Management Contract Trends -

A Review
September 2014
 This report identifies the main commercial
trends and conditions contained within a
selection of Hotel Management Contracts
(HMC’s) across India. Our comments
are based on a review of 42 management
contracts for properties across various
segments, located in the primary and
secondary cities of India. The review
highlights key trends pertaining to fee
structures and important clauses in Hotel
Management Contracts and aims to reflect
current trends in the industry.

2 Management Contract Trends - A Review

 Management contract terms covered in the report

Comparison Parameters Key Aspects Included

Initial Term Period

Hotel Management Contracts Term Option of Number of Extensions

Period of each subsequent Extension

Base Management Fee

Incentive Fee

Sales & Marketing Fee

Fee
Central Reservation Fee & Loyalty Program

Technical services Fee

Furniture, Fixtures and Equipment (FF&E) Reserve

Operating Budget Authority to Owners for Approval or Rejection

Protection Period
Non-Compete Clause
Protection Zone with respect to the Site

Thresholds based upon GOP, RevPAR or a combination of both

Performance Clause
Cure Options

Operator Restrictions Selection of Key Personnel of the Hotel

Financing Restriction
Owner Restrictions
Non-Disturbance Clause

Termination with a Cause

Termination Clause
Termination without any Cause

Operator Guarantees
Operator Guarantee & Contribution Clause
Equity Contribution by Operator

Management Contract Trends - A Review 3

Research Sample Details Location Orientation
Out of the total sample, 52% belonged to business cities, 17% to leisure
Our sample set was fairly evenly spread across all segments, with a
majority of contracts pertaining to properties located in primary cities. cities and 31% to cities having a mix of business as well as leisure
orientation.

Segment
Universal Sample - It constituted of 42 contracts. Out of these, 17% Sample Distribution by Orientation of
belonged to luxury segment, 14% to upper upscale, 26% to upscale, Locations
38% to midscale and 5% to economy segment.

17
Sample Distribution by Hotels Classification
31
5 17
52
38 14
All figures in (%)

Leisure Business Mixed

26 All figures in (%)

Operator
Luxury Upper Upscale Upscale Midscale Economy Out of the total sample, North- American chains comprised 60%
of the sample, European chains comprised 26% and Asian chains
comprised 14%.

Location Sample Distribution by Operator

Headquarters
81% of the contracts were executed for locations belonging to the
metropolitan / tier I cities of India, 12% of the contracts for tier II cities
and 7% for tier III.
14
Sample Distribution by Location
26 60
7
12
All figures in (%)

North America Europe Asia

81 All figures in (%)

Metropolitan/Tier I Cities Tier II Cities Tier III Cities

4 Management Contract Trends - A Review

Management Contracts - Initial Term
Key Aspects
5
15
Term
Among management contracts, 39% stipulated to have an initial term
12 39
of 10-15 years, 29% of 16-20 years, 12% of 21-25 years; 15% of 26-30
years, while only 5% of the contracts stated the term of more than
30 years. On an average, the overall initial term of contracts stood at
around 19.6 years. 29 All figures in (%)

100% of the contracts provided at least one additional term, generally

10 to 15 Years 16-20 Years 21 to 25 Years
by mutual agreement between both parties. 52% of the contracts stated
26 to 30 Years 30 Years plus
provision of extension by two terms, while 39% stated extension by 1
term only. The remainder 9% stipulated extension by more than three
terms. The more the number of extensions allowed, the lesser was the
period of each extension. Base Fee

Base Fee
Base Fee is calculated either on a fixed model (57%) or a scaled model
(43%). Scaled model provides discounts to base fee generally during
the initial few years of operations.
43
This fee is mainly charged as a percentage of Gross Revenue (GR). 57
Overall, based upon fixed base fee and the last year scaled base fee,
2.17% was the average charged base fee stipulated in the sample
contracts. 6% of the sampled contracts stipulated a base fee of less All figures in (%)
than 2%, 75% of the contracts with the fee of more than and equal to
2% and less than or equal to 3% and 19% of the contracts with the fee Fixed Scaled

of more than 3%.

Based upon classification, the average base fee charged for economy
hotels is 2%, midscale hotels is 2.66%, upscale hotels is 2.36%, upper Base Fee on GR
upscale hotels is 2.40% and for luxury hotels is 2.15%.

