In this newsletter we discuss the relevant commercial terms of contemporary HMAs where Australian owners appear to do better deals than the rest of Asia Pacific. In doing so, we will refer to comments made by the panelists at the recent Baker McKenzie Masterclass held in Adelaide on 6 May 2025 as part of the Asia Pacific Hotel Industry Conference. The panel consisted of Ross Beardsell, JLL – Executive Vice President, Advisory & Asset Management, Australasia, JLL Hotels & Hospitality Group, Julian Whiston, JLL – Head of Hotels & Hospitality, John Sutcliffe, TFE Hotels – Director of Development, Rahul Parrab, Ark Capital Partners – Co-Founder & CEO Cameron Burke, IHG – Director of Development - Australasia & Pacific at InterContinental Hotels Group (IHG) and the discussion was moderated by Dora Stilianos.

Please note that some of the matters discussed below can be affected by side letters that are personal to the owner and the operator. Any arrangements in side letters were not considered in the survey results.

Insights

Agreement term

• HMA terms in Australia averaged 15 years as compared to 17 years elsewhere in Asia Pacific (12% shorter).
• In view of the substantial difficulty in prematurely terminating an underperforming operator, owners should negotiate the shortest term that an operator is prepared to agree to (generally 10 years is the minimum).

Operator fees (Base, Incentive, Sales and Marketing Fees)

• Base fees (based on hotel gross revenue) in Australia averaged 1.3% as compared to an average of 1.6% elsewhere in Asia Pacific (19% less).
• Incentive Fees (based on hotel profit) in Australia are similar in structure and amount to incentive fees elsewhere in Asia Pacific.
• In our view base fees should be as low as can be negotiated to avoid undue operator focus on revenue maximisation. Incentive fees should comprise a fair and reasonable compensation for the services that the operator provides with the aim of incentivising the operator to maximise profit.
• At least one Masterclass panellist observed:-
  • The purpose of the fee structure should be considered – for example, should the fees be structured to induce the operator to focus on the food and beverage components of the hotel with the aim of competing strongly with external restaurants and F & B facilities in the neighboring area.
  • That there has been fee compression evident in Australia for some time.
  • From a valuation perspective, a well negotiated fee structure may have a positive impact on hotel value.
• It is interesting to note that since time immemorial all operators globally have elected to be remunerated by reference to a percentage of revenue and/or profit. We have never seen a hotel management agreement where an operator has proposed a different approach (for example, a fixed fee or some form of capped fee).
• Sales and Marketing fees are very difficult to compare between operators but our sense is that these fees have been growing over time both in terms of the categories of this expenditure and the quantum cost of each category.

Operator performance termination provisions

• In Australia all HMAs surveyed contained performance tests. 67% of HMAs contain a single performance test and 33% contain a dual test. Elsewhere in Asia Pacific 92% of HMAs contain performance tests with 41% containing a dual test.
• It is ironic that performance tests are almost universal since experience clearly shows that these provisions do not work in practice. There would be few industries where a principal is unable to terminate a service provider in the face of sustained and prolonged under-performance but, this is the norm in the hotel industry.
• At least one Masterclass panellist observed:-
  • It is extremely difficult to agree on a performance test which satisfies the needs and concerns of both owner and operator.
  • That a budget to actual profit test is preferable to a RevPar test.
  • Is the purpose of a performance test to affect operator termination or to focus the parties on resolving operational performance issues.
• If a satisfactory performance test cannot be negotiated, then a savvy owner should focus its attention elsewhere – such as no fault termination or a manchise. The survey indicated that 9% of contracts contained no fault termination.

Termination on sale

• In Australia 51% of HMAs contained termination on sale.
• Experience shows that hotels available for sale with vacant possession can sell for 10% - 20% more than a hotel encumbered with a HMA and even more if the operator is not performing.

Key money

• In Australia key money was paid by operators in 65% of contracts. (Elsewhere in Asia Pacific it was 22%).
• At least one Masterclass panellist observed:-
  • Key money can be important in assisting in the financing of hotel conversions.
  • The desire for key money can be short sighted and expensive.
  • Key money is usually ignored in the hotel valuation process.
• The popularity of key money in Australia seems to be at odds with the fact that it is by far and away the most expensive funding source available to an owner in the market. We have been advised that operators look to a return on key money in the range of 20% – 25% which is significantly more expensive than institutional debt - and that's before the cost of the owner's inability to obtain the most favourable commercial terms is taken into consideration.
• To choose an operator who has the deepest pockets as opposed to the most convincing approach to long term service delivery and its impact on hotel profitability and sale value seems counter intuitive.

Senior staff appointments

• In Australia, 91% of HMAs require owner consent for the appointment of the general manager and 67% for financial controller and the director of sales.
• Whilst not covered by the survey, we query the number of contracts that contain a specific provision to the effect that if at any time the owner is dissatisfied with the general manager's performance then the owner has the right to refer its concerns to the general manager's immediate superiors who are bound to take whatever action is appropriate in the circumstances including the termination or transfer of the general manager.

Contracts leases & concessions

• In Australia 16% of HMAs provide that owner approval is required for all contracts, 56% provide for owner consent for contracts over a monetary limit and/or length of contract; 4% contain other contract restrictions and 24% contain no approval requirements.
• In Australia, 21% of HMAs provide for owner approval on all leases and concessions, 50% provide for owner approval over a monetary limit and/or length of agreement, 7% provide other restrictions and 21 % contain no approval requirements. 

Conclusion

As we have indicated in other newsletters, the hotel industry competes ferociously on the global stage for its share of relatively scarce available capital which can be capricious, discriminating and risk averse. The commercial terms discussed above dictate in large part whether this capital receives a fair return and hence underwrites the attractiveness of the hotel industry to the stewards of these vast capital pools.