Under a hotel management agreement? Your typical mark-one-mod-zero, off-the-shelf, fill-in-the-blanks HMA calls for a base management fee of 2% of the hotel's revenue, before deductions (payroll, utilities, and operating costs are paid from revenue as much as possible, although a property running in the red will require occasional subsidies or capital calls from its owners) - and every year, the base management fee goes up half a point until it levels off at 5%.
There's also an incentive management fee at the end of the year of ten to fifteen percent of any increase in total revenue from last year's total revenue (there's an accounting term for that, and I'm going to feel stupid when someone mentions it, for being unable for now to remember what it is).
An HMA also provides for a fee of five percent of the cost of all renovations and upgrades done. To be fair, this is in exchange for planning it, overseeing it, making sure it all goes together properly, and keeping the hotel up and running through the duration of it. However, an unscrupulous management company can get away with lots of abuse (see What is a typical Opco/Propco revenue split in the hospitality industry? | Michael Forrest Jones' answer to When a hotel has an electronic "Do Not Disturb" system, what happens, and where, when a guest toggles the setting? ) I hate people like that: they give all hotel management companies a bad name, and cause knowledgeable owners to want to negotiate HMA's very aggressively. (I can deal with and even respect that, it's the tough guys who think they're knowledgeable that are impossible to deal with . . . ) But I try not to judge those management companies too harshly. What they consider to be acceptable behavior, and performance standards, and competency levels, for themselves, presents an opportunity for decent, respectable human beings who want to do things right - like me.
Speaking of which . . . everything in an HMA is negotiable, so we try to be flexible, especially since we're new.
Leasing the building to a hotel operator? I love HMA's. I don't like leases (and here, I refer to a lease agreement, where the hotel operator pays a fixed rent on the entire hotel, plus maybe a percentage, just as with a leased storefront or mall space*).
With an HMA, someone sets you up in business, hands you the keys and access to a large bank account - and pays you for the privilege. (Me, I try to have a little gratitude in my attitude and treat the owner right in return.) With a lease, all the risk shifts to the hotel operator: the landlord gets his money no matter how the hotel performs, the operator puts up all working capital and inventories, all the risk shifts to the operator - and at the end of the lease term he doesn't own the building, so either he walks away with nothing, or the rent goes way, way up. And that's if it works well and is to be considered a success. If not, there's little to stop the operator from simply closing up, dropping off the keys and walking away.
With a lease, lots of maintenance gets deferred. (Is the landlord supposed to pay for it, or the 'lessee'? No matter how you word the lease agreement, there's always a dispute.) There's no incentive to upgrade and the hotel will be downscaled at least once during the lease term. If the operator has to buy new furniture (or anything else for the hotel), he only needs it to last for the remainder of the lease term - and will budget the expenditure accordingly, if at all.
A far-sighted owner who takes into consideration the need to preserve the value of his property is much better off with an HMA. The management agreement stipulates additional fiduciary obligations on the management company: the hotel must be operated under a certain brand and meet its franchise organization's standards for that brand. And while it is - intentionally - very difficult to just arbitrarily 'fire' a management company and send it packing if you're not satisfied with them, it is still possible (for causes limited to those set out in the HMA, for which termination of the agreement is a remedy), and there is much more accountability at every step of the way. The owner gets some say in the operating budget, and the owner and HMA must agree on any major renovations.
(Where abuses of HMAs by management companies occur, it's because some owners, often institutional investors, just don't want to be bothered with it as long as they get a check every quarter - or at least are not too often being asked for more money to put into the property - so they okay nearly anything that comes with a good-sounding story to justify it. My company can make more money over the long term - which is what we're in it for - doing right by our properties and right by the properties' owners, than we can by milking the owner; so we have a commitment to doing it right, even when the owner is an institutional investor that barely has time to take our calls. But regardless of whether it's an HMA or a lease; if either party is just out to milk as much money out of it as it can, as fast or as short-term as it can; then neither an owner-management company nor even a landlord-tenant relationship is going to work for those two for very long. And the value of the property is going to suffer.)
You frequently see hotels leased, in a high value location; especially in resort areas, and quite often in places like New York, Chicago, San Francisco - large cities where lots and lots of buildings are situated on ground leased land and owned by people other than those who actually own the land. But when that occurs, it's happening in a high-value location where someone very badly wants to be. (Yes, I'd love to 'own' a nice hotel in midtown or lower Manhattan, and charge $400 per night, and still be able to count upon 93% occupancy; and I'll even put up with costs - union help, additional service staff, rent - that I wouldn't stand still for in any other location. But only just so much.)
