Warren Buffet once said , “ Only when the tide goes out do you see who ’ s been swimming naked .” The pandemic sure shone a spotlight on some skinny-dippers , but they thought they had been swimming in a lake where there was no threat of tide until it swept them over .
No one anticipated a pandemic that would eliminate demand and close such a high percentage of hotels . As a result , many management agreements did not consider or incorporate the concept of no revenue , and left many operators with ongoing expenses unrecouped from their owner-partners .
Awareness of this risk , and its ongoing potential , is pressing management companies into making changes to their management agreements to create protections that will allow them to diligently maintain operations on behalf of owners , while lessening their exposure . A few such changes include :
Minimum management fees . We all know that 3 % of $ 0 = $ 0 , and faced this stark reality in 2020 . As a result , some management companies are incorporating minimum fees into their agreements to cover the costs of managing through the hopefully rare situation where our industry finds itself in a significantly reduced demand or imposed restriction environment again . Closed hotel fees . When a hotel is temporarily closed , there are still operating expenses , including management , human resources , maintenance , and security , that continue even when the doors are shut . The asset needs to be maintained and protected physically , and critical staffing needs to be retained to oversee the property , and associate needs to be ready to reopen the property when restrictions and / or demand allow .
Working capital . This is not a new concept in management agreements , but its importance has certainly been elevated in the last 16 months . A working capital clause ensures a commitment from the ownerpartner to cover operating expenses via an account that is both funded and maintained at a minimum balance by the hotel operation ( and supplemented by ownership , if / as needed ), and solely debited by the management company . The account will pay operating and fixed expenses first ( may or may not include payment of debt service ), then sweep to an ownership account for dollars ( profit ) that exceed the agreed-upon minimum balance . It is critical that operators have the ability to quickly terminate the management agreement if the working capital account is not funded in a timely manner . This ensures that management companies do not find themselves in the position of acting as the owner ’ s “ bank .”
Proper management of hotels is not a commodity . Perhaps that is understood more fully now than ever . Operating companies provide critical expertise and exceptional effort in supporting top-line revenues , managing expenses , and generating optimal bottomlines for their owner-partners . A significant portion of this effort is focused around associates – hiring , training , managing , and developing – and the spotlight that shone on the industry when the tide went out revealed the incredible amount of work that goes into overseeing the labor aspect of our industry . It makes sense to update management agreements to provide protections that will ensure that the operators and the properties they serve will be sustainable under any market conditions .
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