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The current terms and sources of bargaining power for owners and managers are highlighted in the newest edition of The Negotiation and Administration of Hotel Management Contracts, by James J. Eyster ’69, the emeritus HVS International Professor of Hotel Finance and Real Estate and Jan A. deRoos ’78, the current HVS International Professor of Hotel Finance and Real Estate at Cornell University’s School of Hotel Administration. Based on two years of intensive research, coupled with over four decades of analysis of hotel management contracts, this new volume highlights provisions of concern for both owners and operators in the twenty-first century, as well as providing a rigorous approach for evaluating the finances of proposed projects. The book is available from the Cornell Campus Store.
Eyster began his research on the hotel management contract in the 1970s, when those contracts were relatively undocumented. “My approach then and now is to be even-handed,” he explains. “I wanted to analyze the terms and issues of concern for both operators and owners. What I’ve observed is that the contract provisions evolve in part as a function of relative bargaining power.”
In this new volume, Eyster and deRoos have highlighted the changing terms found in today’s contracts. They note, for example, the following two innovations. First, operators have courted owners of strategically important hotels with offers of a low base fee, coupled with a large incentive fee; this shifts risk to the operator and sends a strong signal that the operator is committed to the success of the property. Second, operators are beginning to participate in cash flows relating to property transactions; this can be as a result of providing a cash flow guarantee in a project’s early years, or by agreeing to a below-market base or incentive fee (or both).
“Another novel feature that we noted is called the ‘manchise,’ in which the management contract and the franchise agreement are held by the same operator,” said deRoos. “Hilton initiated this concept. The management agreement and the franchise license are “stapled together” at the inception of the deal, with Hilton providing both management and franchise services. However, the fact that the agreements are separate allows the owner to sell the hotel to firms that are owner– operators while obligating the new owner to continue to honor the franchise license. In this way, the manager is able to obtain deals that might not otherwise be available.”
Looking at the future of hotel management contracts, Eyster and deRoos point out that the management agreement form has become the “dominant means to separate control and ownership of hotels.” It clearly has eclipsed the use of leases as a means to achieve a separation of the owner and the manager. However, they point out the importance of maintaining a reasonable balance in the agreement terms so that both parties benefit and neither is harmed.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
