HVS.com HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA
HVS HOTEL MANAGEMENT CONTRACT SURVEY
Manav Thadani, MRICS
Chairman – Asia Pacific
Juie S. MobarAssociate Director – Special Projects
AUGUST 2014
EXCERPTSUSA | EUROPE | APAC
PAGE 2 | EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
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 thathelpsusunderstand the termsand language in contemporaryhotelmanagement 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.deRoosIthaca,NewYorkJuly28,2014
JanA.deRoosistheHVSProfessorofHotelFinanceandRealEstateatCornellUniversity'sSchoolofHotelAdministration.Heisco-
author ofTheNegotiationandAdministrationofHotelManagementContracts, long considered to be the industry's leading
referenceonhotelmanagementagreements.Thecurrentfourthedition(2009),co-authoredwithJamesEyster,isavailableat:
[email protected](607)255-2933.
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 3
Figure 1: Survey Sample Set
Figure 2: Primary Independent Variables
Figure 3: Additional Independent Variables
Figure 4: Survey Sections and Report PresentationRegion Contracts Total Rooms Represented
USA 80 22,917
Europe 76 19,232
APAC 80 14,906
Universal 236 57,055
Independent Variable
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
Parameters
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
SectionPrincipal Discussion Key Areas
I Management Contract Term
• 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
III Operator Performance Test
IV Budget and Expenditure
V Contract Termination by Owner
VI Others
• 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
• Commencement Year
• Test Period
• Type of Test (GOP/RevPAR/Both)
• Performance Thresholds
• Provision for Operator to Cure
• FF&E Reserve Contribution
• Control of Receipt/Operating/Revenue
Account
• Expenditure Thresholds
• Operator Non-Performance
(No Cure Made)
• Upon Hotel Sale
• Without Cause
• Termination Fee Payable to the Operator
• Operator Key Money
• Senior Hire
HVSHotelManagementContractSurvey(HMCS)isanextensivecollationandcomparisonofkeytermsandclausesofmanagementcontractsacrosstheUnitedStatesofAmerica,EuropeandtheAsiaPacificregion.Whilethefullreportpresentsthecriticalsurveyresultsinentirety,thisdocumentprovidesanintroductionandsomeexcerptsofthesurvey.
Data Analysis: Primary independent variables(defined as inputs or causes) chosen for the dataanalysis areMarket Positioning, Room Inventory andAgeoftheContract,ashighlightedinFigure2.Here,itisimportanttonotethatthesurveycapturedinformationonadditionalindependentvariables(Figure3),whichhavebeendiscussedinthefullreporttoexplainresults“only”whereapplicable.
ReportPresentation:Thefullsurveyreportconsistsof six major sections, which are recognised to besignificantareasforowner-operatornegotiations.
Survey Methodology
DataCompilation:Datacollectionforthissurveywasimplementedusingacombinationofdifferentways.Welooked at contracts from the HVS global database,dispatchedanonlineself-reportingquestionnaire,andheld discussions with hotels owners as well asoperators.Eventually,theuniversalsurveysamplesetcomprised 236 management contracts (57,055rooms);regionalbreakdownisdepictedinFigure1.
PAGE 4 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
Hotel Companies Represented In This Survey
Totally,38 branded hotel companies have been represented in this survey, in addition to a few independentoperatorsandseveralthird-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 Rafes 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,pleaselogontothe ThereportwillbeavailablebothinPDF(softcopy)aswellasinprint(hardcopy).HVSBookstore.Thepurchaserwillbeallowedtochoosethepreferredformat,postwhichapersonalisedcopyofthereportwillbesentacross.
Fororderinginstructionsoranyotherassistance,pleasecontact:
JuieS.MobarAssociateDirector–SpecialProjectsHVSEmail:[email protected]
Dataconfidentialityhasbeenstrictlymaintainedthroughoutthissurvey,withresultsinthereportbeingpresentedonlyinaggregateandnoindividualcontractdetailsbeingrevealed.
EXCERPT I
Length of the Initial Term
The initial term of a management contract for anew/proposed hotel typically commences from theEffectiveDate (date of executionof themanagementagreement) and continues until the expiration of a“specified”numberofyearsaftertheOpeningDate.Inthecaseofexistinghotels,theinitialtermisgenerallycalculatedfromtheEffectiveDateuntiltheexpirationofa“specified”numberofyears.Theaveragelengthoftheinitialtermfortheuniversalsamplesetis18.3years.
It is common understanding that operators prefer alongercontracttermwithautomaticrenewaloptions(orthoseexcercisablebytheoperator)citingtheneedforstability,toprotecttheirbrandimageaswellastoobtainthedesiredreturnontheirinvestment.Ontheotherhand,ownerspreferashorterinitialtermwithmultiplerenewaloptionsonmutualconsent,seekingflexibility.Inadditiontowhichsideofthetableyouare on, the length of the initial term is alsodependent on the region of operation (Figure 6),hotel’smarketpositioning,roominventoryandtheyearofsigningthecontract,amongothers.
