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Hotel management agreements — the fee stack, the key money, and the exit

A hotel management agreement is priced on a base-plus-incentive fee against the operator's own performance, sits alongside any key money the brand advances (and can claw back), and lives or dies on the performance tests written into it — a RevPAR-index floor and a GOP floor being the two that actually get enforced. Self-managing is the alternative, and it trades those fees for the operating load a management company exists to absorb.

Management fees typically combine a base fee (a percentage of total revenue, paid regardless of profitability) with an incentive fee (a percentage of GOP or NOI above a stated hurdle), so the operator's incentives are only partly aligned with the owner's until the incentive tier is doing real work. On a worked property, total fees over the agreement's modeled term run $3,308,543, with $123,130 in the first year alone.

Key money — an upfront payment from the brand or operator to win the contract — is not free capital; it is a loan repaid through the term and clawed back on early termination. On the same worked property, $750,000 of key money amortizes at $37,500 a year, with an unamortized balance of $487,500 still clawable back at year seven if the agreement is terminated.

The two performance tests that actually get enforced are a RevPAR-index floor against the competitive set (here, 0.95 — the property cannot underperform its comp set by more than 5 points before triggering a cure or termination right) and a GOP floor in dollar terms ($1,275,083 on this property, with $141,676 of headroom above it). Read those two clauses before any other clause in the agreement — they are the ones that end up in a dispute.

#hotels#hospitality#management agreement#key money

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