The base fee is generally considered as the basic fee for the provision of the brand value (for legal/tax reasons occasionally charged separately as a royalty fee) and operators cost of resources in support of the supervision of the hotel management team and typically charged as a percentage of total hotel revenue (net after VAT).
Depending on the geographic market and segment typically in the range of 2.0% – 4.0% of total hotel revenue calculated after the deduction of VAT. Occasionally fee rates are reduced below these levels in ramp up during early years or as an offset against higher incentive fees. From time to time regional study summaries are produced by hotel consultants giving
Understanding Market Value?: No two hotels are the same, no two markets are the same, no two operators or brands are the same, and the environment is constantly changing, more recently in emerging markets to the advantage of the owner. Operators are usually extremely tight-lipped regarding fee conditions accepted in an HMA attaching confidentiality clauses and stressing that each deal is unique. A common developer approach is to poll several operators and chase the lowest fees or test preferred operators with low counter offers. Such a strategy can be time-consuming, lose focus of the bigger picture or the most appropriate operator/brand and leave value on the table. Engaging a well-informed hotel consultant with in-depth knowledge of HMA deals on your market should help ensure you achieve the optimal agreement balanced for your needs.
Base Fee Discussion Notes
Base Fee Scope for Negotiation: In relatively stable markets there is a trend for reduced base fees compensated by raised incentive fees, and there is a direct correlation between the two fees. In a market and with a hotel product where GOP/AGOP is achievable at approx. 50%, then a reduction of 0.5% of the base fee might equate to 1.0% of the incentive fee, though an operator would argue that the incentive fee has higher risk exposure
Split Base Fees: While royalties are usually considered part of the base fee, in certain jurisdictions, some operators may opt to charge a separate royalty fee covering the brand and trademarks, not indicated in the HMA but rather in a separate sub-license agreement. For clarity or comparison in the evaluation of the commercial terms, it should be confirmed with the operator if any royalty fees exist additional to the base fee.
Base Fee Ramp Up: For a new hotel establishing itself in a market there is commonly a lag period of between approximately two and four years in which the property reaches a fair market share. While this negatively impacts total revenue and therefore the base fee, it usually has a more critical impact on cash flow and an owners ability to service their loans. On a long term agreement, an operator may consider reducing the base fee on a ramp up basis during the first three or five years, in exchange for slightly higher stabilised fees, or other terms.
Defining Total Hotel Revenue: Given that the base fee is a percentage of total hotel revenue it is crucial during the HMA negotiation process to determine the constituents of total revenue. The hotel may be a part of a more substantial mixed-use development or include business activities that have little or no relationship to the ongoing management of the hotel; typical activities include office or retail leasing. Definitions and floor plans attached to the HMA which zone exclusion areas for revenue not deemed part of the total hotel revenue can clarify the status. In order not to negatively impact on the profitability of the hotel these excluded areas must have the ability to isolate utilities, and other service costs and the hotel operation should have no obligation to service the business or their employees. For practical purposes, an arrangement for separate service contracts between the hotel and excluded business for services including cleaning, security, employee services etc. can be set up. Where a third party business is in a prominent part of the hotel, for example, the lobby or provides similar services, for example, food & beverage an operator may be extremely reluctant to accept such provisions since these services could impact on the hotel reputation and create issues such as guest billing.
Subordinating Base Fees: Since the operator generally regards the base fee as the minimum compensation for the substantial provision of its services to the operation of the business, it would not usually entertain the idea of subordinating these fees to any form of owners priority. In case the owner has the strength and reason to consider such fees should be subordinated then consideration should be given to minimise the base fee and to increase the incentive fee accordingly.