Hotel management agreements

26 May 2005
Hotel management agreements

The development of more sophisticated management contracts is giving hotel owners more control over their assets than ever before, according to a survey by Jones Lang LaSalle Hotels.
The firm's Focus On Management Agreement Trends survey, published last week, found that owners were gaining increased control over their hotels' performances through the use of operator guarantees, performance clauses and incentive fees, which reward operators according to their profit levels.

By comparing the data with that of previous surveys, Jones Lang LaSalle found that globally there was increasing uniformity in key areas such as the length of management agreements, typically 12-15 years, although incentive fees varied greatly from property to property and region to region.

Another global trend revealed in the survey is the establishment of FF&E (furniture, fixtures and equipment) reserves as a means of funding capital expenditure, with an increasing prevalence of vacant possession clauses that allow the owner to terminate a contract and pay compensation to an operator on the sale of their hotel. "In Europe there has been a movement in power towards the owner, with increasing use of owner's approval rights and measurable performance standards as a means of control," said Mark Wynne-Smith, chief executive officer Europe, Jones Lang LaSalle Hotels. "In addition, the average contract term length has reduced to only 15 years, with the most common renewal option being five years. Combined with an increase in provisions for a termination on sale, this strengthens owners' flexibility."

The report found that base management fees had stabilised at 2.2% in Europe, while more complex incentive fee structures tend to reward operators more generously for outperforming agreed targets. Together with the fact that an FF&E reserve is now standard across Europe, Jones Lang LaSalle concludes that "the management contract business model continues to be a sound platform for operators to grow their business in Europe".

The survey also found consistencies in lease agreements across Europe, despite local legal and practical differences. "This research shows that the increasing number of cross-border transactions in the hotel sector is leading to more standardised agreements across jurisdictions," says James Miller, a partner in real estate at CMS Cameron McKenna, which also worked on the report.

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