Average Base Fee per Segment as % of GR

19 6

75
All figures in (%)

less than 2% more than or equal to 2%, less than 3%

more than or equal to 3%

Management Contract Trends - A Review 5

Incentive Fee with the fee of more than 7% and less than or equal to 8% and the
remainder 5% charged fee more than 8%.
Incentive fee is stated in agreements over and above the Base Fee.
3) If GOP is more than 40% and less than or equal to 50%, then
The majority of agreements had an incentive fee calculated on Gross
5% of the contracts stipulated an incentive fee of less than or equal to
Operating Profit (GOP). There were few linked to the available cash
6%; followed by 5% of the contracts with the fee of more than 6 and
flows too instead of a flat fee. Fee is generally scaled from 4% to
less than or equal to 7%; followed by 62% of the contracts with the fee
10% of GOP. In few of the cases, incentive was nil for GOP being
of more than 7% and less than or equal to 8%, followed by 21% of the
less than 30% of the Gross Operating Revenue (GOR). 19% of the
contracts with the fee of more than 8% and less than or equal to 9%
contracts stipulated a flat fee ranging from 6.5% to 8% irrespective of
and the remainder 7% charged fee more than 9%.
the GOP as a percentage of the GOR.
4) If GOP is more than 50%, then 4% of the contracts stipulated
81% of the sampled contracts had a variable incentive fee linked to
an incentive fee of less than or equal to 7%; followed by 17% of the
profitability.
contracts with the fee of more than 7 and less than or equal to 8%;
1) If GOP is less than or equal to 35%, then 25% of the contracts followed by 50% of the contracts with the fee of more than 8% and less
stipulated an incentive fee of less than or equal to 5%; followed by than or equal to 9%, followed by 29% of the contracts with the fee of
55% of the contracts with the fee of more than 5 and less than or more than 9% and less than or equal to 10%.
equal to 6%; followed by 15% of the contracts with the fee of more
None of the contracts charged incentive fee of more than 10% under
than 6% and less than or equal to 7% and the remainder 5% charged
any condition.
fee more than 7%.
In less than 5% of the sampled contracts, we found a provision where
2) If GOP is more than 35% and less than or equal to 40%, then
the incentive fee payable to the operator was sub-ordinate to a pre-
25% of the contracts stipulated an incentive fee of less than or equal
determined preferential pay-out to the owner.
to 6%; followed by 58% of the contracts with the fee of more than
6 and less than or equal to 7%; followed by 12% of the contracts

Incentive Fee as % of GOP

70%
62%
60% 58%
55%
50%
50%

40%

30% 29%
25% 25%
21%
20% 17%
15%
12%
10% 7%
5% 5% 4% 5% 5%

0%
5%-6% 6%-7% 7%-8% 8%-9% 9%-10%

50%<GOP

6 Management Contract Trends - A Review

Sales & Marketing (S&M) Fee
This fee is mainly charged as a percentage of Gross Rooms
Revenue (GRR) or Total Revenue (TR). Overall, 1.95% of the GRR or
1.5% of the TR was the average charged fee stipulated in the sample
contracts. 43% of the sample ranged from 1 to less than or equal to
1.5%, 42% ranged from more than 1.5% to less than or equal to 2%,
6% ranged from more than 2% to less than or equal to 3% and 9%
ranged above 3%.
CENTRALIZED Reservation Fee
& Loyalty Program
For contracts which stipulates reservation fee, 36% of contracts
constituted of a fixed dollar amount per reservation, while 64% stated a
mix of dollar amount per reservation and a percentage on room revenue.
Reservation fee charges in flat dollars averaged at US$ 7.79 per
booking.

S&M Fee as a % of GRR Centralized Reservation Fee

9
6
36
43
64
42
All figures in (%)
All figures in (%)

more than 1%, less or equal to 1.5% Dollar Charges

more than 1.5%, less or equal to 2% Dollar Charges and % on Room Revenue
more than 2%, less or equal to 3%
more than 3%

Technical Services Fee Technical Fee Average per Segment

in USD
It is usually charged as a flat fee and paid either monthly or quarterly.
Few of the contracts imposed a fine in case of delay in the opening
of the hotel. Sometimes it is linked to the no. of keys of the hotel as
a multiple. In most of the contracts, it was specified that the owner
has to reimburse out of pocket expenses (OPE)s incurred by the
operator, while few had an upper limit imposed on this expenditure.

Based upon the classification, the average technical fee charged for
midscale hotels is USD 111,400 approximately, for upscale is USD
143,600, for upper upscale is USD 135,250 and for luxury is USD
180,650.

