The operator receives:
- a base fee: typically 2-4% of the aggregate turnover; and
- an incentive fee: performance-based compensation: often 8-10% of the gross operating profit (GOP) or the GOP less the base fee (Adjusted GOP or AGOP).
Those fees are usually indexed (eg consumer price index).
Fee structures vary between operators. Commonly, management fees consist of a percentage of the hotel's gross annual revenues (base fee) and a percentage of the hotel's annual gross operating profit (incentive fee). The level of management fees tends to be standard, even if they may vary depending on the typology and characteristics of the hotel, notably its profitability, and the negotiating power of each owner. In some cases, the operator may guarantee the owner that the adjusted gross operating profit of the hotel will not be less than a certain minimum amount per year (over a certain number of years or over the entire duration of the HMA). In these cases, shortfalls are capped at a certain amount over the entire duration of the guaranteed period and the amount of the base fee is set at a higher percentage than in the case of a plain HMA without guaranteed results.
HMAs customarily include a base fee based on gross revenues and an incentive fee based on adjusted gross operating profits.
Fee structures vary between operators. Usually a base management fee is paid, calculated on gross operating revenue (often between 1-3.5%). Incentive management fees may also be paid, calculated on operating profits (often between 2.5-10%, with increased amounts in later fiscal periods and when profits exceed higher thresholds).
A mix of a base fee (percentage of gross revenues) and cascaded incentive fees (percentage of gross operating profits) is the typical fee structure. (Base fees for budget/ midscale hotels tend to be higher because of the lack of food and beverage and other revenue streams offered in full-service hotels.)
It is typical to divide the fee into two types; namely the basic fee and the profit fee. The basic fee is most often determined as a percentage of the gross monthly income from the operation of the hotel (on average in the range between 2-4%). The profit fee is then primarily the remuneration from gross operating profit, the amount of this fee is then determined again as a percentage of this profit (ranging from 8-15%), while it is standard that only one percentage is set.
The standard includes a base fee calculated on revenues and an incentive fee based on profits.
We often see a base management fee and an incentive fee. The base management fee is at a level of 2-4% of the gross revenue and the incentive fee usually amounts to 8-12% of the GOP. Sometimes parties agree on certain incentive management fees, which are applicable when a certain turnover is exceeded.
A typical fee structure is usually comprised of a base fee (a percentage of gross revenue) usually of 3-4% and incentive fees (percentage of gross operating profit or adjusted gross operating profit) usually ranging from 3-7%.
Usually there is a base fee calculated on revenues and an incentive fee based on profits.
Yes, although fee structures vary between operators, they typically include a base fee calculated on revenue combined with an incentive fee when certain profit hurdles are met. In some scenarios, there may only be a base fee.
Usually a base fee is calculated on revenues and an incentive fee is based on profits. Royalty fees are also provided for branded operators.
Fees vary depending on brand, operator and hotel location. The standard position is for a base fee pegged to total revenue and an incentive fee pegged to GOP.
Fees vary depending on brand, operator and hotel location. Fees are normally a percentage of total revenue (such as 1-3%), and a percentage of gross operating profit (such as 0-8%, depending on how profitable the hotel is).
The standard includes a base fee calculated on revenues and an incentive fee based on profits.
Fee structures vary between operators. Usually there is a base fee calculated on revenue combined with an incentive fee when certain profit hurdles are met.
Fee structures vary between operators. We often see that a base management fee is included in addition to an incentive fee.
Between 3-5% and up to 12% of the hotel's operating income.
Fee structures vary between operators. The standard is a base fee and a variable fee calculated on revenues.
Some branded operators may intersperse this with other fees.
Fee structures vary between operators. The standard is a base fee calculated on revenues and an incentive fee based on profits.
Base fee (as a percentage of total revenue) and incentive fee (as a percentage of gross operating profit).
Generally, on the one hand, there will be a base commission for the gross revenues obtained, which will be translated into a fixed percentage of the total amount of these revenues, normally between 2% and 4%, although it will depend on the category of the hotel being managed and the type of operator. However, it is possible for the parties to make the remuneration dependent solely on the total sales of the hotel.
On the other hand, the parties may agree on an incentive fee, which corresponds to a percentage of the gross operating profit.
Finally, other fees could be added to these main fees, such as the Marketing Fee, the Direct Reservation Fee and the Non-Direct Reservation Fee.
