Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Did you know that the major “hotel brands” own very few hotels? In the hotel business, hotel brands like IHG, Marriott, or Hilton are mostly asset light.
These hotels belong to many different kinds of owners, ranging from wealthy individuals, companies or even institutions…who all want to maximize profits from their property. They therefore turn to hotel brands to provide services and support their business.
A Win-Win Proposition
Hotel brands need hotel owners to expand their network footprint and to generate fees from the services provided. On the other hand, hotel owners need hotel brands to benefit from powerful distribution and loyalty systems, the latest technology capabilities and hospitality expert teams. This win-win deal transforms either into a Franchise Agreement or into a Management Agreement.
In this case, the hotel brand is the franchisor and the hotel owner (ex: an individual) is the franchisee. They sign a Franchise Agreement for a specific hotel brand. The overall principle of a Franchise Agreement is that the franchisee operates its own hotel, in compliance with the brand standards.
The franchisee is required to pay a monthly franchise fee based on a percentage of the hotel’s total revenue. Also, mandatory services fees include marketing and sales fees, distribution and loyalty fees, IT fees, hotel quality control and brand compliance audit fees.
The franchisor is required to provide all the brand standards and to deliver the mandatory services. Note: The franchisor is most concerned with top line revenue – not bottom line profits.
In this case, the hotel brand (ex: Marriott) is the manager and the hotel owner (ex: an individual) is the hands-off owner. They sign a Management Agreement for a specific hotel brand (ex: Courtyard).
The overall principle of a Management Agreement is that the manager operates the hotel for and on behalf of the hands-off owner, in compliance with the brand standards.
The hands-off owner is required to pay a base fee corresponding to a percentage of the hotel’s total revenue plus an incentive fee, based on the hotel’s gross operating profit plus mandatory services fees which usually cover marketing and sales fees, distribution and loyalty fees and IT fees.
The manager is required to best optimize the operation of the hotel and to deliver the mandatory services. Note: The manager is concerned with top line revenue and bottom line profit.
Management Agreements are more common for upscale and luxury brands.
In both franchise and management agreement cases, most hotel brands have a range of optional services that answer specific needs, throughout the hotel’s lifecycle.
These optional services cover hotel renovation, revenue management, exposure on distribution channels, learning and development for hotel staff, procurement and much more. These optional services are sold at an additional cost to the franchisee or hands-off owner.
How to choose?
So how does an owner choose between a franchise or management agreement? A franchise agreement is best for an owner who wants to have “hands on” involvement in the daily operations of their hotel. This person may already be an experienced hotelier.
A hand’s off owner may instead be someone who does not have the desire or experience to run the hotel themselves. Their expertise or business interest is more strongly linked to the real estate investment aspect of hotel ownership.
The type of agreement chosen has no impact on the guests. Based on the application of the brand standards, they enjoy the same experience whether they stay in a franchised or managed hotel of the same brand.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com