Key takeaways
- Do not look only at the Base Fee. Add up every layer of fees, and check which are charged above or below GOP.
- The Incentive Fee depends on the profit line used in the calculation, and Owner's Priority is more than just a percentage.
- The right to terminate is usable in practice only when the Performance Test has a clear definition, clear data and a clear timetable.
A hotel owner signs a 20-year HMA during construction because the brand is needed in time for the opening. Five years later, performance is below plan, but on opening the contract the owner finds they are not sure what they are actually entitled to approve. How must the operator fail the test before the contract can be terminated, and how much will termination cost?
An HMA is like hiring a manager to look after a large house for 20 years. If the contract sets no metrics and no way to remove the manager, the manager can stay even as the house begins to sink. This article is a financial framework for reading the agreement, not a legal opinion. Before negotiating or exercising rights under the contract, have a lawyer review it under the law that governs that contract.
Market ranges are a starting point for questions, not a standard
Industry reports and articles give the approximate ranges below, but actual terms differ by brand, country, size and bargaining power. Use specialists or data comparable with the project's market.
| Conditions | Range stated by the source | Sources |
|---|---|---|
| Base Fee | 2–4% of revenue | HVS (Europe) |
| Incentive Fee | 8–10% of AGOP or tiered; some deals reach 15% of GOP when the Base Fee is low | HVS (Europe) |
| Brand contract term | About 15–25 years; Upscale may be longer | HVS (Europe) |
| FF&E Reserve | 3–5% of revenue, usually phased in over the first few years | HVS (Europe) |
| Performance Test | RevPAR at 80–95% of the comp set, together with GOP at 80–90% of budget, usually starting in year 3 or 4 | HVS (Europe) |
10 points owners must read
| No. | What to read | Signs to ask about further |
|---|---|---|
| 1. Definition of revenue | Whether VAT, service charge, deposits and non-operating income are included or excluded | A definition so broad that fees are charged on money that is not hotel revenue |
| 2. Base Fee | Rate and ramp-up during the opening period | Full rate from the first year, while the hotel is still loss-making |
| 3. Incentive Fee | The profit line used, and how arrears are handled | Calculated on GOP with no owner hurdle |
| 4. Group Charges | Marketing, reservation, loyalty, procurement and shared services | No cap, or the operator can change the rate on its own |
| 5. Budget Approval | How far the owner can approve, and what happens when there is no agreement | The operator has the final say, or there is no deadlock mechanism |
| 6. Key personnel | Right to interview or approve the GM, Financial Controller and DOSM | The owner is merely informed after the appointment |
| 7. FF&E and CAPEX | Rate, the account where the money is held, accumulation of balances, and owner-funded CAPEX | The operator can call for additional funds without limit under brand standards |
| 8. Performance Test | Metrics, comp set, the year testing begins, the failure threshold and cure | The operator must fail for several consecutive years, or can pay a cure without limit |
| 9. Termination | Termination events, compensation and sale of the property | Termination is not possible on a sale of the business, or compensation is calculated on all remaining years |
| 10. Data and audit | Monthly reports, audit rights, bank accounts and data systems | The owner cannot access customer data or accounts when the contract ends |
If the operator is a foreign juristic person, check the withholding tax (WHT) and VAT treatment of each type of fee with a tax adviser, looking at the relevant tax treaty and the gross-up wording in the contract.
Example: total fees and the effect of Owner's Priority
Hypothetical example A 220-room hotel with Total Revenue of THB 480 million, Room Revenue of THB 300 million and an investment of THB 1,760 million. Assume Group Charges are already recorded above GOP. The figures do not refer to an actual contract.
| Year with a GOP margin of 38% | Assumption | THB million |
|---|---|---|
| Base Fee | 3% of Total Revenue | 14.40 |
| Marketing | 1.5% of Room Revenue | 4.50 |
| Reservation and loyalty | 2% of Room Revenue | 6.00 |
| Incentive Fee | 8% of GOP of 182.4 | 14.59 |
| Total burden | 8.2% of Total Revenue | 39.49 |
Measured on GOP before Group Charges, which equals THB 192.9 million, the total burden is 20.5%. So a 3% Base Fee does not tell you the full cost of having an operator.
The line used in the calculation also changes the result. The same 8% rate gives an Incentive Fee of THB 14.59 million on GOP, THB 13.44 million on AGOP (GOP after Base Fee), and THB 11.33 million on profit after the Base Fee, Fixed Charges of THB 7.2 million and an FF&E Reserve of 4%, or THB 19.2 million.
Assume further that the HMA sets an Owner's Priority of 7% of the investment, or THB 123.2 million. The Incentive Fee is payable only from the money left after the owner has received the Priority, and any amount that cannot be paid is forfeited.
| GOP Margin | GOP | Cash before Incentive | Incentive per formula | Incentive payable | Owner receives | Returns |
|---|---|---|---|---|---|---|
| 38% | 182.4 | 141.6 | 14.59 | 14.59 | 127.01 | 7.22% |
| 36% | 172.8 | 132.0 | 13.82 | 8.80 | 123.20 | 7.00% |
| 33% | 158.4 | 117.6 | 12.67 | 0.00 | 117.60 | 6.68% |
Cash before Incentive is GOP less the Base Fee, Fixed Charges and FF&E Reserve. Without a Priority, in the year with a 33% margin the owner would receive THB 104.93 million, or 5.96%, a difference of THB 12.67 million.
If accumulated arrears can be paid in later years, the benefit to the owner is reduced. Read the terms Cumulative, Deferred and Forfeited in full. A Priority tied to debt service may change on a refinance, whereas one tied to the investment or to value is more stable.
Calculating the cost of exiting the agreement in advance
If the HMA states compensation as 3 times the latest year's Base and Incentive Fees, then in the example above it equals (14.40 + 14.59) × 3, or about THB 87 million. Owners should add such figures to system-change costs, rebranding costs and cash reserves for the transition period before deciding whether to exercise the right.
Next steps
- Summarise the HMA as a one-page term sheet, separating fees, approval rights and termination events
- Build a table of total fees from actual past financial statements, stating which P&L line each sits on
- Test-calculate the Incentive Fee and Owner's Priority from the contract formulas, then compare them with the amounts actually paid
- Check the calendar of owner rights, such as budget approval dates, test dates and dispute periods
- Calculate the termination compensation for each year according to the remaining contract term
- Have a lawyer and a tax adviser review key clauses before negotiating amendments
- Record the review results in the owner's annual report and follow up open items