventory
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Age of the Contract
Before Year 2005
In or After Year 2005
Figure 3: Additional Independent Variables
Other Variables
Parameters
Management
Brand Managed
Franchised
Type of Property
New
Existing
Year of Property Opening
Before Year 2005
In or After Year 2005
Location of the Property
By City
By Country
Key Areas
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 3
Hotel Companies Represented In This Survey
Totally, 38 branded hotel companies have been represented in this survey, in addition to a few independent
operatorsandseveralthird-partymanagementcompanies.
Figure 5: Hotel Companies (Branded) Represented in the Survey
Accor
Aman Resorts
Americas Best Value Inn (Vantage)
Banyan Tree Hotels and Resorts
Best Western
Caesars Entertainment
Carlson Rezidor
Choice Hotels
Club Méditerranée
Concept Hospitality
Dusit Hotels and Resorts
Fairmont Rafes Hotels International
Four Seasons Hotels and Resorts
Fortune Hotels and Resorts (ITC)
Hilton Worldwide
Hyatt Hotels Corporation
InterContinental Hotels Group
Jumeirah Group
Kempinski Hotels
La Quinta Inns and Suites
Louvre Hotels
Mandarin Oriental Hotel Group
Marriott International
Minor Hotel Group
Moevenpick Hotels and Resorts
Omni Hotels and Resorts
One&Only Luxury Resorts
Peninsula Hotels (HSH Group)
Premier Inn (Whitbread)
Rosewood Hotels and Resorts
Sarovar Hotels and Resorts
Shangri-La Hotels and Resorts
Six Senses Hotels, Resorts and Spas
Starwood Hotels and Resorts
Taj Group
The Leela Palaces, Hotels and Resorts
Trump International
Wyndham Worldwide
Report Purchase And Ordering Instructions
Thefullsurveyreportcomprisingaround35pagescanbepurchasedforUS$2,000.Toprocurethesame,please
logontotheHVSBookstore.ThereportwillbeavailablebothinPDF(softcopy)aswellasinprint(hardcopy).
Thepurchaserwillbeallowedtochoosethepreferredformat,postwhichapersonalisedcopyofthereportwill
besentacross.
Fororderinginstructionsoranyotherassistance,pleasecontact:
JuieS.Mobar
AssociateDirector–SpecialProjects
HVS
Email:jmobar@hvs.com
Dataconfidentialityhasbeenstrictlymaintainedthroughoutthissurvey,withresultsinthereportbeing
presentedonlyinaggregateandnoindividualcontractdetailsbeingrevealed.
PAGE 4 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
EXCERPT I
Figure 6: Length Of The Initial Term
Universal Sample Set
Length of the Initial Term
Avg. 18.3 years
3%
The initial term of a management contract for a
new/proposed hotel typically commences from the
Effective Date (date of execution of the management
agreement) and continues until the expiration of a
“specified”numberofyearsaftertheOpeningDate.In
thecaseofexistinghotels,theinitialtermisgenerally
calculatedfromtheEffectiveDateuntiltheexpirationof
a“specified”numberofyears.Theaveragelengthof
theinitialtermfortheuniversalsamplesetis18.3
years.
It is common understanding that operators prefer a
longercontracttermwithautomaticrenewaloptions
(orthoseexcercisablebytheoperator)citingtheneed
forstability,toprotecttheirbrandimageaswellasto
obtainthedesiredreturnontheirinvestment.Onthe
otherhand,ownerspreferashorterinitialtermwith
multiplerenewaloptionsonmutualconsent,seeking
flexibility.Inadditiontowhichsideofthetableyou
are on, the length of the initial term is also
dependent on the region of operation (Figure 6),
hotel’smarketpositioning,roominventoryandthe
yearofsigningthecontract,amongothers.
The average length of the initial term for existing
hotels(50%oftheuniversalsampleset)isfoundtobe
17.7 years vis-a-vis new properties (48% of the
universalsampleset)thathavealongeraveragetermof
19.1 years. Thisdata is particularly important when
oneconsidersthesurveyresultsbyregioninFigure6.
