It’s telling that the relationship between owners and operators is frequently described as a marriage, the hotel management agreement as a pre-nuptial arrangement, and the breakdown of relations as a divorce.

 

With hotel management agreements lasting for as long as 25 years, finding the right partner is crucial. Aside from the occasional tiff it usually does work out, but all too often the owner-operator relationship can become fraught.

 

This is not really surprising, notes Robert McIntosh, executive director, CBRE Hotels Asia Pacific, given the divergent interests of owners and operators. “Generally, they get on reasonably well, but there is always a tension in there and so there should be between the two parties. They have slightly different agendas and slightly different interests. An owner is generally trying to get a return on their investment [while] an operator’s emphasis is more on providing a particular service to maintain their reputation,” he says.

 

 

The usual grievances for the operator are that the owner is unwilling to stump up enough cash or that there is too much interference in what they are doing. For the owner, the typical complaint is that there isn’t enough revenue coming in or that the operating expenses are too high.

 

“It’s a very unique business arrangement,” says Yuval Tal, resident partner at law firm Proskauer Rose. “It’s a long-term arrangement typically and in Asia is much shorter than it is in the rest of the world, but even here people don’t do deals at less than 10 years and most are 15-20 years. It changes the dynamics because it’s a relationship where you don’t want something fast around the other side, because you’ve got 20 years to live with them. For the most part, it is a good relationship but there are situations where it is bad and especially where owners are losing money.”

 

Tensions typically occur when the operator of a hotel that is underperforming starts making demands for new expenditures, such as new technology or design upgrades, which the owner is unwilling to fund when the property is already losing money. But for the operator, such expenditures are deemed essential in order for it to maintain its reputation and brand standards.

 

“One of the biggest rules [in hospitality] is that you like things to be new, you need to redo the carpets or there is new technology and in order to be a five-star hotel, you need to have an iPad, for example….that’s a significant capital investment and the owner is going to say ‘Why do I need to invest in a hotel that’s losing money already?’ and the operator is going to say ‘I can’t maintain brand X’ so that is going to create tension. Whenever there are capital expenditures, there is typical tension between owner and operator, but especially where the place is losing money,” says Tal.