Wherever else it occurs, it is either someone trying to 'own' a hotel on a shoestring, or someone who's trying to milk as much of a return out of it as fast as he can. It's not really a good deal for either the landlord or the operator.
The landlord-tenant relationship is the ultimate anti-thesis of the 'win-win' relationship: it's 'lose-lose', all the way. No landlord is happy with the amount of rent he can get even from a good-paying tenant, no tenant is happy with the amount of rent he is obliged to pay. Anyone who's ever owned a rental unit knows that there is no such thing as a tenant who pays the rent on time without getting behind, and who takes proper care of the property. Anyone who has ever been a renter has never been happy with the condition of the property as the landlord 'provided' it. Everybody should own a home, even if it's a travel trailer, and the landlord-tenant relationship should have gone out during the Industrial Revolution with the master-slave relationship.
But this is America: everyone wants to be a landlord, that's the real American Dream. Other countries have the same problem, many even worse, but America was for a time the shining light that I'd hoped would one day pull off the eradication of the landlord-tenant relationship before beginning a slide back to feudalism.
If you have a specific hotel in mind, message me. I can perhaps give you a better answer one-on-one.
----------------------------
* - The parties in an HMA are referred to as 'lessor' (owner), and 'lessee' (operator), and for a reason: the HMA is a lease, and the terminology prevents misunderstandings. The way any HMA is written, the management company acquires a leasehold interest in the hotel by virtue of the agreement. This prevents owners from changing management companies the way NHL teams change coaches after only one or two bad seasons.
Some would do it, too. You've probably seen articles in business and even travel publications about 'Velcro' Hotels - a hotel that frequently changes its brand affiliation after an (often nasty) breakup with its franchise organization. (They're a source of concern to readers of travel publications because travelers always want to know, will my reservation at the Hampton Inn in such-and-such place, or the free night I have coming on my points, or the event I have booked, still be honored there now that it's the 'Plaza Hotel' for a month or two, until they can get the Holiday Inn Express punchlist completed?) When it happens, it's as frequently the doing of the management company as it is the owner: franchise changes are great for the management company because they want to collect that five percent upgrades fee on the upgrades that'll be required by the new franchise organization.
Originally appeared on Quora
There's also an incentive management fee at the end of the year of ten to fifteen percent of any increase in total revenue from last year's total revenue (there's an accounting term for that, and I'm going to feel stupid when someone mentions it, for being unable for now to remember what it is).
An HMA also provides for a fee of five percent of the cost of all renovations and upgrades done. To be fair, this is in exchange for planning it, overseeing it, making sure it all goes together properly, and keeping the hotel up and running through the duration of it. However, an unscrupulous management company can get away with lots of abuse (see What is a typical Opco/Propco revenue split in the hospitality industry? | Michael Forrest Jones' answer to When a hotel has an electronic "Do Not Disturb" system, what happens, and where, when a guest toggles the setting? ) I hate people like that: they give all hotel management companies a bad name, and cause knowledgeable owners to want to negotiate HMA's very aggressively. (I can deal with and even respect that, it's the tough guys who think they're knowledgeable that are impossible to deal with . . . ) But I try not to judge those management companies too harshly. What they consider to be acceptable behavior, and performance standards, and competency levels, for themselves, presents an opportunity for decent, respectable human beings who want to do things right - like me.
Speaking of which . . . everything in an HMA is negotiable, so we try to be flexible, especially since we're new.
- We might cap the base fee at 3% instead of 5%, for an owner who we know we won't have any problems with, or for someone who we can count upon to buy (or even better, build) more hotels and put them under our management (particularly if we get to pick the locations!).
- For someone with whom we know we'll have a positive working relationship for a long time, perhaps we'll waive incentive fees in return for equity that will vest over time.
- For a lender-owner who needs to put a foreclosed property under management, we might make it a short-term (three to five years), rather than a standard ten- or twenty-year agreement, and go easy on the termination fees (like, just cover the costs that we incur directly as a result of our folding up our tents and pulling out, and of relocating any of our people who we moved out there) if he has the opportunity to sell it to someone who wants it unencumbered by management.
Leasing the building to a hotel operator? I love HMA's. I don't like leases (and here, I refer to a lease agreement, where the hotel operator pays a fixed rent on the entire hotel, plus maybe a percentage, just as with a leased storefront or mall space*).
With an HMA, someone sets you up in business, hands you the keys and access to a large bank account - and pays you for the privilege. (Me, I try to have a little gratitude in my attitude and treat the owner right in return.) With a lease, all the risk shifts to the hotel operator: the landlord gets his money no matter how the hotel performs, the operator puts up all working capital and inventories, all the risk shifts to the operator - and at the end of the lease term he doesn't own the building, so either he walks away with nothing, or the rent goes way, way up. And that's if it works well and is to be considered a success. If not, there's little to stop the operator from simply closing up, dropping off the keys and walking away.
