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What is Hotel Operator Selection?

Explainer by Gregory Autin

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Last updated on 4 December 2020Comments

The Operator Selection Process
Operator selection is undertaken by developers and owners for the appointment of the hotel management operator. The process involves candidate identification, screening, and contract negotiations, generally together with the owner's legal counsel.

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When selecting an operator, property owners seek:

  • The most suitable candidate to operate the property;
  • The decision on the operating model, the basic terms, and the incentive;
  • A documented and structured model for candidate evaluation, to ensure objectivity and an audit trail;
  • A specialist with industry knowledge and expertise to identify and select the most appropriate operator;
  • Expertise for the negotiation of the operating agreement, to ensure fair partnership conditions and optimized financial returns; and
  • The specialist's recommendation for the final selection.

To initiate the process, the owner's objectives must be fully understood. Then suitable management companies are listed, bidding documents are prepared, and expressions of interest (EOI) and are solicited and collected.

Thereafter, the most suitable candidates are shortlisted, the commercial terms collected, the key provisions and performance criteria negotiated, and the MOU finalized. The memorandum of understanding (MOU) sets out the basic commercial terms by the operator on which the hotel management agreement package will later be drafted.

The operator selection process concludes with the preparation of the draft hotel management agreement (HMA), technical services agreement (TSA), and the pre-opening agreement (POA), their negotiation, and the closing.

The technical services agreement (TSA) governs the construction phase of a development project and details the plans and specifications for the new hotel submitted by the owner to the operator for approval, it setting forth the deadlines for construction milestones. The pre-opening agreement (POA) is that part of the TSA which governs a given period prior to hotel opening, setting forth the actions that the manager will take (at owner's expense) to get the hotel operationally ready for opening, such as property snagging, hiring staff, preselling rooms, etc.

Key Operator Responsibilities
Hotel owners engage operators to manage their properties on their behalf. They are generally responsible for the management of the supply chain, logistics, inventory, quality control, budget, and third-party relationships.

Depending on the property and the operating agreement between the owner and operator, the general manager (GM) may:

  • Hire staff and handle payroll;
  • Run the operational departments;
  • Manage vendor relationships;
  • Determine room rates and run promotions;
  • Perform property maintenance and recommend capital expenditures;
  • Develop budgets and produce financial reports for the owners;
  • Curate the hotel's online presence and implement marketing strategies; and
  • Coordinate renovations or expansions.

Except for the GM and possibly the financial controller, hotel staff is commonly employed by the hotel owner. This protects operating companies from the legal obligations associated with being an employer and makes it easier for owners to switch operators without needing to enter into new employment arrangements with staff.

Hotel operations are separated into front-of-house and back-of-house operations. Front-of-house (FOH) includes the lobby and related services, dining areas, fitness facilities and recreational areas. Back-of-house (BOH) includes such support services and areas as reservations and front-desk office support, the kitchens, housekeeping, human resources, sales and marketing, accounting, security, and maintenance and engineering.

Where owners engage a management company to manage and operate the hotel, they enter into a management agreement under which the management company is the counterparty. For a franchise, the franchisor is the owner's contractual party.

Under a hotel management agreement (HMA), a brand or management company takes over the operations of a hotel from the owner in exchange for a fee, with the owner bearing all risks and the operator manages the property as the owner's agent. Under a franchise agreement, the owner uses the brand, distribution channels and the proprietary knowledge of the franchisor while retaining all risks and liabilities and control of the property.

Operator Pre-Opening Involvement
The business case is used by the developer to solicit interest from prospective project participants - lenders, operators and investors. The decision to participate in hotel development projects is based on the expected costs, the likely rewards, and the financial and legal risks.

Developers undertake feasibility studies to determine the cost of projects, justify the investment of resources, and establish the approach to maximize profit until project exit. Separate feasibility analyses are also undertaken by lenders, operators and investors.

Unless continuing as the operator, the property developer exits the project at construction completion and delivers the facilities to its operator and asset manager. For execution of project exit strategy, the hotel operator must be selected.

Operator selection typically occurs during a project's design phase. This is necessary for project definition and to ensure that the physical facility standards of the operator are met as the facilities are being constructed.

A hotel's exterior and interior design must be coordinated with the operator. The asset manager must be engaged in regular progress meetings and property visits to monitor the project's development.

For closeout, operational testing is performed to allow the operator to have the problems rectified before the facility's actual opening. Unless continuing as the operator and property manager, the property developer exits the project at closeout.

To commission a building, the developer conducts the punch list walkthrough and places the facility manager in charge of its operation and maintenance. Property snagging is performed by the operator to ensure the facilities have been completed according to the operator's design specifications.

Owners and operators address the development risks and allocate additional costs in their hotel management contract. Owners must ensure that any tender or proposal invited from operators requires that the operator identify all fees it intends to charge in relation to the hotel (both at pre-opening and post-opening) and the basis of their calculation.

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Gregory Autin

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