The ins and outs of third-party management
The ins and outs of third-party management
08 OCTOBER 2018 8:21 AM

Speakers at The Lodging Conference gave their thoughts on how to navigate a working owner-operator relationship in a third-party management arrangement.

PHOENIX—Hiring a third-party manager to operate your hotel can work, but there are ways to make the relationship between the owner and the operator more efficient, sources said.

On the “Third-party management: The owner-operator relationship” session at The Lodging Conference, panelists said it is possible to achieve alignment between third-party managers and the ownership company.

“I think one place you’ve got to start is understanding the owner’s goals,” said Kirby Payne, president of HVS Asset Management. “A hotel that is owned by a university, for instance, does not have the same goals as one that’s owned by an independent investor … you need to understand what the goals are; the investment goals, the quality goals and then figure out a way to not only align the management agreement but (align) the key staff with it as it relates to incentive pay and then motivations.”

Chris Green, principal and COO at Chesapeake Hospitality, said his company spends a lot of time “pre-planning and pre-developing deals with our owners.”

That involves “making sure that we have alignment on not only business terms, but on terms that relate to how we handle our staff (and) how we handle our culture,” he said. “We’re a certain kind of company; we’re culture-based, we’re employee-focused, we deliver a certain level of performance and we have to achieve alignment before we ever do business.”

What’s negotiable?
When asked by moderator Bob Rauch, president and CEO of RAR Hospitality, what’s negotiable in a management contract, speakers had different answers.

Roger Pollak, EVP of Island Hospitality Management, said his company ensures there are limitations stated in the contract for what the manager can do.

Green said that all terms are negotiable at Chesapeake.

“We just try to make sure that we don’t create any kind of dual-management representation where the owner’s self-managing. We believe that third parties are hired,” he said. “I have 3,000 employees and they’re all professional hoteliers, so I’ve got to be careful that we don’t create an environment where the owner is slowing down what we’re trying to do for them…”

Payne added that at HVS, working capital and access to banking is typically not negotiable for the management company.

“A management company doesn’t want to be in a situation where they can’t pay payroll and sales tax,” he said. “The rest they can get over, but payroll and sales tax are legal issues that can come back and bite them.”

Owner involvement
Owners can be more involved with management contracts by being heavily involved during the budgeting process and the annual plan, according to Mitch Miller, principal at Miller Law Group.

“That’s the place to come to an agreement about marketing and operations and incentives and how much the amenities and the rooms are going to cost on a daily basis, and every little aspect of your hotel, and if you made the right decision about that manager, that manager will go and run with it and they’ll execute,” he said.

Boutique management
When it comes to third-party managing independent or boutique-style hotels, panelists had differing opinions on whether it is critical for managers to have experience with boutique or independent management before being brought on board.

“I would only hire (a manager) who doesn’t have experience with boutique hotels if I want to waste time and money,” Payne said. “I want one that has at least experience with independent hotels, preferably with boutique hotels (and catering) to (that market).”

Green said he’s had properties where a manager didn’t have experience operating boutique hotels, but they were able to successfully do it.

“I’m glad I have both, but we did get our first one without (a manager with boutique experience) … but what we found out was we applied all the heavy hitting that we do on the brand side and the corporate back end with (our sales) department and we had a better running boutique than most (other boutiques),” he said.

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