Lodging is a specialized industry and hotel guidelines are completely different than anything else that many investors and property developers will have worked on. Considering the size of investment, it makes sense to put your investment in the “Hands of Professionals”. Most management firms have programs in place for first-time owners to get their property open and then help run it. They handle day to day operations, from managing employees to maintaining brand relationships to controlling revenue channels.
“Owners should look for a one-on-one connection with their management company in which they have a vision”. It needs to be a relationship that’s transparent. The owner and operator agreements don’t work when they get out of sync, which can happen when the management company fails to understand the needs of the hotel. Luckily there are a lot of choices out there for owners looking to make the switch or just explore options beyond their current situation. However, this is a tricky balance to weigh, as some management companies have a particular niche, while some are so busy that they don’t have the one-on-one focus necessary for some markets.
And while all owners invest in their property differently, most financial structures encourage having a management company with a standardized set of processes and systems there to operate the property. In the eyes of most lenders, having a third-party management firm in place will help turnaround a property. That’s because they have dedicated staff to oversee revenue management, sales, and operations and are used to handling the peculiarities of the lodging industry. They also have programs in place to mentor entire hotel staff. Owners that bring in a professional company are going to set themselves up for success as well as create stability. “This is especially true in cases where a property joins a portfolio of hotels that is being operated successfully and consistently by a professional management company”.
So how should an owner go about finding the right management company? Calling references is one thing that sure works, look at the depth of the team. At the end of the day these are the people who will set you apart in your comp set. A management company with a healthy ratio of staff will be much more connected to your property on a day-to day basis. Managers that oversee fewer properties have more opportunity to understand each hotel’s place in the market and what its needs are.
Once you’ve identified the best management company for you, then you’ll want to be very careful when you negotiate the contract. All of them vary substantially. Some companies charge just a monthly fee and accounting fee while other insert all sorts of back charges. You want as much transparency in the charges as possible. If you see that there are problems from day one as you negotiate your management contract then you better not go into bed with that company.
With management contracts so crucial in laying the foundation of a hotel’s operational success, they are finding themselves increasingly under the microscope in this transaction heavy environment. For owner’s protection these contracts commonly contain earnings test and cancelation clauses that allows owner to assess the value of the agreement based on how the operator is performing. Given the importance of these contracts the performance metrics need to make sense and not be too onerous.
The contract is where you will “negotiate your out. “It’s where you can make it as painless as possible for all sides”. Integrity Hotel Partners likes to provide our clients with a good exit strategy. Our commitment horizon is usually isn’t longer than five years. We come in, we fix it, we stabilize it, and let the owner decide if he wants to keep the portfolio or sell it for as high a return as possible!