AHC: Are operating agreements becoming more bespoke?
At this week’s Annual Hotel Conference in Manchester, some of the biggest names in hospitality met to discuss the changes that need to be made to drive positive change in the industry. Over 1,000 delegates attended, 15% of which represented some of the largest and most influential equity investors and hospitality funds from the industry.
Among a two-day programme of insightful and thought-provoking educational sessions, our CEO, David Hart joined a panel of thought leaders to discuss how operators and brands are flexing the terms of their operating agreements to align with the requirements of alternative and emerging ownership groups.
He was joined by Castleforge’s Matt Lederer, Choice Hotels EMEA’s Tobias Reinecke, and Hyatt’s Felicity Black-Roberts, as well as Katten’s Gavin Vollans who moderated the discussion. Topics covered included the changes afoot from new entrants to the market and their impact on existing owners, pressures on the real estate market and postponed projects due to construction costs, releasing funds to meet ESG targets and macroeconomic forces as a driver of changes to operational costs.
David explained that we’re starting to see more bespoke agreements coming through compared to 10-15 years ago but rather than seeing new ideas, we’re seeing once-bespoke ideas becoming more common. Things like specific fee structures, detailed deliverables and discussions about ESG clauses on the rise mean that one-size-fits-all contracts cannot work.
When commenting on the necessity for fees to be more creative, David said:
“One of the things we’ve seen is more complexity in the structure of incentive fees with the likes of hurdles and ratcheting percentages. We’ve had good traction with owners who are pushing those (and the need to perform exceptionally in order to achieve incentive fees) to look at a more fixed base fee position. They understand we have to pay people, and then step up to really perform; taking a risk around non-variability of the base fee to implement the reward element around the incentive side.”
“Termination fees can be constructed in all sorts of ways, but we tend to see them reducing as you progress further into the contract. More generally, it’s important for us to give flexibility, because as a management company, we accept that hotels will come and go, and we support that model which a number of shorter-term investors are focussed on.”
Moving the conversation to ESG, he explained:
“The S and the G you can get on with, they’re fairly low cost and less of a discussion is needed with owners. When you come to the environmental and energy side, that’s where the hard cash required starts to ramp up and where there needs to be more discussion and agreement. There are different views on what the money needs to be spent on and how it’s allocated to meet the E and over time those views will likely converge.”
RBH will also be speaking in the upcoming education programmes at the Independent Hotel Show on 17 October and at HOSPACE on 16 November.
Photography credit - Simon Callaghan Photography
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