Ròya International director of asset management Madhu Azad discusses the challenges behind a successful owner-operator partnership and provides advice on how to overcome them.
Why it is important that owner-operator relationships are fairly balanced?
A hotel operation involves several parties — owners, operators customers, vendors and employees. If there is a good understanding and trust between the owner and operator, it creates a strong base for a very progressive, vibrant business model.
These are long-term partnerships wherein the parties enter into the relationship to achieve certain common goals and individual goals. For it to be a successful, happy and lasting relationship, it is important that both parties are totally aligned in their approach.
Why it is so difficult to achieve this ‘even keel’?
The main reason that it is difficult to achieve this even keel between the parties is due to the different perspectives of each. It is the owner who has invested large sums of money for the development of the asset and handed it over to the hotel operator, who is the expert with vast knowledge, experience and technical knowhow for running the hotel business.
Any investor or owner would expect that the operator should work towards maximising the profitability of the business unit (hotel) and maintain the asset of the owner in top condition, thereby enhancing the value of the asset for the owner. The operator is also keen to maximise profitability as this secures higher management/incentive fees for the operator, but they are equally keen to protect the brand standards on a priority basis.
At certain times the corporate policies and procedures of the operator take precedence over owner’s priorities. After all, the operator enters into the relationship for expansion of the portfolio and in line with the corporate strategy of the operator.
At times, the interest of the owner is compromised as the operator runs the hotel as a hotel only and not as a business unit. To achieve an even keel in the relationship, the operator must bear in mind the owner’s requirement of debt servicing, cultural sensitivity of the region and owners’ priorities. Owners must also bear in mind that the operator is a service provider only and is responsible only to that extent .
How should management contracts be drafted to meet these needs?
The owner has invested large sums of the money, is looking for the highest return on investment and expects the operator to ensure that all possible steps are taken towards this end.
The operator, on the other hand, is keen to protect its corporate policies and practices, implement brand standards, and achieve profitability within these parameters.
The essence of the management agreements that are entered between the parties is to outline the obligations, liabilities and rights of both parties.
Generally, these are drafted more in terms of the operators who are duplicating a standard format of the document that is being used by the operator. The main challenge in negotiating these documents is to make them balanced so that both parties feel that it is fair.
What is your advice to owners and operators on this topic?
As owners of the asset, this party wishes to have certain involvement and a feeling of control in the functioning of the hotel — they need to be reassured that the hotel is run efficiently and efforts to maximise the bottom line are being made.
In view of the fact that the owner is also responsible to pay fees to the operator fees, supply additional funds in case there is shortfall and keep money for FF&E, it is only logical that the operator should ensure that the owner is given some comfort through certain provisions in the contract i.e. assurance on performance, achievement of operating budgets and keeping the owner updated on the progress of the hotel.