Hotel Pre-Opening Guide: resolving Hotel Management Contract (HMC) conflicts

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23/10/2016 - Hospitality

With so many new hotels opening in Dubai, it is important that hotel owners and operators seek effective pre-opening strategies, which TFG Asset Management outlined in its 2015 white paper.

One of the most common owner-operator conflicts concerns the Hotel Management Contract (HMC), due to the disparate interests of the two parties.

It is critical for the hotel owner to hire a professional hotel asset manager to represent them, resolve conflicts with the operator, and provide support during pre- and post-opening phase.

Under the Hotel Management Contract (HMC), conflicts between a hotel owner and hotel operator can be grouped into three main categories:

1. Level of control and influence

There is an ongoing argument over to what extent a hotel owner should take control before and after the hotel opening. Historically, HMCs were heavily in favour of management companies. However, since the mid-‘80s, the bargaining power began to shift towards the owner as a result of an increase in the number of hotel management companies and the growing popularity of the asset management concept. Establishing a way to optimise the division of responsibility is highly critical to ensure the operator’s corporate-level strategies are adhered to, yet well adapted to the local market. In a classical scenario, this role shifts after the hotel is opened. As an expert in hotel management, the operator has exclusive control over hotel operations. Nevertheless, major decisions and strategies such as entering into any concession for food service operation agreement or commercial activity on the hotel premises must be approved by the owner.

2. Brand standards

All stakeholders work towards a common goal to ensure the hotel is a profit-driven entity, thus generating high Returns On Investments (ROI). However, the approaches to achieve these mutual targets will vary. An owner’s perspective is focused at property level whereas the operator takes into consideration retaining brand consistency on a global basis, thereby adopting corporate-level strategies. The challenge for the appointed Hotel Asset Manager (HAM) is to find the equilibrium point between the operator’s wish to achieve uniformity and the owner’s wish to meet the needs local hospitality market. The HAM must decide how much the global brand standards apply to the individual property.

3. Budgeting process

It is the owner’s obligation to finance the hotel operation and to provide the necessary working capital. The owner aims to minimise its overall financial requirements and prioritises the enhancement of the property’s appeal in comparison to the surrounding competition, which ultimately leads to higher guest spend. The HAM is best positioned to balance the interest between the hotel owner and operator. The asset management team will suggest a reasonable, justified budget based on the hotel operator’s original proposal.

It is the responsibility of the appointed Asset Management team to resolve conflicts between the hotel owner and operator. This will strengthen the mutual understanding of each party’s operational obligations and constraints. A strong partnership will minimise the potential causes of a hotel opening slowdown. In order to avoid conflicts, in addition to employing a HAM, it is highly recommended to:

1) Adhere to the contract, which needs to be as transparent as possible.

2) Organise regular meetings with all stakeholders to provide activity and progress updates. For more information, please click view our Hotel Pre-Opening Strategies white paper