Hotel Management Agreements

Baker & McKenzie's Views on What is the Risk/reward Relationship Between an Owner and a Manager? - By Graeme Dickson and Kerrie Duong

The starting point for this discussion is the hotel owner. The operation of a hotel is usually the hotel owner's business. The hotel owner is entitled to all the profits of the business and is liable to pay all the losses. Profit is what is left after all the hotel's expenses have been deducted from hotel revenue (and losses arise if the expenses exceed the revenues).

Baker & McKenzie

What is the risk/reward relationship between an owner and a manager?


The starting point for this discussion is the hotel owner. The operation of a hotel is usually the hotel owner's business. The hotel owner is entitled to all the profits of the business and is liable to pay all the losses. Profit is what is left after all the hotel's expenses have been deducted from hotel revenue (and losses arise if the expenses exceed the revenues).


Hotel operation is not for the faint hearted.


Like a number of other industries such as airlines, cinema chains and public car parks, the hotel industry is selling a totally perishable product. If a hotel room is not sold for use tonight, say, then it can never be sold again. If tonight has come and gone and the hotel room has remained idle then it has generated zero income for the hotel owner.


Equally in times of high demand, it is very difficult to quickly increase supply. It takes years to plan and build new hotels. During these periods, hotel owners are entitled to significantly increase room rates. If all hotels in a given locality or city are running at 90% plus occupancy on an ongoing basis then it makes commercial sense for the hotel owner to increase room prices - and in instances of ultra high demand - substantially.


The traditional basis by which a hotel manager is paid is a combination of what are termed "Base fees" and "Incentive Fees".


Base Fees are determined by reference to the hotel's revenue.


Incentive Fees are determined by reference to the hotel's profit.


Whilst it is usual for the manager to receive both Base Fees and Incentive Fees, we have seen instances where the manager has agreed to be paid a higher Incentive Fee but no Base fee.  Such business terms are not frequently seen in the high-end / luxury hotels sector.


Managers may also be prepared to enter into arrangements where payments or financial concessions are made to the hotel owner as an inducement to select one operator in preference to another. This has been seen in transactions involving highly sought after "trophy" hotels or locations. These financial inducements may take a variety of forms and are generally tailored to the personal circumstances of  the specific hotel owner.


We would be happy to elaborate on the various forms that these inducements currently take to any interested reader.



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Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 11,000 people in 77 offices in 47 countries. The Firm is known for its global perspective, deep understanding of the local language and culture of business, uncompromising commitment to excellence, and world-class fluency in its client service. Global revenues for the fiscal year ended 30 June 2014, were US$2.54 billion. Eduardo Leite is Chairman of the Executive Committee. (www.bakermckenzie.com)

 



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