The fee structure will depend on the operator and the brand, but in most cases will be calculated as a base management fees (against total revenue) and incentive fee (a sliding scale against (adjusted) profit).
Base fee (as a percentage of total revenue) and incentive fee (as a percentage of gross operating profit).
Fee structures vary between operators. The standard is a base fee calculated on revenues and an incentive fee based on profits. Some branded operators may intersperse this with royalty fees.
The standard fee structure includes a base fee calculated on gross revenues and an incentive fee based on profits. Base fees range from 2-3% for non-branded third-party management to 2.5-4% for branded management. Base fees tend to have a negative correlation to the initial term (i.e., the shorter the term the higher the base fee and vice versa). Incentive fees vary, but are typically based on some percentage of GOP, AGOP or NOI, and are often subordinated to an owner's priority return on investment.
Australia
Are Hotel Management Agreements (HMAs) common in the jurisdiction?
Yes. HMAs are a common owner/operator structure used in Australia.
If not HMAs, what are the alternatives / what is commonly used?
Other alternative approaches are:
- Franchise agreements – operators enter into franchise agreements with well-known domestic or international hotel chains under which the chain provides a business system, services and licenses the use of the brand and other IP of the hotel chain. The property at which the hotel is operated may be owned by the operator or another party (which may be an entity related to the franchisor). The fee structures may vary and may be made up of a number of components, including royalties for the use of IP, other fixed charges, fees for services and/or fees based on revenue/performance of the hotel business.
- Leases – owners lease the underlying asset to an operator on a long-term basis (under which a fixed lease payment is payable), and the operator operates the hotel business autonomously, or occupies the hotel under the lease, with the HMA regulating the operation of the Hotel.
Is it common or usual for the HMA to be governed by (i) local laws; (ii) the laws of one of the parties' country of incorporation; or (iii) an alternative jurisdiction?
HMAs are typically governed by Australian law. Australia is regarded as a relatively stable legal jurisdiction, such that the sovereign risk and legal risks associated with use of Australia law are limited.
Are there any significant or unusual points to note in respect of tax on HMA payments in the jurisdiction?
HMA payments made to the operator by the owner, and/or any rental payments under a lease of the Hotel property are subject to the Australian Goods and Services Tax (GST).
Download this country guide in PDF format:
Australia
Is there a standard contract period of an HMA?
The duration of HMAs depends in part on the bargaining position of the operator – for major operators, terms of 20+ years are not uncommon. The duration also depends on the nature of the assets, with landmark assets often attracting longer terms.
Is the term usually fixed? Are early exit or similar options included (contractual or implied)?
The term is usually fixed.
It is increasingly common to integrate early exit mechanisms where operators underperform for a sustained period. This is in addition to standard early termination rights, such as for an insolvency event (eg liquidation, receivership, statutory winding up) or where a third party brings any claim or commences proceeding relating to the owner's title to the hotel or land.
Is it usual to include fees / liquidated damages for early termination?
Exit fees for early termination for convenience (ie without cause) or on sale of the property by the owner, and excluding termination in the case of manager default, are common. The level of termination fees/liquidated can vary depending on a number of commercial factors (eg location, type of hotel, market position of brand) and the reason for early termination (ie for convenience vs where the property is sold).
What is the usual position in respect of renewal?
It is common to have renewal periods that are subject to agreement between the parties; options that are exercisable unilaterally are less common. Renewal periods vary depending on the operator and are driven by their own operational needs. Renewal periods as part of an HMA are often negotiated as part of any agreed future capital improvement program for the hotel asset.
Australia
Is there a standard fee structure for HMAs (eg base + incentive)?
HMA fee structures typically comprise a percentage of gross annual revenue (base fees), and a sliding scale percentage of the adjusted gross operating profit, where the operator meets profitability thresholds (incentive fee). The fee structure will depend on various factors including the extent to which the operator or the hotel owner contribute to capital and operational costs of the hotel over the term of the HMA.
What other fees and charges are there (such as royalties, accounting, marketing, license fees, etc.)?
Depending on the parties and type of hotel, marketing contributions and/or fees for use of services such as accounting, software, reservation networks or intellectual property (including branding) may be payable.
Are owners typically required to set aside funds for fixtures and fittings?
Yes. Owners are typically required to make furniture, fitting and equipment (FF&E) contributions for general repairs and maintenance of the hotel, and any other budgeted capital expenditures.