USA,amaturedhotelmarketwith73%ofthesub-set
beingrepresentedbyexistinghotels,hascontractswith
a shorter initial term than those in the APAC region,
which is a developing/emerging hotel market with
74%ofthesub-setcorrespondingtonewhotels.
Additionally,ithasbeenobservedthatinrecenttimes,
increased competition owing to more number of
playersindeveloping/emerginghotelmarkets,besides
the rising awareness amongst hotel owners, have
resultedinmanagementcontractswithashorterinitial
term(safeguardingtheinterestofbothpartiesshould
disappointingmarketconditionsoccur).
Thefullsurveyreportprovidesdetailsonthelengthofthe
initialtermbyhotelmarketpositioning,roominventory
andyearofsigningthecontract,besideselaboratingon
renewal/extensions and area of protection/restricted
area/non-competearea.
15%
10%
Less than 10 years
18%
11%
10 years
15 years
16%
27%
20 years
25 years
30 years
More than 30 years
USA Sub-Set
Avg. 15.6 years
2%
9%
9%
25%
Less than 10 years
10 years
15 years
28%
20%
20 years
25 years
7%
30 years
More than 30 years
Europe Sub-Set
Avg. 21.1 years
1% 2%
1%
Less than 10 years
11%
26%
10 years
21%
15 years
20 years
12%
25 years
26%
30 years
More than 30 years
Not Available
APAC Sub-Set
Avg. 18 .3 years
4% 4%
10%
12%
Less than 10 years
24%
10 years
15 years
20 years
26%
20%
25 years
30 years
More than 30 years
Region:InUSA,theoperatorsappearmorecomfortablewitha
shorter initial term, with 25% of the contracts offering less
than10years.However,incaseofAPAC,relativelyadeveloping
hotelmarket,thiscarveisonly4%.Also,aninitialtermof20
yearsismostcommonacrossallregions.
Note: 87% of the Europe sub-set comprises contracts for
upscale/upper upscale/luxury hotels, which could be the
reasonbehindfewercontractsofferingashorterinitialterm.
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 5
EXCERPT II
Figure 7: Base Management Fee By Room Inventory
5.00%
Base Fee and Incentive Fee together make up the
ManagementFeeschargedbytheoperatorinexchange
forperformingthedutiesspecifiedinthecontract.
4.00%
Base Management Fee: The base fee is usually
calculated as a percentage of the hotel’s Gross
OperatingRevenue.Itcouldeitherbeasinglefee,ora
sum of licensing/royalty fee and operating fee.
Moreover, the base fee is generally chargeable
throughoutthelifeofthecontract;however,itcouldbe
eithercomputedasa“constant”percentageacrossall
years,oritcouldriseovertheinitialyears,gradually
stabilisingfortheremaindertermofthecontract.The
scaledupaveragebasefeefortheuniversalsample
setis2.65%(Year6onwards).
1.00%
3.00%
0.00%
2.76%
Less than 100
rooms
100 - 299
rooms
2.42%
2.30%
300 - 500
rooms
Above 500
rooms
USA Sub-Set
6.00%
5.00%
4.30%
3.68%
4.00%
3.41%
2.77%
3.00%
2.00%
1.00%
0.00%
Less than 100
rooms
100 - 299
rooms
300 - 500
rooms
Above 500
rooms
Europe Sub-Set
6.00%
5.00%
4.00%
3.00%
2.00%
1.71%
2.08%
2.20%
1.54%
1.00%
0.00%
Thefullsurveyreportfeaturesexhaustiveinformationon
the Base Fee highlighting how it varies by market
positioning,roominventoryandageofthecontract,in
additiontorelevantdetailsontheotheroperatorfees.
However, exceptions to linking this fee to GOP/AGOP
can depend on the owner-operator negotiations and
asset-specificconsiderations.
