What was bespoke becoming commonplace in hotel operating agreements

Approaches to hotel operating agreements that may once have been considered bespoke are becoming more commonplace, according to RBH Hospitality Management chief executive David Hart.

For example, specific fee structures, exit terms, or detailed variable lists, which previously might only have been a part of a few contracts, said Hart, speaking at the Annual Hotel Conference (AHC) in Manchester.

RBH recently marked its 200th hotel management partnership with the opening of the Municipal Hotel Liverpool and expanded its partnership with Fragrance Group to operate the Grand Atlantic in Weston-Super-Mare.

Felicity Black-Roberts, vice president acquisitions and development – Europe, Hyatt, said that it was taking a lot longer to get term sheets agreed, with pressure across both hotel management agreements (HMAs) and franchise agreements to push some of the risk back onto the operator or the franchisor.

“The level of due diligence that hotel owners are doing is a lot higher. I think that’s a good thing for the industry because that makes sure our value proposition is in the right place,” she said.

Tobias Reinecke, director, investments and strategic partnerships EMEA, Choice Hotels, agreed: “People want to know more about what they really need to do and what we as a franchisor are responsible for, what we’re going to deliver, provide, the level of support, who’s responsible for what on either side. That’s where most of our discussions are happening,” he said.

Choice Hotels International reported a record quarterly revenue for the second quarter of 2023 and over the next five years, hopes to more than double the revenues coming from its upscale segment.

“We see more and more the owner or operator due diligence becoming much more detailed and that’s why they’re questioning every aspect,” added Reinecke – which has seen fees become more creative.

Matt Lederer, hotel acquisitions director at Castleforge Partners, which recently spent £20m redeveloping Bromley Town Hall in London and is expanding its regional city-focused residential operating platform Ocasa, described a “more incentive-driven structure” coming to the fore, while Reinecke said that Choice is moving towards a more transparent all-in fee structure. There’s also a perception there’s key money to be had from brands, said Hart, a statement backed by Black-Roberts, who said Hyatt was seeing more requests for key money to help with Property Investment Plans (PIPs).

As for employment structures, Hart said it’s become more common for RBH to take on employees, and this is now the case across 15-20 per cent of its estate: “Commercially it makes no difference to us... the risk profile ultimately sits with the owner but it finds a solution for the owner to get the staff off their payroll and it seems to work.”

Although, Black-Roberts said Hyatt prefers not to do this due to tax implications in certain jurisdictions and potential cash flow issues, describing it as a “treat with caution topic”.

And while Hart said he accepts termination clauses are important to give owners flexibility, Black-Roberts highlighted the challenges such clauses can pose to brands trying to achieve long-term market coverage if properties are dropping out of the network every five years. Despite this, the brand is seeing more pressure to reduce its term length.

As for where these changes are coming from, Lederer said that while new entrants were certainly playing a part with more of a willingness to challenge the status quo, it’s also being driven by the economic environment.

“We’re seeing increased costs across the P&L, more scrutiny across the cost lines... there’s no doubt that that’s driving some additional push when it comes to looking at terms of HMAs and franchise agreements,” he said.

Environmental, Social and Governance (ESG) are also starting to creep into discussions and contracts, and last year, RBH experienced its first owner wanting a specific ESG clause in their agreement.

Hart said that asset managers can “largely just get on with” the S and G in ESG, as they are “fairly low cost”, however it’s the environmental aspect “where the hard cash starts to ramp up” and requires more discussion as owners may have different views about where money should be spent.

While Reinecke said Choice is not ‘yet’ at a point where the business is putting very specific clauses into contracts and prescribing reporting requirements of its franchisees, the company’s ability to deliver corporate accounts to hotels is “potentially hindered if we don’t have proper ESG reporting”. Therefore, its priority is to ensure that it is ESG compliant as a company and can report the right metrics and data to maintain that business delivery.

Hyatt, meanwhile, has included environmental reporting requirements in two or three of its HMAs, which were mandated by the lender. Nothing “super heavy”, said Black-Roberts, “but very clear alongside the day-to-day financial reporting we would expect to do”.

“That’s going to become much more the norm,” she added.