With a lease, lots of maintenance gets deferred. (Is the landlord supposed to pay for it, or the 'lessee'? No matter how you word the lease agreement, there's always a dispute.) There's no incentive to upgrade and the hotel will be downscaled at least once during the lease term. If the operator has to buy new furniture (or anything else for the hotel), he only needs it to last for the remainder of the lease term - and will budget the expenditure accordingly, if at all.
A far-sighted owner who takes into consideration the need to preserve the value of his property is much better off with an HMA. The management agreement stipulates additional fiduciary obligations on the management company: the hotel must be operated under a certain brand and meet its franchise organization's standards for that brand. And while it is - intentionally - very difficult to just arbitrarily 'fire' a management company and send it packing if you're not satisfied with them, it is still possible (for causes limited to those set out in the HMA, for which termination of the agreement is a remedy), and there is much more accountability at every step of the way. The owner gets some say in the operating budget, and the owner and HMA must agree on any major renovations.
(Where abuses of HMAs by management companies occur, it's because some owners, often institutional investors, just don't want to be bothered with it as long as they get a check every quarter - or at least are not too often being asked for more money to put into the property - so they okay nearly anything that comes with a good-sounding story to justify it. My company can make more money over the long term - which is what we're in it for - doing right by our properties and right by the properties' owners, than we can by milking the owner; so we have a commitment to doing it right, even when the owner is an institutional investor that barely has time to take our calls. But regardless of whether it's an HMA or a lease; if either party is just out to milk as much money out of it as it can, as fast or as short-term as it can; then neither an owner-management company nor even a landlord-tenant relationship is going to work for those two for very long. And the value of the property is going to suffer.)
You frequently see hotels leased, in a high value location; especially in resort areas, and quite often in places like New York, Chicago, San Francisco - large cities where lots and lots of buildings are situated on ground leased land and owned by people other than those who actually own the land. But when that occurs, it's happening in a high-value location where someone very badly wants to be. (Yes, I'd love to 'own' a nice hotel in midtown or lower Manhattan, and charge $400 per night, and still be able to count upon 93% occupancy; and I'll even put up with costs - union help, additional service staff, rent - that I wouldn't stand still for in any other location. But only just so much.)
Wherever else it occurs, it is either someone trying to 'own' a hotel on a shoestring, or someone who's trying to milk as much of a return out of it as fast as he can. It's not really a good deal for either the landlord or the operator.
The landlord-tenant relationship is the ultimate anti-thesis of the 'win-win' relationship: it's 'lose-lose', all the way. No landlord is happy with the amount of rent he can get even from a good-paying tenant, no tenant is happy with the amount of rent he is obliged to pay. Anyone who's ever owned a rental unit knows that there is no such thing as a tenant who pays the rent on time without getting behind, and who takes proper care of the property. Anyone who has ever been a renter has never been happy with the condition of the property as the landlord 'provided' it. Everybody should own a home, even if it's a travel trailer, and the landlord-tenant relationship should have gone out during the Industrial Revolution with the master-slave relationship.
But this is America: everyone wants to be a landlord, that's the real American Dream. Other countries have the same problem, many even worse, but America was for a time the shining light that I'd hoped would one day pull off the eradication of the landlord-tenant relationship before beginning a slide back to feudalism.
If you have a specific hotel in mind, message me. I can perhaps give you a better answer one-on-one.
----------------------------
* - The parties in an HMA are referred to as 'lessor' (owner), and 'lessee' (operator), and for a reason: the HMA is a lease, and the terminology prevents misunderstandings. The way any HMA is written, the management company acquires a leasehold interest in the hotel by virtue of the agreement. This prevents owners from changing management companies the way NHL teams change coaches after only one or two bad seasons.
Some would do it, too. You've probably seen articles in business and even travel publications about 'Velcro' Hotels - a hotel that frequently changes its brand affiliation after an (often nasty) breakup with its franchise organization. (They're a source of concern to readers of travel publications because travelers always want to know, will my reservation at the Hampton Inn in such-and-such place, or the free night I have coming on my points, or the event I have booked, still be honored there now that it's the 'Plaza Hotel' for a month or two, until they can get the Holiday Inn Express punchlist completed?) When it happens, it's as frequently the doing of the management company as it is the owner: franchise changes are great for the management company because they want to collect that five percent upgrades fee on the upgrades that'll be required by the new franchise organization.
Originally appeared on Quora
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