Comment: Hotel management agreement performance standards – the operator’s take
29 June 2010
Hotel Management Agreement Performance Standards – Analyzing a typical operator provision
The Hotel Management Agreement or HMA is one of the most important factors in the financial success or failure of a hotel, and the value of an owner's or lender's interests in the property.
With experience gained in negotiating, re-negotiating, litigating, arbitrating and advising on more than 1,000 hotel management agreements and more than $60 billion of hotel transactions, the members of JMBM's Global Hospitality Group® wanted to share some lessons learned.
If you would like to review why getting a great operator and a fair HMA are so critical to the success of your hotel, or if you missed any of the earlier series on this subject, please go to www.HotelLawBlog.com, look under the TOPIC tab at the top of the home page, and then select "Hotel Management Agreements" to see some great information.
What does a typical Operator performance clause look like?
Operators may propose an HMA without any performance standard. That would be in their interest, because a performance standard can only be used to their disadvantage - to reduce their income, subordinate their fees, or possibly terminate the management contract. And of course, the right to terminate is the right to re-negotiate the agreement as well. So failure of a performance standard does not mean you have to terminate the Operator, but it might be used as the basis to re-negotiate the allocation of financial and other risks.
The typical performance standard clause proposed by a branded hotel operator often looks something like this:
In addition to the other rights of termination in this Agreement, the Owner shall have the right to terminate this Agreement if, for any two consecutive Fiscal Years beginning after the completion of the third (3rd) Full Fiscal Year, both (a) the Annualized RevPAR for the Hotel for such Fiscal Year is less than 80% of the average Annualized RevPAR for the Competitive Set for such Fiscal Year (the "RevPAR Test"), and (b) the Gross Operating Profit of the Hotel is less than 80% of the Gross Operating Profit of the Hotel as set forth in the Annual Budget for such Fiscal Year (the "GOP Test") (the RevPAR Test and the GOP Test are collectively referred to as the "Performance Standard").
This provision is fairly short, but it contains a number of moving parts, and we need to discuss some of the key components.
There are many different industries all over the world. Different industry works in different sectors. But there are few industries which are called successful business. And also there are many industries which are called business. There is a long way between business and successful business. Business becomes successful by a proper management system. So the management system is very important in the sector of development.
The management system that manages all things about hotel business is called hotel management. Another way, the hotel management is the perfect management techniques including hotel administration, accounts, marketing, maintenance, housekeeping, food and beverage management and catering. This management system runs the hotel properly and manages every single thing according to the way it should be. Mistakes are banned in this type of management system. Because proper management depends on how perfectly it managed. So each and every person related to this hotel management system should be careful and should be aware of responsibility. That’s way the management board needs professionals for their management system. Only the professionals can run the system properly and perfectly. So many universities and educational institutions prefer hotel management as a subject to their students.
These educational institutions provide the environment and training opportunities to their students. And because of this opportunity, the students become the professionals. After completing the course of hotel management, they can apply to various and luxurious hotels all over the world. And that’s the real opportunity for a student. Worldwide job opportunity, they can work anywhere. And also it’s a great fact that any hotel will give a big amount of money for a good worker or for a professional. Because the hotel owner or the hotels managing director knows that, only a professional have the proper knowledge of hotel management. How the management runs, how the workers work, how the management system improves, how the service and hospitality managed, how polite the behavior should be and also what is the importance of a guest in a hospitality industry, who knows better these things than a professional ? So the hotels need good workers/professionals and the educational institutions provide the professionals. This circle runs like the circle of life.