Hotel Owners Increasingly Willing to Share Profit and Risk with Operators

In a world first, Jones Lang LaSalle Hotels and global law firm Baker & McKenzie jointly reviewed more than 100 recently negotiated hotel management agreements from Asia Pacific, Europe and the Americas. Among the findings, says Arthur Adler, managing director of the Americas for Jones Lang LaSalle Hotels, are that, “Globally, owners are recognizing the benefit of providing hotel operators with adequate incentives to deliver superior profits and results, above pre-agreed hurdle rates. This is particularly the case where operators are willing to be remunerated on a heavily incentive fee weighted basis.”

The survey revealed a marked shift toward higher operator fees during the last three years in all regions except for the Asia Pacific. This is particularly true of incentive fees, where variations to fee calculation are emerging. While the favored formula is a fixed percentage of gross operating profit, methods such as sliding scales–which reward a higher level of GOP with a higher percentage fee–are increasingly prevalent.

Also noted was a strong trend toward financial performance criteria, with failure to achieve a specified benchmark resulting in an opportunity to terminate the management agreement.