Trends in Hotel Management Contracts

Abstract

An April 1996 survey of 25 hospitality chains, operators, and institutional investors by U S Realty Consultants revealed a continuing trend toward shorter management contracts and more incentive fees in the 1990s, as compared to the 1980s. The survey was conducted to determine what, if any, changes in management-contracts' provisions had occurred over the past ten years (1986 to 1996). Operators surveyed viewed management contracts as carrying greater risk since the 1980s due both to more liberal termination clauses and the fact that a greater share of fees was generated from incentive clauses. A review of 32 management contracts executed over the past ten years confirmed the changes observed by the respondents. The average duration of a management contract fell from seventeen years in the 1 980s to six years in 1990s' contracts. The review also revealed that limited-service hotels carry the largest average managementfee percentages, while upscale hotels have smaller fee percentages but larger overall fees due to higher cash flow. Franchise-fee percentages were unrelated to management fees.