Management Contract Trends - A Review 7

Furniture, Fixtures and opening hotels within a radius of 7.4 kilometres of site’s location. In the
CBD areas, it was less than or equal to 5 km while in non-CBD areas it
Equipment (FF&E) Reserve was more than 5 km.

Out of all the sampled contracts, 95% showed the trend of increasing
the fee by one percent each year over the first few years. The typical
FF&E structure is as follows:

Year 1: either 1% or 2% of Gross Revenues

Year 2: either 2% or 3% of Gross Revenues

Year 3: either 3% or 4% of Gross Revenues

Year 4 onwards: 4% of Gross Revenues

44% of the contracts specified the fee of 1% in year 1 while 56% of the
contracts stated a fee of 2% in year 1.

Furthermore 5% of sampled contracts had flat FF&E Reserve provision

fee with an average of 2%. The FF&E reserve across all the sampled
contracts averaged to 3.3% of GR per year post stabilisation.
Protection Period

Operating Budget 12.5 16

83% of the sample contracts gave authority to owners for approval
or rejection of the annual budget, while 17% had consultative right
12.5
only. This clause helps the owner as well as operator to work in the 3
best interests of the hotel to improve its performance and monitor it
9
on mutual understanding taking utmost care in deciding the budget.
This minimises the risk of untimely termination from either parties as
47
expectations are set based upon in depth discussions of the budget. All figures in (%)

In case of any disagreement between owner and the operator on

1-4 years 5-9 years 10 +
the operating budgets, our sample contracts provided for an expert
Entire tenure of the contract No clause
determination/ arbitration as the dispute resolution mechanism
No specified period

Non-compete clause Protection Zone

Out of the total sampled contracts, 87.5% of them mentioned a non-
compete clause. It prohibited the opening of a hotel of the same brand
within few kilometers of the site’s location.
13
28
16% of contracts stipulated a protection period less than 4 years from
commencement of operations, 47% stated a period from 5 to 9 years,
9% stated a period of more than 10 years, 3% for the entire tenure of

3
the agreement while the other 12.5% had a non-compete clause but did
not specify the period.

Out of the total agreements, 28% stated protection radius of less than 5 53 3
kilometres, 3% each with the radius of 6 to 10 kilometres and more than
10 kilometres, 53% defined the area on the map related to the site. The All figures in (%)

remaining 13% did not mention non-compete clause.

less than 5 kms 6-10 kms More than 10 kms
On an average, non-compete clause restricted the same brand from Defined Area No clause

8 Management Contract Trends - A Review

Performance clause
Management agreements differ in their performance clause structure.
The performance clause is usually based upon Gross Operating Profit
(GOP) or Revenue per Available Room (RevPAR) or a combination
of both. From our sample, the results showcased that 43% of the
contracts stated performance based upon GOP, 36% of the contracts
were tested for performance based upon RevPAR, 21% were tested
against a combination of both.
45% of the contracts mentioned at least one cure option before
termination of the agreement on the basis of non-performance.
Normal cure provision for operator amounted to payment of
differential amount between actual performance and budgeted/
benchmark performance for the year in which performance clause
gets triggered. Almost, all our sampled contracts provided for the
performance measurement period of two consecutive years.
The achievable percentage in a combination of GOP and RevPAR
together ranged from 80% to 90% of the GOP/competitive set
performance figures for the year.
The achievable percentage for GOP ranged from 80 to 85% of the
operating budget on an average for 75% of the contracts stating their
performance based upon GOP alone. The other 25% ranged from 70
to 75% of the operating budget.
The achievable percentage for RevPAR threshold was 85% of the
competitive set performance.
Operator Restrictions
The owner’s consent on appointment of the General Manager (GM)
and Financial Controller (FC) for the hotel was agreed in 47% of the
sampled contracts, while 50% agreed for appointment of GM alone.
However, very few mentioned about owner’s consent on choosing
expatriate personnel for the hotel.
GM and FC Appointment
3
47 50
All figures in (%)
Operator's sole discretion Owner consent for GM alone
Owner consent for GM and FC both
OWNER RESTRICTIONS
Restrictions on owner financing were stipulated in 65% of contracts
with the most common restriction being debt to equity ratio of 60-70%.
Prohibited entities on sale were specified in all the contracts. On the
sampled contracts, provision was found for the operating agreements to
survive any change of ownership for the hotel/asset.
Termination
Termination clause with a cause either by operator or owner were
specified in detail in all the contracts. However, 7% of the sampled
contracts also had an inclusion of a termination clause without any
cause. If the owner terminates the agreement without any cause,
then he is liable to pay termination fee which is derived from base
management fee, incentive fee, and the remaining no. of calendar
months of the signed term of operation. In few cases, the termination
fee is also charged as a mutually agreed lump sum fee stipulated in the
agreement.
Operator Guarantee &
Contribution
None of the contracts in our sample included an operator guarantee or
equity contribution.
Conclusion
Today, as the Indian hotel market starts to mature, hotel owners benefit
from enhanced knowledge of the nuances of management contracts
and the increase in the number of operators present in India has
created a highly competitive market, with owners in a strong position to
negotiate management agreements. While the key issues in negotiating
a management agreement have remained largely consistent over
the past decade, there is increased pressure on operators to provide
more flexible terms than those provided historically and the balance of
power has begun to shift towards being more favourable to owners in
comparison to the earlier trends.
Management Contract Trends - A Review 9
OPERATOR SELECTION & • Searching the market using our extensive database and global
network
CONTRACT NEGOTIATION • Finding a good brand match
Our Added Value- Your Success • Assessing operator performance record

