20 Nov

Selection of the Management Company: Process and Path

We are often engaged in the first part of hotel planning where the developer, hotel consultant, hotel operator, designer and legal advisor need to be addressed and coordinated following the correct timing of the engagement. What are the typical questions that the developer would face?

When shall I appoint my hotel operator?

You operator should come on board simply at the “right time”. If engaged too early it means, in several cases, that the tendering process, selection and negotiation were not done correctly. Inexperienced developers tend to rush into the appointment of the operator in the belief that the operator will guide them through the development process as a central coordinator and advisor. This faulty belief will compromise the ability of the developer for a proper negotiation strategy and it will lead to much higher TSA fee, weakly negotiated terms and total control by operators. In addition, untested business models open up the risk of future changes in positioning and design. The tendering process should be used as method to start engaging different operators without fully committing to a specific brand.

What terms are important to look for?

There could be 15 to 20 important commercial terms that have a large impact on the management agreement. All of the terms are “important” but the order of importance largely depends upon the main investment strategy. For instance, in the case where the developer will build to sell the single asset, terms related to early termination play a vital role. While in the case where the developer aims to create a portfolio of assets for holding long term, terms related to controlling mechanism are the first object of focus.

Hotel consultants will need to work with the developer on the strategy before engaging in commercial terms negotiation.

All the commercial terms should be well negotiated at MOU stage and not delayed to the HMA. The negotiation position of the developer is much stronger before the MOU is signed since the “competition” is still open for other offers. Often operators will not include all the range of commercial terms inside the first version MOU and they will limit mainly to terms regarding the fee, duration and basic explanation about the control mechanisms. Below are some of the terms we recommend to include in the first round of negotiations:

  • Process of budget approval
  • Process of key personnel appointment and dismissal
  • Use of bank accounts
  • Owner’s right to use the hotel
  • Area restrictions
  • Performance criteria
  • Opening date and term
  • Restrictions on redevelopment
  • Fees regarding management, marketing, maintenance and other hidden fees
  • Discussion about pro forma and reliance on future forecasts
  • Policy approvals and chop control
  • Shared services and group purchasing
  • Brand standard and implication on design
  • Replacement reserves and insurance
  • Indemnity
  • The technical services and pre-opening period

Several other commercial terms not included in the list above can be moved to the HMA stage which will have less impact about the selection of the operator.

What is the correct process?

We suggest to engage operators as soon the business model has been finalized and, ideally, right after the concept design that follows the business model has been issued. It will allow the operator to have a much better understanding about the expectation of the developer, positioning, quality and scale. This will turn into a correct identification about the possible brand and will show the operator the seriousness of the developer.

The steps should be:

  1. Developer gives general ideas.
  2. Hotel consultant to advise on the suitable business model following the developer’s vision.
  3. Hotel consultant to engage with the operators for initial feedback and brand suggestions.
  4. Hotel consultant to create an area program, facility mix and design brief.
  5. Hotel consultant to engage with the operators for initial review of area program.
  6. Architect to issue concept design following design brief.
  7. Operators to start reviewing concept design following brand suggested. Meanwhile, the developer to judge the suitability of the brand and operators.
  8. Hotel consultant and developer to finalize appointment of operator (MOU).

Any risk if the process is not done correctly?

Wow, where do I start?