Market conditions, owner demands and increasing operator competition have significantly shaped management agreement in recent years. Where are we now and are all parties satisfied?
“Management agreements are still quite long agreements from which is very difficult to exit… the rigidity around brand standards sometimes doesn’t take into consideration the life cycle of a current investment in the hotel space,” says Giordano Nicoletti, head of hotel operator selection Europe & consultancy Italy for CBRE.
Frank Veenstra, senior advisor – group development board at Corinthia Hotels, which recently signed a hotel management agreement to operate a luxury resort in the Maldives, agrees: “It’s changed in that there are more guarantees maybe, more alignment through hurdles, but ultimately that doesn’t change the fact it’s a big leap of faith to a certain extent from an owner’s perspective, which translates into very thick owner contracts, because there’s a lot of policing around that relationship… [but] if nobody liked them, then nobody would sign them…
“There is a reason why management agreements exist: because owners still like the outcome… If you look at the way the cashflow is split in the management agreement compared to the alternative, which would be a lease, it makes it attractive for owners as well.”
Maria Zarraluqui, global development VP for Melia Hotels International, which is set to rebrand the Gran Hotel Monterrey in Costa Brava, suggests there has become more flexibility and transparency around fees, as well as operators getting creative with alternative structures.
Nicoletti agrees operators are more willing to show their fee breakdowns, but adds that what is more important is how those fees are spent: “Uniformity of distribution channels and transparency are two aspects where operators are trying to do their part giving more visibility to owners, but also because owners are becoming more involved in the operation of the hotel due to the change in profile of the player active in our sector compared to a few years ago,” he explains.
Veenstra expresses surprise at the lack of changes in base fees and believes there is “room for optimising that”, but suggests that there has been a lot of creativity around incentive fees: “What we also see more and more is incentive management fees that, as a percentage, grow with the percentage margin that the operator is realising on the GOP level, which seems to help align parties as well,” he says.
Ina Plunien, vice president of Cedar Capital Partners Ltd, says in scenarios where owners are investing a lot of capital into properties, she is seeing an increase in incentive hurdles for operators being tied to percentages of investment values.
“[This] has proven quite successful for us in our interaction with operators, aligning interests and how we think about going through renovation processes with operating partners,” she says.
Meanwhile, Nicoletti adds that he is seeing notional FF&E reserve becoming “almost the norm” in an expensive debt environment.
No such thing as an empty clause?
When it comes to opportunities for further change, despite length of contract being a bugbear for some, others argue that even clauses which are not necessarily enforceable can still be of value, for example termination right for failure to meet a performance test.
“They’re important in terms of setting expectations between the parties and a baseline of discussing how we’re expecting this asset to perform. Even though they may not be enforceable on the basis of failing to meet the clause, they at least provide ground for discussion when things go badly, how we realign and what we do about it,” suggests Plunien.
Zarraluqui agrees that some clauses are beneficial for peace of mind of both parties: “I don’t think they are ‘waste of time’ clauses if the parties feel comfortable when they sign it, because it gives them the opportunity to discuss,” she says.
Meanwhile, termination on sale provisions also appear to be on the rise. “It used to be more binary, either there was free termination on sale or there was nothing. I see more and more that there is a termination right on sale but with some more structure around it, either termination fees or a lock-up period that during the first X years you cannot terminate. It is evolving but we see more and more of it,” says Veenstra.
ESG on the rise
Meanwhile, Environmental, Social and Governance (ESG) is also making its way into negotiations.
“It’s a discussion that’s in its very, very early stages – the most that we’re seeing is agreements to cooperate with each other and discuss at budget time,” says Karen Friebe, partner at Bird & Bird LLP.
Veenstra argues that owners are driving this discussion, “ownership knows perfectly what they want to achieve and they’re actually looking at the operator to deliver,” he explains, while Plunien adds that owners want to ensure they have a viable product and can access capital.
“A lot of regulator banks have fairly tight requirements in terms of what their assets need to achieve,” she points out.
Although the fundamentals of hotel management agreements remain the same, there are changes operators and owners would love to see, such as more flexible brand standards, transparency in the negotiating process – and shorter contracts.
“I’d love to lose the brand standard wall, ‘no can do, computer says no’ approach,” says Plunien. “Every project, every investor, every hotel is different, and it would be great to move to a point where all parties can come with a degree of flexibility to the table.”
All those quoted in the article appeared on stage at the International Hospitality Investment Forum (IHIF) held in Berlin between May 15 and 17, in a session called: Management Agreements: A Critical Review.