MCD Hotel Advisors

When you are creating your hotel pro forma, according to USALI of course, you will have line items for Management Fees. Base Management Fees and Incentive Management Fees. If you are operating an independent hotel, these obviously do not apply. But if have you have a Hotel Management Agreement (HMA) with a brand then these will be part of the agreement and thus included in your pro forma…

Base Management Fees

Base Management Fees can be considered the fixed component of management fees. It is an agreed upon percentage of the total revenues. This varies a little and negotiated. This is calculated on all hotel revenue streams.

Incentive Management Fees

The Incentive Management Fee (“IMF”) comes further down in the Pro Forma because it is variable and dependent upon performance metrics. This is also negotiated as part of the HMA. For the IMF, not only is the value of the performance metric negotiated but also is the actual performance metric used. A common one is GOP (Gross Operating Profit) hurdles. Another is an ROIC (Return On Invested Capital) hurdle.

Why Are The Fees Structured In This Manner?

This “fixed” and “dependent” fee structure was established in HMA agreements to ensure operator (management company) and owner interests align. By having a good amount operator fees tied to profit metrics, then it minimizes (and hopefully eliminates) a scenario where the operator sacrifices profits for revenue. For instance, in the absence of this type of fee arrangement, it is conceivable that an operator excessively spends on the guest experience to get higher revenues, but spends too much in this pursuit and the profits of the hotel actual suffer despite higher revenue.