Hotel management agreements: what owners should verify

What a performance test measures

• The RevPAR test. Whether the hotel achieved an agreed percentage of the average RevPAR of a defined set of comparable hotels.
• The GOP test. Whether the hotel achieved an agreed percentage of the gross operating profit in the approved budget.
• The cure right. Most agreements let the operator pay the shortfall to avoid termination, at least once.
• The comp set definition. Often the most contested clause: change the set and the index changes with it.

For reference: performance tests in modern management agreements commonly require the operator to miss both an agreed share of the comp set’s RevPAR and an agreed share of budgeted GOP, often in the region of 80–85 per cent, for two consecutive years before termination rights arise, and most give the operator a cure right.^[1–4]

What the tests cannot show

Both tests are lagging, aggregated and operator-reported. A RevPAR index can hold while the digital estate loses direct demand to intermediaries. A GOP test can pass while the golf, spa or family operation loses the highest-value guests. Neither says anything about service quality, the condition of the asset as a guest sees it, or how the operator behaves when a guest raises a problem. Owners argue performance tests with numbers because numbers are what they have.

What an owner should verify before the review

1. Whether the estate captures the demand the asset deserves. Search, answer engines and generative search, Instagram, the website and the booking path, reviewed by someone who builds demand systems.
2. What a paying guest receives. A minimum of four nights, unannounced, across the full cycle of a stay, with shortcomings raised so recovery is observed.
3. Where the asset stands against the comp set the agreement names. Optionally, the same review run silently at those properties.
4. Which findings are operator failures and which are asset failures. The report separates what to raise with the operator from what to invest in the asset.

Operator selection and renewal

The same evidence serves an owner choosing between operators or deciding whether to renew. An operator’s pitch is a presentation; its performance at the properties it already runs is observable, as a guest, this season.

Questions owners ask

• What is a hotel management agreement?

  A contract under which a hotel operator or brand manages the owner’s hotel in exchange for base and incentive fees, with the owner retaining the asset and most of the risk.

• What is a performance test in an HMA?

  A clause allowing the owner to act, up to termination, if the hotel fails to reach agreed shares of comp set RevPAR and budgeted GOP over consecutive years.

• How do owners hold operators to account?

  Through budget approval, reporting rights, the performance test, and the evidence they bring to the annual review. The Owner’s Audit is guest-side evidence for that review.

• Can an Owner’s Audit be used in a dispute?

  It is a written, dated, first-hand account of the property and its digital estate, commissioned by the owner. How it is used is for the owner and its advisers.

• Is a fee published?

  Fees follow scope, which depends on the property, the season and whether comp set benchmarking is included. We agree it in conversation and are glad to give an early indication.

• What should be included in a hotel management agreement?

  Term and renewal, base and incentive fees, the approved budget process, reporting and audit rights, the performance test and its comp set, cure rights, owner approval rights over the GM and capex, termination on sale, and non-disturbance for lenders. The owner’s leverage in all of them depends on evidence.

• How long is a typical hotel management contract?

  Brand-managed luxury agreements often run twenty years or more with renewal options; third-party management agreements are commonly shorter, five to ten years. Performance tests and termination-on-sale rights matter more than the headline term.

Sources

1. Bird & Bird, HMA Bites: Performance Tests
2. HVS, Hotel Management Contracts
3. Hotel Development Guide, Hotel Performance Tests in Hotel Management Agreements
4. Pryor Cashman, Hospitality Performance Tests: Fool’s Gold?

Related

• The Owner’s AuditScope, posture, inclusions, and how an engagement runs.
• Hotel management companies in Europe: how owners evaluate themChoosing and reviewing an operator.
• Hotel asset management and the view from the roomWhere an in-residence review fits.