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.