International or local hotel consultants will be familiar with the hotel operator’s development executives active in their respective regions, and they should have an understanding of their development strategies. Engaging an appropriate hotel consultant for operator selection provides knowledge to access and accelerate the process as well as the commercial experience to give a competitive benefit in early discussions. Where the developer is unable to commission a hotel consultant or favours a direct approach, then active hotel operators can be readily identified via press articles, hotel real estate industry publications, or local/regional hotel conference attendees/speaker lists. The contact details for hotel operators are freely available by following the links via the section marked “development” at the footer of the hotel operator’s main website or searching with the hotel operator or brand name + “development” in a search engine.
When pursuing several operators simultaneously, the operator selection process can be time-consuming and complicated in attempting to evaluate dissimilar proposals and diverse attributes, and without a full appreciation of the implications of terms or traits, it is difficult to avoid getting caught in relatively insignificant issues. Nevertheless, the process can be used to good effect as it provokes competitive tension between operators, and it is at this stage that critical commercial terms and the overall commercial balance can be best leveraged. Therefore even during the initial stages, it is essential to be strategic, to clearly understand the negotiation goals and commercially significant issues. While one operator may come into focus early as the best fit, it is worth holding onto positive relationships with at least one other shortlisted operator to maintain the competitive tension, or in case negotiations with the favoured operator reach an impass.
The following consideration points should help to determine a hotel operator that aligns to the process and budget for the project, though note this list is by no means exhaustive and it is vital to present the elements of questioning of the hotel operator carefully. Do not alarm the hotel operator with obsessively detailed interrogation early in the process, as the hotel operator’s resources and priorities are likely to be limited, and at this point, the project is just as much under evaluation as the hotel operator. Most operators are thick skinned, but this is potentially the start of very long term relationship, and at worst an antagonistic approach may cause the best-matched operator to drop out of the process altogether.
- Brand Portfolio: Does the hotel operator have within their portfolio a brand or selection of brands which might fit the configuration of the hotel development?
- Project Feedback: Ask the hotel operator for feedback on the project. Detailed considered and critical market and technical comments and suggestions will indicate if the hotel operator is genuinely interested and should give an early indication of their expertise and collaborative approach.
- Responsiveness: How responsive is the hotel operator to initial requests and once in full discussion are there suddenly delays in getting answers to critical questions or technical support? These may indicate the level of interest, the resources and the efficiency/bureaucracy of the hotel operator.
- Aligned Visions: How does the operator envisage the project, their perspective of the ideal facilities configuration for the location and market? Does this fit within the scope and budget of the development plan?
- Experience: How many hotels do the hotel operator currently manage within the country and region and for how long have they been present in the market? Note while franchised properties may promote the marketing of the brand, the hotel operator is not directly managing them and therefore does not necessarily have the experience of the market or resources.
- Performance: Benchmark statistics of the properties in the region of a similar type to the development including occupancies, average rates, food, beverage, conferencing and other incomes (as % of overall revenue), gross operating profit %. Hotel operators will most likely be reluctant to disclose detailed information, especially in early discussions due to disclosure restrictions from their respective property owners, but they should be able to give indicative performance ranges. Does this performance fit with the initial business plan or what has been advised by the hotel consultant?
- Support Personnel: Does the hotel operator have substantial regional or national resources? Numerous hotel development or travelling senior executives may have presented themselves during negotiations, but how many personnel do they actually have dedicated to technical development and hotel operations in the local or regional office?
- Fees: What is the typical fee structure of management fees and to what degree can these be negotiated? Hotel operator fees are usually a combination of a base fee (typically a % of total revenue) and incentive fee (typically a % of gross operating profit (GOP) or adjusted GOP. If comparing several operators, you should note that an operator with a higher base fee may be able to generate much higher revenues, or in the case of the incentive fee, much higher profitability. Hotel operators will also have a quantity of diversely calculated license, system, reservation and marketing fees, so like for like comparisons will be challenging.
- Technical: What is the cost of technical services, and what is the scope of works provided by the hotel operator? Is there an obligation to engage specified third party technical professionals and if so at what cost and for what deliverables? How is the hotel operator’s technical support going to be assigned to the project? If a specific coordinator, ask for details of experience and other projects they are working on in the region.
- Payment: At what stages does the hotel operator require to make payments? Hotel operator’s do not usually ask for any fees or expenses before the general concept, and the technical services support agreement i
s in place, and typically, the hotel operator covers technical and business development travel expenses. The hotel operator may require the developer to undertake third-party services at a cost, such as a market or feasibility study, technical diligence appraisal or architectural concept design development. In such circumstances in case of an alternative management option, these third-party services should be generic, and of further use to the project.
- Process: How convoluted is the hotel operator’s due diligence process? Check what steps are necessary before concluding the management agreement and how long these steps require. How much authority does the hotel operator’s negotiator have, who makes final approval of the project, what checks are undertaken by the hotel operator, will the project receive commitment by the hotel operator for full support on the technical process before contract, or is it possible to make a separate technical agreement?
- Financial Commitment: Is the hotel operator ready to give any form of guarantees to the management agreement, provide direct investment or financing or introduce their financing partners to the project? Any financial commitment is very much dependent on the project, the stability and risks of the market and the desire of the hotel operator to be present at the location.
- Jurisdiction of Contract: Is the hotel operator ready to accept the hotel management agreement under local law, a mutual jurisdiction or only under the law of the hotel operator’s headquarters. For the hotel operator’s corporate counsel control purposes, they may limit jurisdiction, whereas other operators may be more flexible. Naturally, operational compliance with local law is obligatory, but having the contract under another jurisdiction is that an issue for the owners or partners?
- Competitive Leases: Does the hotel operator have existing lease agreements in the same market which might be considered competitive to the subject property? If leases exist what assurances and safeguards can they offer to ensure the property gets the same sales and management priorities?
See also:
What can a hotel operator do for me?