An experienced hotel operator engaged under a well thought-through
contract can make an enormous difference to the financial performance
of a hotel investment and its ultimate capital value. Our operator
selection team has the depth and breadth of experience to know what
to look for and how to button down the detail to protect the owner’s
interest.
The process involves:
• Setting appropriate success criteria
• Negotiating commercial terms
• Ensuring operating profits and any future asset disposal are not
compromised
• Working with the owner’s legal team
Our ultimate aim is to maximise operational performance and asset
value. We can only do this by finding the most suitable operator,
minimising contractual risk and creating the conditions for an effective
owner/operator relationship.

JLL Operator Search Services

Prepare target
Pre-marketing Review plans, Discuss and decide Prepare Information
list of potential
& Briefing market positioning selection criteria Memorandum for
operators to be
Document and business plan with client client review
approached

Send information Liaise with all Evaluate proposals Coordinate

Operator memorandum to interested parties and shortlist presentation and
search interested parties prior to proposals preferred parties pitches

Operator
Finalize and sign
Selection Select preferred Negotiate terms of Liaise with client’s
management
and Contract bidder contract legal terms
contract
Negotiation

10 Management Contract Trends - A Review

 About JLL Hotels & Hospitality Group
JLL’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for
luxury, upscale, select service and budget hotels; timeshare and fractional ownership properties; convention
centers; mixed-use developments and other hospitality properties. The firm’s 300 dedicated hotel and
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The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by
industry-leading research.

Authors

Mandeep S Lamba Harshendra Goyal Roopa George

Managing Director, India Senior Vice President Senior Associate
Hotels and Hospitality Group Hotels and Hospitality Group Hotels and Hospitality Group
tel +124 460 5151 tel +124 460 5168 tel +124 460 5089
mandeep.lamba@ap.jll.com harshendra.goyal@ap.jll.com roopa.george@ap.jll.com

Shirat Mathur Christopher Thepot

Senior Analyst Hotels and Hospitality Group
Hotels and Hospitality Group tel +124 460 5092
tel +124 460 5775 christopher.thepot@ap.jll.com
shirat.mathur@ap.jll.com

Management Contract Trends - A Review 11

About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by
owning, occupying and investing in real estate. With annual fee revenue of $4 billion, JLL has more than 200 corporate offices and operates in 75 countries
worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and
completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $48.0
billion of real estate assets under management.
JLL has over 50 years of experience in Asia Pacific, with over 27,500 employees operating in 80 offices in 15 countries across the region. The firm was named
‘Best Property Consultancy’ in seven Asia Pacific countries at the International Property Awards Asia Pacific 2014, and won nine Asia Pacific awards in the
Euromoney Real Estate Awards 2013. www.jll.com/asiapacific

About JLL India

JLL is India’s premier and largest professional services firm specializing in real estate. With an extensive geographic footprint across 11 cities (Ahmedabad, Delhi,
Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 6800, the firm provides investors,
developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project
and development services, integrated facility management, property and asset management, sustainability, industrial, capital markets, residential, hotels, health
care, senior living, education and retail advisory. The firm was named the Best Property Consultancy in India at the International Property Awards Asia Pacific
2014-15. For further information, please visit www.joneslanglasalle.co.in

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