Hotel Management Agreements - why not have incentive-only management fees?


David Elsen adds another lonely voice to join the chorus of those thinking there needs to be a change in Hotel Management Agreements.  With a few notable exceptions, very few hotel operators are willing to operate someone else's hotel on the basis of a share of the profit only.  The operator's argument usually goes something like "it's the owner's asset; we're just managing it and we're not going to take on the risk for owner".  

The problem is that - for the most part - all of the operator's overheads of running the hotel (and often a proportion of central overheads as well) are borne by the owner and deducted from the hotel's revenue at source anyway; so the base fee (usually a % of revenue) is profit and the operating costs pose no risk for the operator. Where there is an incentive fee (usually a somewhat larger % of gross operating profit) as well, it is usually only of limited impact as a driver to drive the operator to minimise costs and increase profitability. 

Owners need at the negotiating stage at least to request remuneration by incentive fee only as an option.  As a German friend of mine is fond of saying, "Fragen kostet nichts" (asking costs nothing).

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The owner-and-operator relationship is ostensibly an equitable partnership, but is oftentimes diametrically opposed. Logically, if an operator’s main source of income comes from fees off of revenue, then it will do its best to maximize revenues, sometimes at the sacrifice of expenses. ... Any outcome that better aligns a hotel’s manager and owner is a positive trend and one that can find its basis at the outset of the relationship, through the terms of the management agreement.