Hotels as Leased Assets
Historically, the U.S. centric model for hotel management was and is the hotel management agreement. The net distributable cash that ultimately finds its way into the bank account of the hotel owner varies from accounting period to accounting period and is not guaranteed by the hotel manager. In fact, the form of hotel management agreement prepared by most well known hotel management companies says precisely the opposite.
The language of the agreement is intended to make it clear to the hotel owner that no amount of return is assured. This has been in stark comparison to the European model for hotel management, which was not a management agreement at all, but rather a lease of the hotel to the management company. Under the lease model, the hotel owner could negotiate for a fixed monthly rental amount from the hotel operator. With changes in the hospitality industry and the hotel landscape, the European model of the past has had to evolve. It is probably no coincidence that this evolution has been facilitated by the presence of U.S.-based hotel management companies bringing with them the hotel management agreement model.
The result has been not only more management agreements, but also more variable leases rather than fixed leases. As we look ahead, we think Benjamin Jones at HotelNewsNow has it right when he says that long-term, fixed hotel lease agreements in Europe are being eased out in favor of variable contracts and management agreements. We expect to see management agreements ultimately rule the day.