The average length of the initial term for existinghotels(50%oftheuniversalsampleset)isfoundtobe17.7 years vis-a-vis new properties (48% of theuniversalsampleset)thathavealongeraveragetermof19.1years.Thisdata isparticularly importantwhenoneconsidersthesurveyresultsbyregioninFigure6.USA,amaturedhotelmarketwith73%ofthesub-setbeingrepresentedbyexistinghotels,hascontractswitha shorter initial term than those in theAPAC region,which is a developing/emerging hotel market with74%ofthesub-setcorrespondingtonewhotels.
Additionally,ithasbeenobservedthatinrecenttimes,increased competition owing to more number ofplayersindeveloping/emerginghotelmarkets,besidesthe rising awareness amongst hotel owners, haveresultedinmanagementcontractswithashorterinitialterm(safeguardingtheinterestofbothpartiesshoulddisappointingmarketconditionsoccur).
Thefullsurveyreportprovidesdetailsonthelengthoftheinitialtermbyhotelmarketpositioning,roominventoryandyearofsigningthecontract,besideselaboratingonrenewal/extensions and area of protection/restrictedarea/non-competearea.
Figure 6: Length Of The Initial Term
25%
20%
7%
28%
9%9%
2%USA Sub-Set
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 15.6 years
Europe Sub-Set
2%
11%
21%
26%
12%
26%
1%1%
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Not Available
Avg. 21.1 years
4%
24%
20%26%
12%
10%
4%
APAC Sub-Set
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 18 .3 years
Region:InUSA,theoperatorsappearmorecomfortablewithashorter initial term,with 25%of the contracts offering lessthan10years.However,incaseofAPAC,relativelyadevelopinghotelmarket,thiscarveisonly4%.Also,aninitialtermof20yearsismostcommonacrossallregions.
Note: 87% of the Europe sub-set comprises contracts forupscale/upper upscale/luxury hotels, which could be thereasonbehindfewercontractsofferingashorterinitialterm.
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 5
Universal Sample Set
10%
18%
16%27%
11%
15%
3%
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 18.3 years
PAGE 6 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
Figure 7: Base Management Fee By Room Inventory
RoomInventory:Itisimportanttocorrelatethedatainthisfigurewithhotelmarketpositioning.The<100roomsgroupintheUSAsub-setismostly(90%)representedbybudget/midmarket hotels that tend to have a higher base fee thanupscale/luxuryhotels.ThesituationisreversedinthecaseoftheEuropesub-setwiththisinventorygroupcorrespondingtoonly upscale/upper upscale/luxury hotels. As for the APACcontracts,theytogetherrepresentanearequalmixoflowerandhigherrangesofpositioning.
On the otherhand,95%of the>500 roomsgroup for theuniversalsamplesetrelatestoupscale/luxuryhotels.
2.64% 2.76%2.42% 2.30%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Universal Sample Set
2.20% 2.42%
1.81% 2.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00% APAC Sub-Set
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
1.71%2.08% 2.20%
1.54%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Europe Sub-Set
4.30%
3.68%3.41%
2.77%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
USA Sub-Set
EXCERPT II
Management Fees
Base Fee and Incentive Fee together make up theManagementFeeschargedbytheoperatorinexchangeforperformingthedutiesspecifiedinthecontract.
Base Management Fee: The base fee is usuallycalculated as a percentage of the hotel’s GrossOperatingRevenue.Itcouldeitherbeasinglefee,orasum of licensing/royalty fee and operating fee.Moreover, the base fee is generally chargeablethroughoutthelifeofthecontract;however,itcouldbeeithercomputedasa“constant”percentageacrossallyears,oritcouldriseovertheinitialyears,graduallystabilisingfortheremaindertermofthecontract.Thescaledupaveragebasefeefortheuniversalsamplesetis2.65%(Year6onwards).
Figure7discussesthesurveyresultspertainingtothisfeebyroominventory.Thefollowinginformationmustbeborneinmindwhilereviewingthisfigure–(i)24%oftheEuropeancontractsdonotprovidecompletedetailsonthebasefee,loweringtheaverage,aswedonothavetheLicensing/Royaltyagreementsforthese;(ii)10%oftheAPACcontractsdonotchargebasefeeseparately. They instead charge a higher incentivemanagementfee,whichisinclusiveofthebasefee;and(iii)overall,thebasefeeforexistinghotels(2.86%)isfoundtobehigherthanthatfornewhotels(2.42%).
Thefullsurveyreportfeaturesexhaustiveinformationonthe Base Fee highlighting how it varies by marketpositioning,roominventoryandageofthecontract,inadditiontorelevantdetailsontheotheroperatorfees.