2.64%
2.00%
Figure7discussesthesurveyresultspertainingtothis
feebyroominventory.Thefollowinginformationmust
beborneinmindwhilereviewingthisfigure–(i)24%
oftheEuropeancontractsdonotprovidecomplete
detailsonthebasefee,loweringtheaverage,aswedo
nothavetheLicensing/Royaltyagreementsforthese;
(ii)10%oftheAPACcontractsdonotchargebasefee
separately. They instead charge a higher incentive
managementfee,whichisinclusiveofthebasefee;and
(iii)overall,thebasefeeforexistinghotels(2.86%)is
foundtobehigherthanthatfornewhotels(2.42%).
Incentive Management Fee: In addition to the base
fee,anoperatorusuallyreceivesanincentivefee,which
islinkedtothehotel’soperatingprofit.Therefore,while
theformermotivatestheoperatortofocusonthetopline, the latter ensures that there is an incentive
towardscontrollingexpensesaswell.Mostoperators
prefer linking this fee to either the Gross Operating
Profit (GOP) or the Adjusted GOP (AGOP, which is
inclusive of the base fee and also known as Income
BeforeFixedCharges).Expensesbeyondthislevelina
P&L (up to the EBIDTA line item per the Uniform
SystemofAccountsfortheLodgingIndustry),areFixed
CostspertainingtoRent,PropertyInsurance,Property
TaxandReserveforReplacement,whicharearguably
beyondthecontroloftheOperator.
Universal Sample Set
6.00%
Management Fees
Less than 100
rooms
100 - 299
rooms
300 - 500
rooms
Above 500
rooms
APAC Sub-Set
6.00%
5.00%
4.00%
3.00%
2.20%
2.42%
Less than 100
rooms
100 - 299
rooms
2.00%
1.81%
2.00%
300 - 500
rooms
Above 500
rooms
1.00%
0.00%
RoomInventory:Itisimportanttocorrelatethedatainthis
figurewithhotelmarketpositioning.The<100roomsgroupin
theUSAsub-setismostly(90%)representedbybudget/mid
market hotels that tend to have a higher base fee than
upscale/luxuryhotels.Thesituationisreversedinthecaseof
theEuropesub-setwiththisinventorygroupcorrespondingto
only upscale/upper upscale/luxury hotels. As for the APAC
contracts,theytogetherrepresentanearequalmixoflower
andhigherrangesofpositioning.
On the other hand, 95% of the > 500 rooms group for the
universalsamplesetrelatestoupscale/luxuryhotels.
PAGE 6 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
In this survey, contracts are seen having different
incentive fee structures. Broadly, these can be
identifiedasunder:
•
FlatFeeStructure:Incentivefeeis expressedasa
percentage of the annual operating profit (defined
differentlyacrosscontracts).Thispercentage could
either remain constant or could scale upwards
throughthetermofthecontract–lowerintheinitial
years and peaking from Year 5 or 6 onwards. For
example, Operating Years 1-4 could have an
incentivefeeof6%,andfortheremainderoftheterm
itcouldequal8%.
•
Linked to the GOP/AGOP performance of the
Hotel:Incentivefeeisdefinedasapercentageofthe
annual operating profit (defined differently across
contracts), with it being dependent on the predefinedrangesofGOP/AGOPMargin.Forexample,
incentive fee could equal 8% of GOP/AGOP, if the
hotelachievesaGOP/AGOPMarginbetween35%40%; and it could equal 10% of GOP/AGOP for a
Margin>40%.
•
LinkedtoAvailableCashFlowoftheHotel:Where
applicable,IncentiveFeeistypicallysubordinatedto
theOwner’sPriority(mostcontractsinthissurvey
offeringthistypeofi ncentive fee structure also
provideforanowner’spriority),with“AvailableCash
Flow”beingdefineddifferentlyineachcontract.
•
Others: Thistype is represented by contracts that
either have a combination of Flat and Linked Fee
structuresorpresentaverycustomisedcalculation
oftheincentivefee.Forexample,incentivefeecould
equal2%ofGrossRevenuesor20%oftheAvailable
CashFlow,whicheveristhelesserofthetwo.
Figure 8 depicts the types of incentive fee structures
prevailingintheuniversalandregionalsamplesets.
