Hotel owners and hotel operators have enjoyed a lengthy working relationship. The arrangement typically allows operators to expand their portfolios while avoiding the risks associated with real estate ownership, while owners gain access to the operational expertise they need in order to turn a profit. Around 20% of European hotels and 13% of those in North America operate under management agreements, and while each case may be unique, there are broad similarities which influence the negotiation of a majority of such agreements.
Negotiating a hotel management agreement usually starts with the negotiation of a memorandum of understanding (MOU) or a letter of intent, and it is typically the operator who sets out the prime commercial terms within the MOU. Although it is non-binding, it is difficult to make substantial changes to the MOU once it has been signed, so it is very important to resolve any potential issues before they become entrenched.
The wellness sector is not dissimilar to the industry as a whole, but there are some key differences of which owners need to be aware when coming to terms at the MOU stage. In a new white paper, Horwath HTL Health and Wellness team from Bangkok, together with Tim Dobson, a lawyer with over 35 years of experience and the Founding Partner of Dobson & Partners, set out to shed light on the specific issues and benchmarks related to wellness resorts and wellness real estate developments, but it’s helpful to first gain a brief overview of the contrasting goals of owners and operators in the basic negotiating process.
The aim of the operator is to secure a long-term deal for a property which will be built and managed in line with the operator’s own brand standards and specifications. The operator would hope to secure the rights to approve the name of the hotel, and to directly employ the GM and other senior members of staff. Staffing levels, salaries, and room rates would all fall under the control of the operator.
In contrast, the owner is better served by a shorter deal, which offers clear terms for either renewal or termination. They also prefer to retain control over staffing decisions, salaries, and maintenance costs, and also to have the final say over the choice of GM candidates. Typically, owners will also be concerned that the brand is suitable for the location and the target market to which the property might appeal.
The management agreements for wellness resorts tend to use much the same business model, whereby the operator receives a percentage of the gross operating revenue as a management fee and a percentage of the gross operating profit as an incentive in return for managing the property’s day-to-day operations. Such arrangements will typically be of at least 20 years’ duration. The main difference is that wellness operators command a much higher base management fee than the broader industry norm of 2.5% to 3.5%. The incentive rates will also be higher on the basis of the greater amount of technical know-how and practical experience that wellness operators must provide to ensure appropriate design, a clear strategy, the pre-opening setup, and ultimately the success of the overall wellness development.
In the case of medical wellness resorts, further specifications are often necessary. Medical therapies require highly specialized expertise that neither holistic wellness operators nor hotel operators typically possess. Therefore, medical services, such as dentistry, cosmetic surgery, and even stem cell therapy, are often outsourced to a third-party medical service provider, experienced in healthcare and hospital management. In this scenario, the wellness operator would manage the rooms, food and beverage outlets, and integrative wellness components, and the medical operator would oversee the medical center along with its range of semi-invasive and invasive treatments. When negotiating the MOU, it is crucial that the allocation of medical service revenue is clearly specified.
Another important consideration is the role of spa consulting services, which are often provided by small companies whose expertise focuses on the operation of the spa, but not the wider context of the overall health and wellness resort development. It is therefore common for hotels and their report spas to enter into partnerships with product houses, with product sales becoming the main emphasis rather than the performance of the spa.
In addition, the owner may decide to sell any residential real estate that forms part of the wellness resort. In this case, it is common for the operator to charge an additional branding fee, usually around 5%, on the total sale price, which corresponds with the substantial premiums achieved by wellness-branded real estate properties.
Given the complexity of reaching an effective management agreement in the context of a wellness project, it is essential to have a thorough understanding of the terms, details, and potential pitfalls involved. The objectives and interests of both owners and operators can be brought into alignment with a successful MOU, but it is helpful for all parties to seek expert advice at the start of the negotiations to ensure that the partnership meets the needs of all concerned for sustained success over the longer term.