Incentive Management Fee: Inaddition to thebasefee,anoperatorusuallyreceivesanincentivefee,whichislinkedtothehotel’soperatingprofit.Therefore,whiletheformermotivatestheoperatortofocusonthetop-line, the latter ensures that there is an incentivetowardscontrollingexpensesaswell.Mostoperatorsprefer linking this fee to either the Gross OperatingProfit (GOP) or the Adjusted GOP (AGOP, which isinclusive of the base fee and also known as IncomeBeforeFixedCharges).ExpensesbeyondthislevelinaP&L (up to the EBIDTA line item per the UniformSystemofAccountsfortheLodgingIndustry),areFixedCostspertainingtoRent,PropertyInsurance,PropertyTaxandReserveforReplacement,whicharearguablybeyondthecontroloftheOperator.
However,exceptionsto linkingthis fee toGOP/AGOPcan depend on the owner-operator negotiations andasset-specificconsiderations.
In this survey, contracts are seen having differentincentive fee structures. Broadly, these can beidentifiedasunder:
• Incentivefeeis expressedasaFlatFeeStructure: percentageof theannualoperatingprofit (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 operatingprofit (defineddifferently across contracts), with it being dependent on the pre- definedrangesofGOP/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%.
• WhereLinkedtoAvailableCashFlowoftheHotel: applicable,IncentiveFeeistypicallysubordinatedto theOwner’sPriority(mostcontractsinthissurvey offeringthistypeofincentive fee structure also provideforanowner’spriority),with“AvailableCash Flow”beingdefineddifferentlyineachcontract.
• This type isrepresentedbycontracts thatOthers: either have a combination of Flat and Linked Fee structuresorpresentaverycustomisedcalculation oftheincentivefee.Forexample,incentivefeecould equal2%ofGrossRevenuesor20%oftheAvailable CashFlow,whicheveristhelesserofthetwo.
Figure8depicts the typesof incentive feestructuresprevailingintheuniversalandregionalsamplesets.
Thefullsurveyreportprovidescomprehensivedataonowner'spriorityinadditiontodiscussingtheincentivefeerangesacrossthethreedifferentfeestructures.
Figure 8: Types Of Incentive Fee Structures
IncentiveFeeStructure:Notably,theflatfeestructurealongwithlinkingtheincentivefeetoGOP/AGOPMarginaremostprevalentintheAPACregion,whileitismorecustomaryinUSAto link the incentive fee to the hotel's available cash flow.Consideringthattheprovisionforanowner'spriorityisnewtotheAPACregion,itisnotsurprisingthattheonlytwocontractsinthe subjectsub-setofferinganincentivefee linkedtothehotel'savailablecashflowweresignedasrecentlyasin2012.
European contracts, in contrast, have the maximumcustomised calculations for incentive fee among the threeregions.
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
45%
17%
13%
3%
16%6%
APAC Sub-Set
10%
56%
8%
26%
USA Sub-Set
Flat Fee
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
30%
3%
8%
14%
25%
20%
Europe Sub-Set
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 7
28%
7%
7%25%
16%
17%
Universal Sample Set
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
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About HVSHVS 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,HVSfounded the New Delhiofficein1997.Heisactivelyi nvo lved i n op e ra to rs e a r c h /ma n a g eme n tcontract negotiations and
providesstrategicadvicetokeyclients.Headditionally serves as amentor to otherHVSverticalsintheAPACregion,andistheglobal head of HVS Sustainability.Moreover, Manav oversees the planningand implementation of the regionalHVSconferences, including Hotel InvestmentConference–SouthAsia(HICSA);Tourism,Ho te l I nve s tmen t & Ne twork ingConference (THINC) Indonesia; and theChina Hotel Investment Conference(CHIC). On a personal level, Manav co-foundedSAMHIin2011,aleadingIndianhotel investment and development firmwithfocusonownershipofbrandedhotelsin the mid-scale/economy [email protected]
About the Authors
Juie S. Mobar is AssociateDirector - Special ProjectswithHVS'NewDelhioffice.Shehasspentfiveyearswiththe company starting as aConsulting & ValuationAnalyst . In addit ion to
having worked on feasibility studies,v a l u a t i o n s , ma rke t s t u d i e s a ndoperational audits in the past, Juie hasbeenactivelyinvolvedinoperatorsearchand management contract negotiations,research-based assignments and selectwork for HVS Susta inabi l i ty. Shecompleted her Management TraineeProgramwiththeTajGroupin2006,andholds a BA (Hon) in Hotel Managementfrom the Institute of Hotel ManagementAurangabad (University of Huddersfield,UK ) a n d B a c h e l o r s i n B u s i n e s sAdministrat ion from [email protected]
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