Tuesday, January 24, 2012

Hotel Management Agreements - Owner Approvals

As discussed in previous posts, a common model for hotel development transactions in the Middle East is for the hotel to have a separate owner and a separate operator.

The owner is the investor or group of investors that provides (i) funding necessary for the construction, maintenance and operation of the hotel, and (ii) high-level (usually financial) oversight of the hotel's performance as a business. The owner typically hails from the country in which the hotel is located, or from elsewhere in the Middle East.

The operator, in turn, is a company that specialises in the planning, design and day-to-day management of hotels, and runs the hotel on the owner's behalf in exchange for fee-based compensation that is typically a percentage of the hotel's gross revenues and operating profits. Most major hotel operators are international companies based in North America, Europe or East Asia.

The owner and operator typically enter into a hotel management agreement that provides a framework to govern their working relationship, detailing their respective rights and responsibilities. One important aspect of this relationship is the owner's right to approve certain key actions by the operator. Such approval rights are obviously important to the owner as a way to help protect its investment in the hotel. However, the operator will resist owner approval rights that would hinder its ability to run the hotel in accordance with its own best judgment.

Typically, the owner will have approval rights with respect to items such as:
• The yearly budget for the hotel as projected by the operator;
• Capital improvements or renovations to the hotel over a certain dollar amount;
• Leases of concessions to third parties (e.g., retailers or spa operators) within the hotel over a certain dollar amount; and
• The appointment of key hotel personnel such as the general manager and financial controller.