An abundance of hotel brands and operators in the United States, coupled with rapidly changing technology and increasing global connectivity, have made selecting a suitable hotel operator even more important for owners. The right operating partner plays a crucial role in maximizing the financial performance and the capital value of the assets, which makes the experience and expertise hotel operators bring to the table a critical element for consideration.
Also, as the chain scales go higher, properties become more complex to operate. With more revenue-generating departments and amenities, such as food-and-beverage outlets, meeting spaces, spa and fitness centers, retail shops, parking garages, recreational amenities and programs, and other special amenities, luxury and upper-upscale hotels have more to consider (and more to risk) when selecting an operator than select-service hotels do.
To obtain the right operator, hotel owners should:
1. Consider the operator’s brand and positioning
Before drawing up a contract with a hotel operator, evaluate its brand and performance record and determine if it fits with the hotel’s vision. If a hotel is part of a mixed-use development, it’s particularly critical to understand how its positioning creates synergies with the rest of the components within the master plan. Consider the property’s geographical location, target guest demographic and what type of amenities it offers to guide the decision-making process.
2. Understand current commercial terms
When writing and negotiating contracts, be familiar with the commercial terms available and their reasonable parameters (including key money, management fees, incentive fees, areas of restriction, renewal options, service fees, etc.) to ensure all parties are being set up for success. Different terms have intertwined relationships, and it is essential to understand how one term could influence the others and impact hotel operations and profitability. If the terms go off on a tangent, owners risk paying too much in fees or entering an arrangement that is not sustainable for mutual benefits.
3. Have an exit strategy
Every investor has a timeline to monetize their investments. Whether an owner would like to hold the property for five years, 10 years or generations to come, the goal is to maximize value when the property is ready to sell. Since a relationship with an operator is contractually binding, the encumbrance will have a direct influence on the price when marketing and selling the property.
It is not unusual for owners, even for those who are experienced in hotel development, to not have the broad experience or insights needed to understand and negotiate the various terms available for different operators. These owners typically find a joint venture development partner who is familiar with market terms to guide them through the process or a development consultant to represent them in effective negotiations.
The owner/operator relationship can be binding for an extended period of time (particularly for larger, more complex assets) and will have future implications on financial performance and asset values. To maximize the investment returns, hotel owners must find an operator that has the right brand and positioning, and devise an agreement with appropriate commercial terms that accommodates for their exit strategy. When these three factors are considered and the appropriate steps are taken, the hotel owner will be well positioned for an effective relationship with the hotel operator and mutual success for years to come.
Charlotte Kang, EVP at JLL, provides strategy advisory and asset management services in the United States.