PROVIDENCE, RI—Following the recently issued 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI), published by the American Hotel & Lodging Association (AH&LA), Hotel Asset Value Enhancement, Inc. (hotelAVE), a hospitality asset management firm based here, published a white paper, revealing the effects on management agreements.
Michelle Russo, founder and CEO of hotelAVE, authored the “How Will the 11th Edition of the Uniform System Affect Your Management Agreement?” white paper. As a member of the Financial Management Committee, Russo addresses what owners and operators need to know about future management agreements.
The white paper shares details to allow them to evaluate and fully understand the impact and changes on management fees and performance tests. Along with recommendations to assess revenue terms, profit terms and thoughts for future management agreements, Russo also shares tips for evaluating current agreements before changes become effective Jan. 1.
The AH&LA issued the new edition of the USALI in July. The process took almost three years, and the edition reflects the first time that ownership interests were included in the Financial Management Committee that previously comprised only operators, industry consultants, CPAs and educators. While there are many changes from the 10th to 11th editions, this article addresses what owners and operators need to evaluate to understand the impact of the 11th edition on manager fees and performance tests.
The 10th edition committee was made up of 25 individuals including 13 operators, four consultants, three auditors and three professors. According to Russo, the new membership committee included Jeff Carter, VP, CWCapital Asset Management; Vicki Richman, COO, HVS Hotel Management & HVS Asset Management; and Cindy Braak, SVP, finance business partner, global lodging services at Marriott International Inc. to help identify the membership base’s lack of balance and void of owner representation.
“They rebalanced the membership to be equal numbers of operators, industry consultants/educators and owners,” said Russo. “They recruited 10 owners, including five from the major REITs, two from private owners and three third-party asset managers. All the voices are now represented. Adding the owner constituent for the first time had been more interesting and livelier when analyzing concepts.”
Among the main points in the USALI of which hotel owners may not have been previously aware are the enhancements in the detail of reporting. “Prior to this edition, there was only one line item for wages in each department and an average of 40 to 60 lines for other expenses, when labor represents an average of 60% of our total operating costs,” said Russo. “Now, there are eight labor line items in the rooms department, for example.”
Additional improvements include a more-detailed room revenue reporting with uniform segmentation requirements to be used by all. “These efforts will enhance benchmarking across all hotel operators and brands,” added Russo. The committee also moved non-operating revenue, generated by the real estate but not directed by hotel operations, below Gross Operating Profit (GOP). “If the hotel operator oversees this revenue, then it remains in miscellaneous revenue,” said Russo. “Operator fees should be tied to operating revenue.” Also, the resort fee is no longer in room revenue, and rental units that are in the room inventory for a term of less than one year are also no longer included in room revenue.
With the expanded use of technology and more cloud-based systems versus capital expenditures of hardware, the Financial Management Committee added an IT department. The committee members determined that tracking this expense in one department was necessary to reflect the future of the industry.
As detailed in the 11th edition of the USALI, hotel owners would need to understand changes regarding manager fees and performance tests. The following changes have implications for RevPAR and GOP, which may influence performance tests and fees:
• Exclusions from room revenue (resort fee, rental management units with terms of less than one year and the reduction of room revenue of all commissions and rebates paid to group).
• Relocating non-operating revenue below GOP.
• Change of reporting of certain revenue from gross to net.
• The hotelAVE Reference Grid outlines each change and how it could affect each area of the hotel Profit and Loss (P&L) statement.
Hotel owners and operators should also comprehend future management agreements. “The management agreement should address the exceptions to the definition but not the defined term,” said Russo. “Many management agreements use terms such as Gross Revenue and Operating Profit; these are not GAAP (Generally Accepted Accounting Principles) or USALI terms. Standardization of our industry’s key terms reduces interpretation and enhances consistency for benchmarking.”
For more information on hotelAVE’s white paper, visit www.hotelave.com.