EUROPE HMC

EUROPE HMC

1. DEFINITION

   • hotel’s owner contracts with a separate company, or an operator, to run a hotel
   • PROS AND CONS
     • (P) maximise the return on investment (ROI) for both the operator and the owner
     • (C) places the operational risk of profit and loss on the owner, and can affect the asset value in a positive or negative way depending on the quality of the operating company and market conditions.

2. TRENDS

   • Hotel owners are more educated with the way hotels are run and the contract terms
   • More institutional and financial investors
   • continued consolidation and globalisation of the industry leading to an increase in competition among operators

3. Contract Terms

   • Terms
     • How long the contract last, usually 15 to 20 years, depending on the brand. Major brands like Ritz Carlton and Four Season last more than 50 years. Renewal plans are set in to extend term durations base on performance
   • Operating Fees
     • Operator receives basic fee from owner that ranges from 2% to 4% of total revenue and Incentive Fee based on% of profit
   • Operator Guarantees
     • Ensure owner receive certain level of profit
   • Performance Measures
     • Measured through 1. RevPar 2. GOP achieved from the operating year is less than pre-agreed % of GOP
   • Owner Approval
     • The extend of owner consent needed to make decisions for the hotel operations
   • Capital Expenditure
     • a ‘sinking’ fund is set up to accumulate capital for the periodic replacement of FF&E, typically a percentage of gross revenue.
   • Non Compete Clause
     • owner has an assurance that no other property with the same brand is allowed to open within a certain radius of the subject hotel, typically for the whole duration of the agreement or at least for a defined period,
   • Dispute Resolution
     • Key Disputes: Arbitration, Expenses, Jurisdiction and Venues, Severance
   • Termination, Early Termination
     • Each party may terminate an agreement for a variety of reasons
       • Termination On Sale, Termination without clause

4. Issues

   • Power Balance
   • Sala and Manage Back Deals
   • Less Implications