Key money , at its most basic , is a payment made by a hotel operator or a hotel brand to a hotel owner to secure a management or franchise agreement . And though there are caveats to it , its attractiveness to owners is that it serves as a kind of self-amortizing loan that , if

conditions are met , like the life of the agreement is satisfied , doesn ’ t need to be paid back . ( This is sometimes referred to as a “ burn-off ” provision , where if the agreement is terminated before the burn-off period , the operator or franchisor is usually due back the remaining key money .) For brands or management companies , key money can be a deciding factor between getting a deal and not getting a deal .

Sound like a bribe ? It ’ s not far from off ; but in an era of higher interest rates that has choked

off new development , activated conversions and created cracks in the capital stack , key money , which typically doesn ’ t exceed more than 5 % of the total deal cost , acts as a highly effective inducement . After all , who is going to turn down free money ( some strings attached )?

“ Key money is being used more frequently at present ,” said Sean Hennessey , founder of Lodging Advisors and a clinical associate professor at the Jonathan M . Tisch Center of Hospitality at NYU . “ It is particularly important to help

secure new unit growth .”

Hennessey noted that though key money , historically , was used more by operators to secure management contracts , he is now seeing more franchisors willing to pony up cash to secure their brand name on a building and the attendant franchise fees that come with it . When brands offer key money , he said , they usually ask for deal terms they might not otherwise get , such as a longer contract term or narrower performance termination rights .

“ The marginal cost of bolting

8 hotelsmag . com Mar / Apr 2025