Asset-managing hotel management contracts

An overview for owners.

Asset managers can use a number of “tactical levers” to help achieve hotel owners objectives.

By the nature of the relationship, conflict sometimes develops between the owner and the operator concerning the management of a hotel. The fundamental problem the asset manager faces is how to improve the performance of individual hotel assets in ways that enhances hotel value.

What tools can the asset manager use to address this problem?

Certain tactical levers include the management contract, the capital expenditure decision, benchmarking, risk analysis, and refinancing.

Asset managers have several tactical levers at their disposal. The asset manager uses the management contract as a tactical lever to resolve disputes between the owner and the operator. Such disputes often occur when financial performance fails to meet expectations, and resolving disputes over performance can be a key element of maintaining a mutually beneficial working relationship.

Asset managers can use the contract provisions to apply pressure to the operator, or may need to respond to pressure from the operator to change contract provisions. The process from desired outcome to the specific contract language may ultimately lead to decisions to renegotiate the contract or use the contract terms to impose a solution.

Asset managers use capital expenditure decisions to enhance the value of the property through reinvestment. Using this lever, the asset manager works with the operator to decide which projects best enhance the value or the returns from the property.

Asset managers use the benchmarking lever to answer the following question, “Were we good or were we just lucky?” Or conversely, “Were we bad or were we simply unlucky?” Good benchmarking facilitates good decision making by applying objective information.

Asset managers use the risk analysis lever to answer the question, “Does the asset continue to contribute to the investor’s portfolio return and diversification goals?” Investors are not interested in simply maximizing returns, they are interested in maximizing risk-adjusted returns; risk management tools can help asset managers evaluate a property’s performance.

And lastly, the asset manager uses the refinancing lever to answer the question, “Do we harvest equity now or do we harvest equity later?” As properties mature and grow in value, the refinancing decision becomes increasingly important in helping investors realize their overall performance goals.

These are important business aspects for owners that management companies do not address, and that asset managers bring to the table.

For owners further discussions on this can be communicated through mark@turnerlodgingco.com

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