Australia
What is the usual standard imposed on an operator in respect of the operation of the hotel?
Commonly, the standard imposed on the operator is that the operator will use the skill, effort, care and expertise reasonably expected of a prudent operator of hotels with regard to the brand and brand standards of the hotel operator. KPIs and other prescriptive standards are less common, although the inclusion of such standards varies depending on the operator and the consequences flowing from failures to achieve such standards, the operator and the asset.
What performance measures are commonly used in the jurisdiction?
Common performance measures are generally related to performance against an agreed budget and/or Revenue Per Available Room (RevPAR) relative to a set of similar competitors.
These measures are often linked to termination rights for failures to meet these standards.
Is an operator or owner guarantee common in the jurisdiction?
The inclusion of guarantees depends on the identity and structure of operator and owner, including the financial position and assets held by them.
What is the usual position in respect of employees? With whom does the liability for the employees sit?
Commonly, the owner of the hotel employs the employees and the employees take directions under the supervision of the operator. In these circumstances, the hotel owner is liable with respect to:
- minimum wage obligations, work, health and safety (WHS) and discrimination law compliance;
- any penalties, damages, compensation or other order arising of unfair dismissal; and
- vicariously liability for the acts and omissions of employees.
For everyday management, owners usually give operators permission to direct and control its employees.
In some cases, the general manager, and possibly other key employees (eg executive chef), will be employed by the hotel operator.
Is it usual to have a non-compete clause, eg that no other property with that brand can open within a certain radius?
Yes, based on a geographic radius.
Who is responsible for insurance?
The owner is typically responsible for obtaining insurance for:
- the property;
- business interruption;
- workers compensation for employees employed by the owner; and
- items owned by the owner or people other than the operator.
The operator is typically responsible for the following insurances:
- public liability;
- workers compensation for employees employed by the operator;
- motor vehicle;
- employee fidelity; and
- other operating risks it is customary to insure against in the operation of hotels.
Does the HMA give rights in real estate in the jurisdiction?
No, provided that the HMA does not operate as a lease or give rise to a leasehold interest.
Does the HMA need to be recorded against the property, if this is possible in the jurisdiction?
No.
However, where an HMA is not recorded against the property (for example, via a caveatable interest and caveat registered against the title to the property), operators will need to ensure they properly secure their operating rights in the event the hotel property is sold.
Where financing is taken, is it standard to obtain a Non-Disturbance Agreement (NDA) as part of a management or lease agreement?
Yes. The terms of NDAs vary depending on the parties.
What other agreements usually sit alongside an HMA in the jurisdiction?
There may be other associated agreements depending on the operator, which can include:
- IP licensing agreements;
- services agreements for the provision of services (eg accounting, software licensing, access to reservation networks);
- individual employment contracts for the general manager of the operator;
- supply agreements; and
- mortgagee step-in right deeds (on behalf of the owner).
Australia
What are the standard rights / restrictions in respect of transfer / sale of the hotel?
The rights and restrictions applicable to the transfer/sale of the hotel depend on the operator and the asset. For major operators and/or landmark assets, the consent of the operator is commonly required for the hotel to be sold or transferred. Otherwise, the owner is usually permitted to transfer or sell the hotel without the consent of the operator.
When a managed hotel is sold (either asset or share deal), is it usual in the jurisdiction that either the Operator's consent is required for the sale, or that the hotel may only be sold if the HMA transfers with the hotel?
Both. In relation to the requirement for the consent of the operator, see above – it depends on the operator and the asset; however, commonly with marquee hotels operated by international hotel operators, their consent is usually required, and commonly provided if the purchaser agrees to be bound by the HMA following the sale of the hotel.
Whether this is the case with other operators, or if the owner can sell the hotel property with vacant possession will depend on the terms of the HMA.
For taxation reasons, hotels are commonly sold with the HMAs in place, even if these can be terminated after settlement. Taxation advice should be sought as part of any hotel acquisition or disposal.
Do HMAs commonly include a right of first refusal for the operator to purchase the hotel?
It depends on the operator and the asset. Some operators also own hotels and therefore like to have a first right of refusal, while other organizations that are simply operators do not seek such a right.
Is it usual to include provisions which enable the sale of the property with vacant possession ie without the brand?
As above, these depends on the terms of the HMA and the operator. There are different tax consequences arising if the hotel property is sold with vacant possession and taxation advice should be sought as part of any hotel disposal.
Australia
