Partner Cliff Risman discussed distinctions between management contracts and leases as part of Hotel News Now’s Virtual Hospitality Law Conference. The conference is presenting news to the hotel industry about current and forthcoming challenges amid the COVID pandemic and recovery. Risman addressed the issues hoteliers will encounters as they work through management agreements and pricing their hotels.
“When looking at management deals, it’s important everyone understands the structure of the potential deal being discussed as there are differences between management contracts and leases,” Risman said.
“With a management contract, a third-party operator receives some combination of the base or base plus incentive and the balance of the net results of operations belongs to the owner of the operation, he said. In a lease, the operator comes in and leases the facility while paying the owner an agreed rent amount, which could be the base percentage with some other add-ons. The benefits or burdens resulting from their operations then falls upon the manager, not the owner.
“Operators have different options when trying to win a deal, Risman said. Key money in essence is a one-time payment in exchange for the contract, and it amortizes or burns off such that if the manager receives the full benefit of the term of the contract, the obligation on the owner to repay the key money is waived, he said. Managers also sometimes make equity investments, putting down mezzanine debt in place and agree to a level of performance or reimburse the owner if certain deficits are incurred,” he said.
“This is more important in the current environment than ever, because so many owners are cash-challenged at the moment,” he said. “There is a tremendous cash crunch. They've either been closed and are just reopening or have been operating at perhaps even single-digit occupancy while ownership expenses, mortgage taxes, insurance have continued to be payable.”
Read his full presentation here.