Terms Protect Lenders, Set Operational Standards
It is an understatement to say that hotels are different from other commercial real estate investments.
Poorly operated office, retail or industrial properties can nevertheless be profitable based on locations and leasing alone. Not so with hotels, where property values and profitability depend on successful branding and hotel management.
Term of HMA
Hotel management agreements (HMAs) differ from franchise agreements. Franchise agreements allow hotel owners to adopt reputable brands, or “flags,” with their associated goodwill, marketing support, and reservations systems. In contrast, HMAs require hotel owners to cede control of their properties to hotel operators, subject to negotiated guardrails involving major decisions. Some key HMA provisions are discussed below.
HMAs can last several years, even decades, depending upon factors such as financing requirements, relative negotiating strengths, and financial contributions from the operator. While HMAs do not create interests in land, they are usually structured as independent contractor agreements rather than agency agreements, making it difficult and expensive for owners to terminate them and install new management unless the manager is in default. Franchisors always reserve rights to approve management changes, because such changes can disrupt hotel operations. Most HMAs require hotel owners to pay operators costly termination fees for terminations without good cause.
Management Fees
Base management fees paid to operators often range from 2 to 5 percent of hotel gross revenues. This formula creates tension between owners and operators, because operators receive the same base fee regardless of the hotel’s profitability. Operators have less incentive to manage costs when their compensation is tied only to revenue and not actual income. For this reason, HMAs often include incentive fees for operators, based on a percentage of the hotel’s net operating income (NOI). Management fees should only be derived from room revenue and core hotel services – not other revenues sources beyond the operator’s responsibilities, such as independently operated restaurants, recreational facilities and spa services.
Budgeting and Financial Records
Although HMAs give hotel operators control over day-to-day hotel management, hotel owners must stay involved in the annual budgeting process for operating costs, capital replacements and property improvement plans. Hotel owners need to monitor their hotels’ financial performance as part of the budgeting process. They should expect regular financial reporting from hotel operators, with audited financial reports on an annual basis for larger hotels.
Performance Standards
The hotel industry has developed a set of accounting standards for hotels, known as the Uniform System of Accounts for the Lodging Industry. HMAs should reference these standards and allow hotel owners access to operators’ books and financial records to confirm compliance.
Hotel owners often want to terminate HMAs when properties fail to deliver adequate returns on investment. Operators push back against owner termination rights, because a hotel’s underperformance might be unrelated to the operator. Fires and other casualties, labor disruptions, pandemics and permitting problems prevent hotels from meeting expectations, but are usually beyond operators’ control. Disappointing results also arise when owners fail to provide financial support or lose their flags because of a breach of their franchise agreements. Owners can negotiate termination rights when properties fail to meet specific performance standards over a sustained period. Performance standards can be tied to metrics such as a hotel’s NOI, revenue per available room (RevPAR), or average daily rate per room sold (ADR), and how those metrics compare with a hotel’s identified competitors or other benchmarks. If the hotel underperforms, and the problem persists after notice to the operator, the owner can invoke contractual remedies that might include termination of the HMA or require the operator to make financial accommodations to the owner.
Subordination, Nondisturbance and Attornment Agreements
Institutional lenders that make loans to hotel owners never want to end up managing a foreclosed hotel property. Nor do operators want to lose a profitable HMA because of an owner’s loan default. Accordingly, lenders and hotel operators expect owners to obtain subordination, nondisturbance, and attornment agreements (SNDAs), where operators agree to recognize the institutional lender’s rights and commit to managing the hotel if the lender acquires it by foreclosure. A frequent area of negotiation in SNDAs is whether the lender can terminate the HMA on a distressed property. SNDAs for brand managed hotels will usually require the lender to keep the branded operator in place.
Choosing hotel operators and negotiating HMAs are among the most important decisions that hotel owners make. Experienced owners know how to navigate this process. Investors new to the industry should seek advice from consultants and attorneys with that specific expertise.
Download the article as seen in Banker & Tradesman on February 23, 2026. Learn more about Christopher R. Vaccaro.
