HVS Asset Management Proposes Overhaul of Hotel Management Fee Structures: New structure to Align Fees with Owners’ Interests

Prevalent incentive management fee structures partly align the interests of hotel managers with those of owners. They also arbitrarily reward managers primarily on market performance, rather than management effectiveness. A new approach is discussed.

September 27, 2011: HVS Asset Management & Advisory’s Miguel Rivera is pleased to announce the findings of his new study: “Hotel Management Fees Miss the Mark.” Rivera argues that the prevalent management fee structures “compensate managers primarily based on the performance of the market, rather than the results achieved by management.”

“Management companies have billed incentive fees as a way to share risk with owners,” Rivera added. “However, risk implies potential losses, which management companies distinctly do not share. All they have achieved is sharing the upside with [owners] by incorporating into their contracts a call option on hotel performance.”

Thus, Rivera proposes reducing base management fees while basing incentive fees on RevPAR and GOP margin performance relative to that of the competitive market. This implies good managers that beat the market will earn incentive fees during both rising and declining markets. “Decoupling market risk from management fee streams will warrant higher valuation multiples for operating companies,” says Rivera.

“Hotel Management Fees Miss the Mark” was released by HVS in September 2011 and is available for download by clicking here. Rivera is Senior Vice Present of Asset Management & Advisory at HVS San Francisco. He advises clients on maximizing real estate value and aligning a property's operations with its investment goals. He has more than 14 years of experience in real estate finance; including asset management, brokerage, financing, credit ratings, and appraisals. He has worked on more than $900 million worth of hotel transactions, and valued more than $12 billion worth of real estate. He holds an MBA from Yale and a BS in Hotel Administration from Cornell.

Marah Reece
Tel: (415) 268-0350