Figure 8: Types Of Incentive Fee Structures
Universal Sample Set
17%
Linked to GOP Performance
16%
7%
7%
25%
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen ve Fee/No Details
USA Sub-Set
10%
26%
Flat Fee
Linked to Available Cash Flow
8%
56%
Others
No Incen ve Fee/No Details
Europe Sub-Set
20%
Flat Fee
30%
Linked to GOP Performance
3%
8%
25%
14%
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen ve Fee/No Details
APAC Sub-Set
16%
Flat Fee
6%
45%
3%
Linked to GOP Performance
Linked to AGOP Performance
13%
Thefullsurveyreportprovidescomprehensivedataon
owner'spriorityinadditiontodiscussingtheincentive
feerangesacrossthethreedifferentfeestructures.
Flat Fee
28%
Linked to Available Cash Flow
17%
Others
No Incen ve Fee/No Details
IncentiveFeeStructure:Notably,theflatfeestructurealong
withlinkingtheincentivefeetoGOP/AGOPMarginaremost
prevalentintheAPACregion,whileitismorecustomaryinUSA
to link the incentive fee to the hotel's available cash flow.
Consideringthattheprovisionforanowner'spriorityisnewto
theAPACregion,itisnotsurprisingthattheonlytwocontracts
inthe subjectsub-setofferinganincentivefeelinkedtothe
hotel'savailablecashflowweresignedasrecentlyasin2012.
European contracts, in contrast, have the maximum
customised calculations for incentive fee among the three
regions.
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 7
About HVS
About the Authors
HVS is the world's leading consulting and services organisation
focused on the hotel, mixed-use, shared ownership, gaming, and
leisure industries. Established in 1980, the company performs 4500+
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 30 offices and 450 professionals, HVS provides
an unparalleled range of complementary services for the hospitality
industry. HVS.com
Manav Thadani, MRICS,
Chairman,AsiaPacific,HVS
founded the New Delhi
officein1997.Heisactively
i n v o l v e d i n o p e r a t o r
s e a r c h / m a n a g e m e n t
contract negotiations and
providesstrategicadvicetokeyclients.He
additionally serves as a mentor to other
HVSverticalsintheAPACregion,andisthe
global head of HVS Sustainability.
Moreover, Manav oversees the planning
and implementation of the regional HVS
conferences, including Hotel Investment
Conference–SouthAsia(HICSA);Tourism,
H o t e l I n v e s t m e n t & N e t w o r k i n g
Conference (THINC) Indonesia; and the
China Hotel Investment Conference
(CHIC). On a personal level, Manav cofoundedSAMHIin2011,aleadingIndian
hotel investment and development firm
withfocusonownershipofbrandedhotels
in the mid-scale/economy segments
acrosskeycities.
mthadani@hvs.com
Superior Results through Unrivalled Hospitality Intelligence.
Everywhere.
HVS Consulting & Valuation enjoys impeccable worldwide
reputation for credibility, excellence and thoroughness. With offices
strategically located throughout North and South America, Asia,
Europe and the Middle East, our clients benefit from local insights
and international expertise.
HVS.com
Juie S. Mobar is Associate
Director - Special Projects
withHVS'NewDelhioffice.
Shehasspentfiveyearswith
the company starting as a
Consulting & Valuation
Analyst . In addition to
having worked on feasibility studies,
v a l u a t i o n s , m a r k e t s t u d i e s a n d
operational audits in the past, Juie has
beenactivelyinvolvedinoperatorsearch
and management contract negotiations,
research-based assignments and select
w o r k f o r H V S S u s t a i n a b i l i t y. S h e
completed her Management Trainee
ProgramwiththeTajGroupin2006,and
holds a BA (Hon) in Hotel Management
from the Institute of Hotel Management
Aurangabad (University of Huddersfield,
U K ) a n d B a c h e l o r s i n B u s i n e s s
A d m i n i s t ra t i o n f ro m M a ra t hwa d a
University.
jmobar@hvs.com
HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA