PHOENIX—The most important consideration for an owner in choosing a management company is alignment of interests. Both sides—owner and manager—should share a vision and strategy for the hotel, said panelists during a session titled “The hotel management company” at the 19th annual Lodging Conference.
“To say any operator can operate any hotel is boastful,” said Bill Linehan, chief marketing officer of Richfield Hospitality and its affiliate, Sceptre Hospitality Resources. “It’s important to have the right kind of operator for the right kind of asset, so the owner needs to select an operator with aligned interests and an aligned strategy for the property.”
Linehan said Richfield has separate teams with “separate mentalities and philosophies” for full-service, select-service and lifestyle hotels.
A large management company, such as Interstate Hotels & Resorts, tailors its operations teams to meet the profiles of the hotels it operates, said Chris Ivy, executive VP of development and acquisitions.
Interstate is divided between full-service and select-service hotels and operates each division regionally to give owners the specialized services they require. Ivy said each regional team has the full marketing and operations resources of a smaller management company.
“We have two types of owners: large players such as (real estate investment trusts), private equity and institutional owners and small owners that may have one or a few hotels,” said Ivy. “The large owners come to us because our scale allows us to do things smaller companies can’t, but we need to make sure smaller owners don’t feel as though they are lost in a big organization.”
Choosing a company
In addition to aligned interests, the panelists presented other factors an owner needs to evaluate when choosing management, including communications, transparency and brand relationships.
“Some owners still choose the management company that offers the best pro forma, and that’s not necessarily to their best advantage,” Ivy said. “An ability to provide increased interaction with owners is also important. There is a greater need for owners and managers to be on the same page.”
To promote communications and transparency, Interstate and Richfield use technology and face-to-face contact to interact frequently with owners.
Ivy said his company holds annual owner meetings, gives quarterly updates and provides technology that allows owners to monitor performance of their hotels on a daily basis.
Linehan and Ivy said operators should be able to help owners deal with brand companies.
“It’s less about dispute resolution and more about building alliances with the brands,” Linehan said. “Every brand has its own map to the same destination, so understanding those maps and resources is what owners can rely on operators to do, and that prevents conflicts.”
Management companies also can help owners deal with brands on capital expenditure requirements. Ivy said nearly 100 of the hotels Interstate manages underwent a renovation last year. Among that total were 17 lobby redesign projects at Courtyard by Marriott hotels.
“We operate hotels with 39 different brands and have representation on every major brand council,” Ivy said. “In the (product improvement plan) process we can help owners navigate what brands will allow and what they won’t allow.”
Fees and terms
While management companies typically charge 3% to 4% of revenues, incentive fees can vary widely, said the panelists. Incentives often are based on profit goals, but other factors can be used.
“We structure incentive fees based on owner objectives,” said Ivy, noting contracts sometimes include profits plus guest scores or can be based on revenue growth goals or a combination of several measurements.
“Most management companies are flexible in calculating incentive fees. We’re open to most things as long as there is a way for us to effect change and to earn the fee,” he added.
Linehan said incentives are increasingly tied to a combined quality index, which includes management of a hotel’s online reputation.
Karen Thiessen Moyer, an attorney with Davis Wright Tremaine in Seattle, said secondary incentive fees in management contracts sometimes reflect the owner’s long-term goal for the asset.
“If the goal is to flip it in five years, the management company might take a back seat on an incentive fee and instead opt for a percentage of the sale price,” she said.
The panelists said another issue owners and management companies need to negotiate is subordination and non-disturbance, or a clause that in case of foreclosure prevents the lender or new owner from removing the management company.
Moyer said lenders often balk at these provisions, believing it gives them less flexibility in case they need to take ownership of a property.
“It’s probably the single biggest area of negotiation in a management contract,” Moyer said. “For owners seeking a loan, (a non-disturbance agreement) can be an encumbrance on their ability to get money now or 10 years down the road. I still see them in contracts, but they’re harder to get.”