There is a lack of information to assist first-time hotel owners demystify the peculiarities of hotel management agreements, says Matt Gebbie, director, Pacific Asia of Horwath HTL
As wealth spreads across Asia, increasing numbers of entrepreneurs are considering the burgeoning hotel industry as a place to deploy capital with long-term cash flow in mind. Some investors wish to build and manage hotels themselves, while others wish to outsource management to a professional local or international hotel management company (HMC).
The relationship between an owner and a HMC is complex and lasts many years, often through many economic cycles. The establishment of a mutually beneficial agreement that recognises the HMC’s need to operate the property without undue interference and the owner’s right to participate in decisions important to them will go a long way to ensuring an amicable and rewarding long-term partnership. It is imperative that hotel owners are aware of many nuanced concepts before they commence negotiations with their chosen HMC.
Unlocking the Mystery of Hotel Management Agreements, released by Horwath HTL, addresses some of the key commercial terms forming the backbone of a typical hotel management agreement (HMA). Use of the Uniform System of Accounts for the Lodging Industry is one peculiarity but an internationally recognised standard practice. It provides standardised formats and account classifications to guide hotel management in the preparation and presentation of financial statements for benchmarking and analysing performance.
Many other commercial terms baffle first-time hotel owners such as technical services fees, base management fees versus incentive management fees, centralised or group system fees, and so on. Questions often posed by owners who are reading HMAs for the first time include: Do I have to pay fees? Are they negotiable? Do they vary from one HMC to another? What do they actually cover? Seeking professional guidance on interpretation and benchmarking such fees and other commercial terms at the outset can go a long way to narrowing the knowledge gap, saving the hotel owner a significant amount of money and providing peace of mind for the duration of the HMA.
Brand standards are often a major stumbling block in negotiations between owners and HMCs. For example, certain brands require certain facilities (number and/or type of F&B outlets, minimum meeting space allocations), minimum/maximum number of keys and an acceptable room size range. Such things are integral to the DNA of the brand and HMCs guard the integrity of their brands very carefully. At the end of the day, the integrity of the brand is what an owner is paying for and what a guest expects. That said, typically there is some flexibility and having professional assistance during the negotiation process will assist owners in knowing when to push and when to back off.
Other common concerns for owners include: Who controls the hotel’s operating bank account? Who is responsible for hiring the hotel staff and in particular the general manager? Who approves the annual hotel budgets? Also, ultimately if the relationship has soured, do I have the option to terminate the HMA? All these issues should be resolved in advance of execution.
If nothing else, entering negotiations with a deeper understanding of the terminology will go a long way to ensuring a level playing field between parties.
By Matt Gebbie, director, Pacific Asia of Horwath HTL
