Leasing or management better and why?

Leasing or management better and why?

Leasing and management are two different verticals when choosing to operate a hotel. It all depend on the risk appetite of the owner. A management contract is a combination of high risks and high return to the owner. A fixed lease offers low risks with a low return to the landlord / lender.    

Hotel lease categories / Types

  1. Fixed Lease – This is a fixed lease with pre-marked growth. This offers guaranteed returns but low risk low rewards to the landlord / lender. Many small and mid-scale hotel landlords / lender prefer to lease out their hotel to known operator. This gives them a sense of security to watch their rental income stream flow regularly no matter the economic conditions exists. However, situations sometimes do turn messy, where the landlord / lenders stop or don’t get their rental regularly as predicted.
  2. Revenue Sharing   – This is a floating lease, where the landlord / lender shares the risks and rewards on the performance of the hotel. They share a certain percentage of income with the operator. The landlord / lender do get a chance to monitor the performance of the hotel compared to data of other operating hotels in the same markets.     

Hotel Management Services –

Hotel management services is a time framed contract between the owner and the operator, where the hotel property title and absolute business ownership lies with the owner. However,  the owner  hires a suitable operator to manage and operator the hotel on his behalf. The owner undertakes all the risks and reaps a major portion of the of the GOP (Gross operating profit). The operator in turn charges a percentage as a fee for providing the services.

  1. Standard Management Agreements – The operator charges a 2 to 3% as a base management fee on the total revenue and 10% on the GOP (Gross operating profit)
  2. Performance Based Agreements – The base management fee is low to 2.5%. However the operator would layer his incentives on the GOP (Gross operating profits) defining a base line threshold. Which increases over a period of time and achievements.   

Which is better Lease or Management ?

It all depends on the owner’s risk appetite & business foresightedness. Hotels owned or invested by private equity funds / multinational corporations / industrial business houses prefer to engage a branded operator for their hotel. However in recent times it has been observed that many hotel owners are shifting from a fixed lease to management contracts.        

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