Cornell Authors Update Management Contract Research
Fourth Edition Gives New Focus on Terms, Terminations, and Innovations
In this new volume, Eyster and deRoos have highlighted the changing terms found in today’s contracts. They note, for example, the following two innovations. First, operators have courted owners of strategically important hotels with offers of a low base fee, coupled with a large incentive fee; this shifts risk to the operator and sends a strong signal that the operator is committed to the success of the property. Second, operators are beginning to participate in cash flows relating to property transactions; this can be as a result of providing a cash flow guarantee in a project’s early years, or by agreeing to a below-market base or incentive fee (or both).
“Another novel feature that we noted is called the ‘manchise,’ in which the management contract and the franchise agreement are held by the same operator,” said deRoos. “Hilton initiated this concept. The management agreement and the franchise license are “stapled together” at the inception of the deal, with Hilton providing both management and franchise services. However, the fact that the agreements are separate allows the owner to sell the hotel to firms that are owner–operators while obligating the new owner to continue to honor the franchise license. In this way, the manager is able to obtain deals that might not otherwise be available.”
Looking at the future of hotel management contracts, Eyster and deRoos point out that the management agreement form has become the “dominant means to separate control and ownership of hotels.” It clearly has eclipsed the use of leases as a means to achieve a separation of the owner and the manager. However, they point out the importance of maintaining a reasonable balance in the agreement terms so that both parties benefit and neither is harmed.
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