When an HMA deal is negotiated, one would very early on see the divergence in goals desired by the owner and the operator. Challenge is in bringing the parties with varying agendas to the table, engage in a mutually beneficial dialogue, and leave with a feeling of win-win for both parties, and celebrating that outcome in the form of a hotel management agreement.
That said, we focus here on three key issues often raised by owners in their conversations with prospective operators.
One of the essential terms of contract is the requirement for key money.
Key money is paid in return for granting the contract. It does not give any right for the operator to take part in the ownership. This key money may be given to assist the owner either with repayment of a loan, complete the investment or conversion plan, or as an upfront fee to win the deal. It is generally non-refundable and often non-adjustable against future revenue over a burn off period. However, some do ask for key money to be retuned on premature termination of the HMA.
Payment of key money may also put the owners under a bit of stress to bargain hard on some other clauses such as minimum guarantee or performance test.
Nonetheless, the fact remains that key money remains an issue of contention and intense negotiation in deals. Some operators are turned off by the idea of key money while others object to the amount.
The other issue of contention is the amount spent on property conversion or property investment plan. Depending on the condition of the property, and the stage of development it is in, there may be requirements from the operator to upgrade the resort to a certain standard consistent with the incoming brand, or complete development as per those standards, or convert the hotel to fit those standards. Either way, this is money to be spent entirely by the owner to attract that particular brand and has no way to set that off against fees paid to the operator.
Owners often object to the amount to be spent and the extent of renovation required. This is especially true of resorts that ought to undergo a major renovation phase to fit to a brand quality. This is equally true of those islands that are being developed to suit a brand promise. However, those properties that have had a shorter operations period, or had opened recently may have a stronger position to manage with a smaller amount spent on property investment or conversion to fit to a brand quality or brand promise.
One other key issue that often pushes a deal to its breaking point is that of minimum guarantee of owner’s returns or the performance clause.
There is a degree of legitimacy in the owners’ motivation. It is the owners who would ultimately be responsible for lease rent payment, loan repayment, insurance, working capital requirements, and capital expenditure. Therefore, the owners would like the operator to be a competent operator which can ensure that the hotel performs at a degree of profitability to allow the owners to receive enough returns to meet these costs and provide a return on investment.
The contention appears in the efforts of the owners religiously insisting on the clause and operators constantly struggling to find ways to lessen its burden.
From the perspective of the owners, the insistence on this clause goes to the essence of the deal: profit for the owner and competence of the operator.
The Maldivian favorite seems to be a Budget or GOP test where profitability is achieved based on proposed budget projections. The second favorite is the NOI test where a formula is proposed to guarantee owners returns based on gross operating profit less fees, insurance premium and FF& E reserves. More often than not, owners already have a figure in their contemplation.
A RevPAR test often proposed by the operators is not generally favored by the Maldivian owners.
Any brand that is looking at entering the Maldives market or expanding its foothold with a management agreement may have to tackle the above issues in some form – in arriving at a successful hotel management deal.
Editor’s Note: This article was first published on Nasheed & Co Reproduced here with courtesy of the firm.