HMA Duration

The primary stress of negotiating the duration of an HMA usually comes from the Operator looking for a longer-term agreement versus the Owner looking for a shorter-term agreement. The degree of focus on the HMA duration or additional comfort clauses will depend on the owner’s exit strategy and, to some degree, the profile of investors in the regional hotel transaction market.

Duration of HMA Discussion Notes

Operator Considerations

The Operator considers the following factors while evaluating the duration of the agreement:

• The objective is to establish and maintain a stable long-term brand, as frequent changes and deflagging of properties can be harmful to a brand’s reputation;
• Most of the operator’s resource and cost input occurs during the development process and early years of operation while systems are being implemented; a longer term will offset these initial efforts and costs;
• An HMA represents a reasonable, stable future fee stream for an operator, and in the case of public companies, the valuation of the organisation is primarily based on the collective sum of future fees from their agreements;
• Long-term agreements facilitate strategic planning, leverage into reinvestment into the property to brand standards and avoid the uncertainty that could influence areas such as recruitment;
• Renegotiation of the HMA or the business development efforts to find a new property requires costly resources.

Owner HMA Duration Considerations

The Owner considers the following factors while evaluating the duration of the agreement:

• A long-term HMA might restrict or narrow the ability or option to sell the property to buyers with other brand preferences, potentially impacting the Owner’s choice and the asset value;
• The Owner is concerned that over time, the Operator might not maintain its management effectiveness, and a long-term agreement ties the Owner into a non-performing agreement;
• The local market evolves or changes to the detriment of the brand, and the Owner has to wait long term before it can take advantage of the new brand or segment opportunities;
• Consolidation of hotel operators and brands in the global market is more likely over a longer term and could force the Owner into an undesired or inappropriate partnership;
• As their hotel portfolio grows, the Owner would like to reserve the right to enter the business of hotel operations themselves in the medium or long term.

Alternate HMA Duration Considerations:

Conversely, it may also be considered that:

• A long-term HMA provides stability to the business and provides value to the asset, particularly to institutional investors;
• A short-term HMA has management risk regarding its potential renewal. The Operator may decline to continue a relationship favouring other new-build opportunities with efficient, modern equipment and decor; otherwise, the brand may be downgraded, or capital expenditure for property improvements may be demanded before renewing the agreement.

Duration, Renewal Terms and Other Provisions

Duration Varies by Market Segment

Super luxury and luxury hotel brands generally demand slightly longer HMA duration than upscale, midmarket and budget brands. They may require more than thirty years, sometimes occasionally up to fifty years. Depending on the market segment, twenty years is a typical default, and twenty-five years is usually the limit for non-luxury hotels, with the majority being in the upper region of fifteen to twenty years.

In emerging markets, the duration can be longer than in established markets to compensate the Operator for a slower ramp-up period, perceived risk/uncertainty, or added infrastructure. A minority of new HMAs are between ten and fifteen years in duration, and agreements with established international operators for a duration of fewer than ten years are rare. Those with a short duration typically carry a very specific or strategic purpose.

Note the term of the agreement is almost always initiated on 1 January after the opening date; therefore, if the opening date is 2 January, the duration of the contract can be practically a full additional year.

HMA Renewal Term

In addition to the initial term, the draft HMA often includes five or ten-year multiple renewal terms, which are unilateral or mutual. Unless in the Owner’s favour or matched/negotiated against a corresponding clause, there is little merit in a unilateral renewal term. While they may clarify the process, mutual renewal clauses do not offer additional value since, at the end of the HMA term, there shouldn’t be any barrier to the parties extending the agreement. There may be local legal reasons, or the Operator may prefer to include a mutual renewal term. Still, the Owner should beware of clauses with long automatic renewal processes that pressure Owners to commit to renewal early or otherwise anticipate Owners’ oversight in missing such distant contract deadlines.

Provisions for Owner Comfort in Long-Term HMA

Additional clauses elsewhere in the HMA can negate the majority of the Owner’s long-term duration issues, for example:

• Transfer by Owner: Easing the rights of the Owner to sell or transfer the property;
• Transfer by Operator: Provide the Owner with termination rights in case the status of the Operator or brand changes;
• Performance/Underperformance clauses: Provide a mechanism for early termination based on a set of performance measures linked to revenue, profitability, market penetration or competitors performance;
• Buyout clauses (or liquidated damages): Providing a mechanism by which the Owner or a potential buyer can, for a determined cost (fixed sum or a multiple of fees), terminate the HMA;
• Contract conversion: Provide the Owner with the option or window(s) of opportunity based on duration or performance to convert the agreement to a different contract form, such as a franchise agreement.