Hotel Management Contract Survey 2020 | South Asia
Hotelivate is excited to bring to you the Hotel Management Contract Survey 2020 – South Asia, entailing a comprehensive review of 85 contracts/LOIs, representing around 16,200 rooms, signed in the region over the last two decades.
Why should you read this report?
This substantive report highlights the key terms and clauses of hotel management agreements, provides broad definitions, and discusses trends over time. It also offers exclusive insights by the authors who have considerable hands-on experience in operator search and management contract negotiations in the region and have published pioneering research and articles on the topic.
Endeavoring to serve as a reference document for the industry, the survey report will enhance the reader’s understanding of the traditional as well as emerging areas of discussions between hotel owners and operators in South Asia, covering:
Key Terms and Clauses of a Hotel Management Contract
- Management Contract Term
- Exclusivity Area/Area of Protection
- Operator Fees
- Operator Performance Test
- Contract Termination
- Key Money and Operator Loan
Other Non-Traditional Areas of Negotiations Gaining Prominence
- Force Majeure
- Annual Plan
- Operator’s Authority
- FF&E Reserve
- Senior Hire
- Owner Privileges
In addition, the report also provides an indicative list of Owner’s Obligations Under a Hotel Management Contract during the various phases of a contract’s lifecycle – hotel development and pre-opening; operations; contract termination; and general obligations.
EXCERPT I | Management Contract Term
The duration of a hotel management contract is defined by an initial term and one or more renewal/extension term(s). The initial term commences from the Effective Date of the agreement (the date of signing) and continues for a certain number of years, often beginning with the first full operating year of the hotel after the Opening Date. The average length of the initial term in South Asia is 20.7 years. The hotel management contract may be extended for pre-defined successive periods, constituting the renewal/extension term. The average length of the renewal/extension term in South Asia is 8.2 years.
Average Length of the Initial Term
The length of the initial term depends on myriad factors, such as positioning, year of signing the contract, brand standards of the operator, location of the hotel, and specific nuances of the agreement. In this sample set, the initial term ranges widely from 8 years to 40 years. Usually, it is in the owner’s interest to negotiate a shorter initial term with renewal on mutual consent, as it allows a quicker exit opportunity in case s/he is looking to sell the property or there is non-alignment of objectives with the operator. However, it is important to bear in mind that a shorter initial term (than the typical average for that brand) is often accompanied by higher fees and other operator-oriented provisions.
Initial Term by Positioning
Market positioning of a hotel and its initial term have a positive correlation. As one goes higher up on the positioning scale, the length of the average initial term tends to increase. This is understandable considering that operators seek greater stability (in terms of brand image and reputation) and require more time to recover their investment for upscale-luxury brands than for those operating in the budget-mid market segment.
There are two sides of this argument. The operator will often cite that they are heavily investing their brand, resources, goodwill and reputation, and therefore, require a certain minimum period assured in a management contract. Often, the hotel does take time to stabilize and the desirable level of income from fees is only made towards the end of the term.
As someone who has seen the industry evolve over the past 25 years, my take is that today, with the advent of technology and how fast things are changing, do we even know if brands will exist and operate the way they do currently two decades from now? Around 25 years ago, internet was not as widespread. OTAs had just about entered the playing field, while metasearch sites were non-existent. Hence, the quantum of fees/commissions going to third parties was way lower. Moreover, who could have predicted that homestays like Airbnb and new-age hotel chains like OYO would have an impact on how people travel and stay. So, one can see why owners are hesitant to be locked in with a brand for 20 years (or more).
It is, thus, easy to reason for both sides and perhaps, the parties to the contract should be more flexible in finding middle ground.
EXCERPT II | Base Management Fee
Base Management Fee is an ongoing fee, typically expressed as a percentage of total revenue of the hotel. Some operators may split this fee into a license/royalty fee, an operating fee and/or an advisory fee. Previously, the base fee used to be a flat annual figure through the life of the contract, but recently, we are seeing more tiered structures with a ramp-up. Occasionally, for strategic projects, a ramp-down or a base fee linked to pre-defined monetary revenue thresholds can also be found. The average stabilized base fee in South Asia is 2.35% of Gross Revenue, influenced by factors like positioning, location and size of the hotel, year of signing the contract, length of the initial term and other commercial terms of the agreement.
Stabilized Base Management Fee by Positioning
Overall, the base fee decreases with the rise in positioning, based on the logic that lower-positioned hotels have limited revenue streams (mostly rooms) compared to upscale-luxury hotels, requiring the operator to charge at least a certain level of fees to make it a profitable opportunity. Moreover, some budget hotel operators in South Asia do not charge an incentive fee, and hence, seek a higher base fee.
Stabilized Base Management Fee Trendline by Year of Signing
The sample set results confirm our observation that the stabilized base fee has decreased over the years. Though the difference here may not be significant owing to the trendline being impacted by the hotel positioning, size and other property/deal-specific factors, it may be useful to note that many recent contracts have a stabilized base fee as low as 1.75% of Gross Revenue (which may ramp-up from 1.5%, or in exceptional cases 1.25% as well).