Site icon Global Asset Solutions

Re-negotiating your Management Agreement: The Owner’s Perspective

Re-negotiating your Management Agreement: The Owners Perspective

COVID-19 introduced the hotel industry to a lot of uncertainties for the future. It also revealed several weak spots and high-risk areas within hotel management agreements (HMA’s). As these weaknesses become more evident, it is important to decide which points to focus on, how they can be adapted moving forward, and how each party can make the necessary adjustments to help each other out. 

Of course, there are two sides to every agreement. That said, as Asset Managers, it is our responsibility to protect the Owner’s interests as will be seen in the content below. Yet, it is crucial to recognize the importance of the Operator’s rights. After all, it is all about the hotel, and each party will have to make concessions to aid its successful continuance. 

There are many clauses within an HMA that may need to be reworked and reconsidered when amending current contracts or developing new ones. It will be a process of re-negotiating as a long-term agreement is likely in place. Below are some of the key areas to focus on should you be able to re-negotiate your current agreement or to keep in mind for future contracts. Many of the below changes will require lender consent, however this paper will not touch on lender issues.

 

Management Fees

As we know, management fees in an HMA are usually two-fold. There are a base fee and an incentive fee[1]. As for structuring the incentive fee offers more flexibility to minimize risk for the Owner and aligns the Owner and Operator’s interests, this is where the focus should be placed.

While some of these clauses are most likely already in your HMA, it is times like these that reveal their importance. Take a second look at them to ensure they are fair, and that the risk-compensation mix is balanced accordingly.

 

Management Fees: COVID-19 Specific

The management fees will also need to be reviewed as more hotels convert into hospitals or offer their beds up for health care workers. This will be a temporary adjustment put in place for the duration of the pandemic.

Consider embedding an exclusionary clause that outlines the above for the future. Be prepared and adjust the fees according to each hotel’s situation.

 

Deferring and Redirecting Fees

Corporate reimbursable should be reviewed so that they are disclosed properly and proportionate to their current year’s usage instead of the previous one as 2019, 2020 and 2021 usage will be significantly different from one another. These are the fees paid by the Owner to the Operator for central services such as sales & marketing, HR, IT, reservations, or the loyalty program.

By minimizing or deferring these fees, the operator can lighten the impact on the current diminished cash flows.

Owners may also request operators to consider waiving, deferring or ‘nominalizing’ the contribution to the FF&E Replacement Reserve.

If a deferral is put in place or being considered, it is important for each party to remember that it is only a deferral, and eventually, in better financial times, the fees will need to be paid. Act now as these changes will require both brand and lender approval which can be difficult to obtain and could take a significant amount of time.

 

Force Majeure

Force Majeure has been a popular topic and heavy issue for most hoteliers. It differs from country to country, state to state, and contract to contract. While several months ago, COVID-19 could have potentially been claimed as unforeseeable, it has now been seen. Moving forward, what will qualify as “unforeseeable” is questionable. Will it be unexpected if a new COVID strand strikes six months from now? If a completely unrelated pandemic hits in a year, can it be claimed as unpredictable? Pay close attention to your Force Majeure clause and consider how to amend it for the future.

Another reason to re-evaluate the force majeure clause is to determine how it can be used in regard to the future of a property. If after the leniency period certain terms and obligations have still not been delivered, the Owner or Operator are free to enact force majeure in order to end the agreement. For example, if the Owner decides the hotel business model is too risky and wants to repurpose the hotel, they can use force majeure as reason to terminate the contract. This should be enacted cautiously. If the termination is perceived to be for a reason other than COVID-19’s impact, it could lead to a lawsuit and an on-going legal battle.

 

Exclusivity Period

Many development projects will face severe delays as a result of COVID-19.

The Operator should be understanding of the Owner and vice-versa. Both parties should acknowledge that all projects are experiencing the same distress and consider adding an extension to the exclusivity period beyond the length offered by Force Majeure.

 

Performance Tests

The performance test may also be a point of contention and Operators will deem this year an unfair period to be evaluated. Review your contract’s force majeure adjustment provision. In case your contract does not include one for performance tests, consider adding one upon re-negotiation.

 

Conclusion

Once again, the management agreements should reflect the interests of both parties and while the above caters to the owner’s perspective, the brands’ and operators’ terms should be respected. At the end of the day, both parties should work together to preserve the hotel.

The above clauses have either been affected by COVID-19 or the pandemic revealed their weaknesses, and each should be adjusted and renegotiated according to each hotel and contract. Please contact us at info@globalassetsolutions.com, we would be delighted to offer you our services, evaluate your management agreement, and tailor-make an action plan for you to move forward. 

 

Written by

Eliana Levine, Vani van Nielen, Larina Maira Laube, Mingze Li, Zhaoyu Zhu, and Paloma Guerra

Ecole Hôtelière de Lausanne Students and Alumna

Global Asset Solutions, your key partner in hotel asset management, has partnered with a team of five students and one alumna from Ecole Hôtelière de Lausanne, recognized by industry leaders as the best hospitality school in the world. Together, we are working on compiling the best practices to help hotel owners and operators navigate through the COVID-19 crisis. By combining diligent research, expert opinions, and our own experiences, we will be publishing the best practices on the most current topics facing our industry. Team APAC is composed of Paloma Guerra, Mingze Li, and Zhaoyu Zhu, while Eliana Levine, Larina Maira Laube, and Vani van Nielen make up our Team EU & US and Remy Rein (EHL Lecturer).

Co-Published with Alex Sogno  (CEO – Senior Hotel Asset Manager at Global Asset Solutions). Mr. Sogno began his career in New York City after graduating with honors at Ecole Hôtelière de Lausanne, Switzerland. He joined HVS International New York, and he established a new venture at the Cushman & Wakefield headquarters in Manhattan. In 2005, Mr. Sogno began working for Kingdom Hotel Investments (KHI), founded by HRH Prince Al-Walid bin Talal bin Abdul Aziz Al Saud member of the Saudi Royal family, and asset managed various hotels including Four Seasons, Fairmont, Raffles, Mövenpick, and Swissôtel. He also participated to the Initial Public Offering (IPO) of KHI at the London Stock Exchange as well as the Dubai International Financial Exchange. Mr. Sogno is also the co-writer of the ‘Hotel Asset Management’ textbook second edition published by the Hospitality Asset Managers Association (HAMA), the American Hotel & Lodging Education Institute, and the University of Denver. He is the Founder of the Hospitality Asset Managers Association Asia Pacific (HAMA AP) and Middle East Africa (HAMA MEA).

[1] Incentive Fee: Management fees that are contingent upon achieving certain predefined levels of performance typically based on GOP or AGOP. It minimizes the risk for the owner in comparison to base fees as it encourages the operator to take responsibility for all operational expenses, and not only the top line.

[2] Owner’s Priority: Amount or percentage to be paid to the Owner before the Operator receives their incentive fee

[3] Owner’s Guarantee: Fixed amount the operator must pay to the owner in case of GOP short fall

 

Exit mobile version