LOS ANGELES— A recent global survey of hotel management agreements shows a trend toward higher operator fees and shorter terms. It also shows that operators are accepting more risk so as to align themselves with owners’ interests. Jones Lang LaSalle Hotels did the survey to discern new trends in management agreements, according to Melinda McKay, senior vp in the firm’s Chicago office. The company reviewed 107 new management agreements negotiated in Asia Pacific, Europe and the Americas for the report titled, “Management Agreement Trends Worldwide.” “This was the first truly global survey,” McKay noted, explaining that previous surveys in 1994 and 1997 had covered Australia and Asia but not Europe and the Americas. Overall, the report said that “trends are quite different [from the]1990s” when previous studies were published. “Globalization of the hotel industry and the consolidation into fewer major players is affecting the negotiation balance.” Noting that the hospitality industry is “increasingly competitive and sophisticated,” the report said, “operators can bring real value to a hotel’s operation. Different operators bring different benefits. Most owners no longer look at the level of fees as the main criteria of the management agreement. They now place much greater emphasis on the delicate cocktail of branding, marketing and management expertise for a given hotel in a given economic environment in a given location to provide the best balance.” • One of the most interesting trends cited by the report was a “noticeable” shift toward higher operator fees over the last three years. “Owners are recognizing the benefit of providing hotel operators with adequate incentives to deliver superior profit results above pre-agreed hurdle rates. The result is that owners are increasingly willing to share profit and risk with operators,” the report said. McKay pointed out that the Jones Lang LaSalle’s analysis showed that attempts have been made to align operator and owner interests through increased use of sliding incentive fees and performance clauses. “The new balance of risk and reward in management agreements is significant,” she said. She added that this alignment of interest is likely to further open the hotel investment market to institutional investors who have been absent as significant owners for most of the ’90s in many countries. The higher operator fees have applied to both base and incentive fees in all regions other than Asia Pacific, a region where operators are subject to the most competitive pressures when negotiating management agreements, noted McKay. The average base fee for the American management agreements analyzed in the report was 2.7% of gross revenue, the highest rate of all three regions. In Asia Pacific, the average base fee was 1.5% and in Europe it was 1.8%. The report noted that the scaling of base fees is more prevalent in America than in other regions. The most popular base fee in the agreements analyzed was 3.5% of gross revenue, followed by 3.0%. “American agreements exhibit a significant departure from the traditional measure of incentive fees as a percentage of GOP [gross operating profit],” the report further noted. “Many American agreements tie the operators’ incentives to a minimum return on investment for the owners as opposed to a level of gross profits… even where the incentive fee is a percentage of GOP, a number of [American] agreements provide an overall cap of a specified percentage of gross revenue.” McKay pointed out the wide variance in average incentive fees by region. In the Americas, it was 3.3% of gross operating profit; in Europe, 6.9%; and in Asia Pacific, 7.3%. • The initial term of management agreements on average has fallen in recent years except in Europe, the report revealed. The average term length in Europe was 19 years, with 62.1% of the agreements surveyed having a term of 20 years or more. In Asia Pacific, the average term length was 12 years, with one
