MRP hotels - Hoteldevelopment

Hotel Agreements - More and More Complex Constructs

04/03/2014 Vienna
In recent years, more and more complex constructs regarding management and lease agreements have been established. The classic pure management agreement is almost non-existent nowadays, except in less developed countries with high market uncertainty (e.g. CEE and CIS countries). Also foreign investors (e.g. from China, etc.) accept such contracts for investments in Western Europe, since lease or rental agreements are not known in their country of origin. In Western Europe, especially in the D/A/CH region, more complex models are developed, which are harder for investors, banks, etc. to understand and handle.

These agreements are now often referred to as “lease agreements”, in which the entire economic risk – except a few guarantees – lies with the leaseholder. On the other hand, we also see management agreements with high promises of guarantee for managers more repeatedly in our daily business. Therefore, the demand by investors and banks for lease agreements is becoming less understandable – risk sharing is taken into account in these contracts, which have little effect in the event of a crisis. Nevertheless, such lease agreements with high fixed and smaller variable components are still available in developed countries (such as Vienna, Munich, Berlin, Zurich, etc.).

The aim of the negotiations must be an agreement which not only increases the value of the property in the long run (especially with a planned Exit), but also enables operators and leaseholders to enjoy work and challenges them via performance-based objectives.

Exemplary listed topics are to be considered in “modern” hotel agreements:

  • Performance test: The termination of the operator in instances of non-performance should be an integral part of the agreement, if there is no high fixed component in the contract. Suitable evaluation criteria are for example the budget achievement (GOP or revenue) or the RevPar index (compared to the competitor).
  • Budget negotiations: In October or November owners usually receive – with little ambition – the budget for the following year of operation in the form of a “sales event”. Agreements often state that the operator will “consider” the recommendations of the owner. More effective co-determination in the form of expert regulations or the like should be set in these agreements.
  • Guarantees and Incentive Fees: Guaranteed payments are often agreed to in lease or management contracts in case the defined economic targets are not met in the on-going hotel business. In a lot of cases, though, leaseholders and operators overlook the fact that they are still entitled to an Incentive Fee. This means that the leaseholder or operator can generate the guaranteed payments to a substantial degree through the Incentive Fee. A corresponding passage in the agreement must exclude this.

This list could go on and on forever. In spite of everything one thing has to be ensured: the hotel agreement must be easy to administer and most of all allow an Exit.

MRP hotels consults hotel property developers and owners in the drafting of a precise agreement.

You can find the print version for download here.
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