Comment: Hotel management agreement performance standards – the operator’s take
29 June 2010
What is RevPAR?
RevPAR is acronym for "Revenue Per Available Room." RevPAR is calculated by dividing the gross revenues for a hotel for a period of time by the total number of available room nights over the same period. The resulting number will tell you how much money you are generating from each room in your hotel for a particular period. It is a way of combining the results of two other key factors -average daily rate or ADR and Occupancy. The ADR is included in the revenue component of RevPAR, and the occupancy is encompassed in the available room night component.
What is the Competitive Set?
The competitive set is a group of hotels that are similar to your hotel. For example, a 100 room select-service hotel might be compared to a nearby Courtyard by Marriott, but not the local Ritz-Carlton which would be excluded. Picking the competitive set is a critical issue and something of an art. The data for the competitive set is provided by independent data sources, like Smith Travel Research, and usually require a minimum of five different hotels in the set (in addition to your hotel) to ensure confidentiality and anonymity of hotel data participants.
What is the Budget test?
The budget test requires that the Hotel achieves a minimum percentage (often less than 100%) of the profit that the operator anticipated in its budget for a particular year. This standard raises a very important issue for owners, since operators prepare the budgets for the hotel and therefore have the ability to propose a budget that is easier to achieve. While owners typically have budget approval rights (or at least they should!), operators are in a much better position to forecast the potential profitability of the hotel. Even more importantly, the operator, by virtue of its management of the hotel, is in a position to manipulate the operations of the hotel to achieve the necessary level of performance. For example, an operator might choose to push certain expenses into a following year to meet the operating test or accelerate certain income.